NCLT’s Governance on Mergers

This article was written by Akshita Jain, a student of Vivekananda Institute of Professional Studies

Abstract

Corporate finance world is emerging at that pace in the 21^st century that it is governing the major part of the economic and social world. Every sector in the world in one or other way is related and influenced by the corporate actions. Corporate houses continue to be formed, merged, acquired, taken over and also winded up. All these processes are normal courses of the corporate proceedings. To regulate and manage these processes there is a need of a statute which can govern the corporate proceedings. In India, the Companies Act, 2013 regulate these corporate proceedings. It contains the provisions relating to the formation of the company, shares, meetings, directors, mergers, winding up of the company and many more. In addition, to the act, National Company Law Tribunal (NCLT) which is itself the product of the companies act, 2013 governs these procedures and also work when any discrepancy takes place in the company. In situations of mergers of companies, NCLT plays a vital role in the setting up the rights of all the parties involved in the process of merger or are affected through it. In certain situations, certain complexities arise in mergers, there NCLT aids in resolving the issues in an expeditious and effective manner. It has become possible only because of the powers and restrictions imposed on the tribunal mentioned above.

Key words: Corporate houses, merger, acquisition, National Company Law Tribunal (NCLT), Companies Act, 2013

Introduction

The quasi- judicial body, National Company Law Tribunal established under section 408 of the new Companies Act, 2013, constituted on 1 June, 2016 adjudicates the issues in relation to the Indian companies and corporate houses. The tribunal came into existence on the recommendation of the V. Balakrishna Eradi Committee constituted in 1999, the committee recommended the establishment of a specialized agency that can deal with the matters related to mergers, amalgamations, revivals, rehabilitation and winding up of companies, and also to adjudicate the disputes and issues arise in the companies. The tribunal enumerate speedier and simpler dispute resolving mechanism to the corporate bodies. The constitution and establishment of NCLT resulted in dissolution of the BIFR (Board for Industrial and Financial Reconstruction), CLB (Company Law Board) and the AAIFR (Appellate Authority for Industrial and Financial Reconstruction) which were the traditional bodies incorporated under the previous company acts and used to resolve the company disputes by the virtue of section 466 of the Companies Act, 2013. After the establishment of the NCLT the matters from BIFR, AAIFR and CLB were transferred to the National Company Law Tribunal.

Research Objective:

• To analyse the process of mergers through the role of NCLT in it.
• To examine the powers of the national tribunal as regards to the mergers and acquisitions.
• To analyse the recent mergers in accordance with NCLT’s governance in it

Hypothesis

The following hypothesis would be observed in the study:

• The intricacies involved in the process of mergers and amalgamations effect all the stakeholders, directors, employees of the company.
• The powers given to the NCLT is quite necessary to deal with the complex procedures of mergers.
• From 1956 Act to the 2013 Companies Act, the processes have undergone large changes.

Mergers

The processes like Compromise, Arrangements and Amalgamations that includes demergers, mergers and acquisition are provided under chapter xv of the Companies Act, 2013 especially section 230, 231 and 232 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 issued by the notification on 14^th December 2016 by MCA and came into force from 15^th December 2016. Mergers and Acquisitions are the important and general processes of the corporate houses. These are the consolidation of the companies. Merger is the amalgamation or the combination of the two or more companies to form a one corporate body, though acquisitions are sometimes used in the same senses as the mergers but technically they meant different to the process of mergers. Acquisition is the course when one company is taken over by the other and is fully acquired by another entity. It is no more the amalgamation of the companies but the full control and hold of one company over the other. The motive behind the mergers and acquisitions is to create more profits and opportunities for the corporate entities, as two or more companies can create more value and opportunity as compared to the single and separate companies and to enhance financial and operational strengths of merged organizations. Mergers can take place by purchasing common shares, purchasing assets, by exchange of shares for assets or by exchanging shares for shares. It is a formal proceeding taken place between two or more companies and companies need to necessarily comply with all the provisions of the Companies Act, rules as prescribes by the Ministry of Corporate Affairs. Mergers are defined as fusion or absorption of one thing or a right into another. It is an arrangement where the assets and liabilities of two or more corporate entities are vested in or under one corporate entity or the company. All the shareholders of each company become the shareholder of the newly incorporated company formed after merger. Therefore, during the course of merger either one of the existing company mergers its identity, assets, liabilities and everything into any other existing company or the other option is when both or all the companies wishing merger merge their identities, assets and liabilities into a newly incorporated company by forming a new company. Mergers of companies is of various types that includes horizontal mergers, vertical mergers and conglomerate mergers. Horizontal mergers are those where the two or more companies are in direct competition involved in the same industry mergers in a one company. Vertical merger is that where two or more companies involved in the same industry but operate at different levels and not in direct competition to each other. Vertical merger is further classified in forward and backward mergers. The reasons behind this type of mergeare to attain economies of scale, reduce cost of production or to expand consumer base. Conglomerate mergers are those where the unrelated companies merge to achieve synergy benefits and to expand business. There are a number of ins and outs for which the companies decide to get merge with the other, some of them are, improving company’s performance and accelerate its growth, to manage economies of scale, financial synergy for lower cost of capital, to increase market share and positioning giving broader market access, for diversification for higher growth products or markets, to achieve undervalued target diversification of risk, tax considerations and to manage strategic realignment and technological change.¹

There are positive fluctuations in the course of mergers of the companies introduced by the Companies Act, 2013 to make the process faster, modest and increased participation of shareholders, debenture holders. The Eradi committee report recommended certain proactive changes such as cross border mergers, fast track mergers and the very efficient establishment of the National Company Law Tribunal.

Intricacies in the course of mergers

Mergers are generally taken place to reduce the competition and to increase the consumer base, but when a number of entities are joined together, sometimes they leave the things on each other and eventually the quality of the produce and the efficiency of the company degrades. As a lot of stakeholders are involved in the course of mergers and it is a tedious task to agree all of them for the same. So, in that situation it is important that there should be a specialized agency which could keep a check on all these proceedings and confirm that rules are followed amid these processes. That’s why NCLTs have given the power to give sanction for the approval of scheme of mergers, in addition to these certain discretionary powers are also given to the tribunal to oversee the process of mergers and amalgamations.²

Role of NCLT in the process of merger

Before the constitution of NCLT, there was lack of the institution which could have dealt with all the issues arising related to the companies in India, basically there was lack of a centralized institution. Parties have to move to different institution for the redressal of their issues, some of those institutions are High courts, CLB (Company Law Board), BIFR (Board for Industrial and Financial Reconstruction), etc. people moved to high courts for the purpose of winding up of the companies or for mergers, amalgamation plans, CLB adjudicate von the issues of abuse of oppression or mismanagement), BIFR were approached by parties in the matters for pronouncing as a sick company and ultimately leading ti being winded up. This scattered system caused a variety of difficulties as there are different procedures and rules by which a single entity was governed. But with the establishment of the National Company Law Tribunal, all the procedures, rules, powers were combined in a single authority which could deal with all the company related matters. It can adjudicate all the disputes and issues arising in a company, give approvals or rejections for the mergers, acquisitions, etc. and can also keep a check and oversee the actions of the Indian companies. The main role of NCLT in a merger is that it ensures fairness and effective overseeing of the deals. And also ensures that all the mergers are carried out in accordance with the provisions of the Companies Act, 2013.

NCLTs role in the mergers are provided under sections 230, 231 and 232 of the above-mentioned companies act.

Procedure to be followed for merger in accordance with NCLT

• Both the transferor and transferee company should be authorized to do mergers by the articles and memorandum of the companies. If they are not authorized to do so they should alter their article of association first.
• The draft of the scheme of the merger or amalgamation should be prepared by the transferor and transferee company.
• The next step in the process of merger is that the company wishes for the merger has to convene a meeting of board of directors where a resolution for merger is to get passed with the simple majority (50%) present in the meeting and voting.³ but the noticed of the meeting shall be served before not less than 7 days before the meeting according to section 173(3) of the Companies act, 2013.
• After the resolution being passed by the company, it has to file an application to the NCLT which has jurisdiction over the company in the Form No. NCLT- 1 along with notice of admission in the Form no. NCLT 2 and a copy of scheme of mergers containing all the material facts of the company i.e., auditors report, financial position of the company, etc. as per the Ministry of Corporate Affairs and Section 230 of the Companies Act, 2013.⁴ An affidavit under Form No. NCLT 6 shall also be filed.
• Then, the NCLT convenes a meeting and get the scheme passed by not less than 75% of the secured creditors. With this Form no CAA that is the statement of the creditor’s responsibility, valuation report and the protection of the stakeholders.
• Auditor’s report has to confirm with the liquidity of the company and the statement which shows that the merger is in consonance with the guidelines of the RBI, provisions of the Companies Act, along with the requisite fee.
• As per Rule 4 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, GSR No. 1134(E) India, further the applicant has to disclose how each class of members or creditors has been identifies and their approval for the scheme of the merger to the tribunal.
• Joint application for the merger can also be filed by the companies wishing to get merged before the tribunal.
• In accordance with Rule 5 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, a notice of the meeting accompanied with the scheme of arrangements or merger is to be sent to all the creditors in the Form No. CAA 2.
• Notice of the meeting shall be published in the English newspaper and in one vernacular language newspaper.
• The notice also needs to be sent to the regulatory authorities including the central government, income tax authorities, the Reserve Bank of India, the Registrar of Companies, the official liquidator, the Competition Commission of India and such other sectoral regulators in the Form No CAA 3. If any of the authority want to raise any objective then it can do so within 30 days of the receipt of the notice before the tribunal.
• After the meeting the chairperson prepares a report of the meeting, that report is required to be filed along with the affidavit before tribunal within 3 days in the Form No. CAA 4.

• Eventually, to get the sanction of the scheme of merger the company within 7 days of the meeting needs to file the report of meeting along with the petition in the Form No CAA 5.⁵
• Then the tribunal exercises its discretionary powers and propose the variations or modifications as it deems fit and can also execute those variations and modifications in the Form No. CAA 6. The scheme of merger passes will have an appointed date from which the scheme shall get effective.

All these processes are monitored and supervised under the authority of the NCLT.

Powers of NCLT in mergers

NCLT has the huge powers relating to the mergers and amalgamations. It is the authority which sanctions or rejects or introduce modifications in the scheme of the mergers presented before it through application. In a 1922 case of Continental Supply Co, Re⁶, the court provided the matters which the tribunal has to take in consideration in giving its sanction. The court observed that firstly the tribunal has to see that all the provisions of the statute are complied with while companies entering into mergers or other such schemes. All the elements of the entity are fairly and equally represented and most importantly the majority is not coercing the minority to agree over their decisions. Also, the arrangements between or among the corporate houses are reasonable and in just manner.⁷

The tribunals have wide powers as regards granting sanctions and rejections for the scheme of mergers or amalgamations. Some of these powers are:

• The major power with the tribunal is to supervise the mergers or any variations or modifications as it may deem fit that can be suggested to the applicants pre or even post the mergers.⁸ The Bombay High Court, in Reliance Natural Resources Ltd. Vs Reliance Industries Ltd.⁹, held that an agreement that is an essential condition of the demerger can’t in invalidate by subsequent agreement.

• The tribunal also has power to sanction the applications of mergers along with the modifications if necessary. In Gountermann Peippers (India) Ltd. vs UOI¹⁰, a scheme of arrangement was prepared, the scheme was also sanctioned by majority of the creditors and shareholders and creditors but two creditors raised the objection on the reason that the unit was under huge debts, though their objections were held non- maintainable but the tribunal made some modifications while providing sanction for the merger.
• Though the tribunal has wide discretionary powers but they are also subject to certain restrictions as the tribunal can give directions regarding the modifications in the scheme of mergers as it can’t add terms which were not there in the original application and the modifications directions should only be limited for the proper working of the scheme of mergers.¹¹

• NCLT exercises its powers in the situations when any false information is furnished or any fact is concealed or mis- leaded in the course of the scheme of mergers, the tribunal gives a chance of hearing to the entity for its defense but the ramifications of the above events can be the change in the contract reports and the expulsion of the company’s name from the register of the companies. The people who are directly involved in such practices are personally liable for the fines and even punitive outcomes, in accordance with section 7(5) (6) (7) of the Companies Act, 2013.
• NCLT can even execute liquidation of the company in case of oppression and mismanagement.
• It has the power to oversee whether the terms of the scheme of merger or amalgamation are for re- establishment of the business and to overcome difficulties or not.
• The tribunal have also the power to recall its order passed ex- parte if the ex -parte party able to satisfy the tribunal that the order passed u/s 230 of the companies Act was erroneous and passed under misconception.¹²
• If the interest of the members or the depositors are hampered, they can file class action suit against the company, directors, experts, auditors, advisors or any other persons and NCLT has the power to take cognizance of such matter and pass the orders deems necessary to it, as per section 245 of the Companies Act, 2013.
• In the situations that is equivalent to mistreatment or botch, the minority investors can approach the NCLT as per section 241 of the Companies Act. The minority should comprise of 100 individuals or holder of 1/10 of the capital whichever is less. If the minority comprised of the mentioned composition it can file objection before the tribunal when there are material changes in the administration or control of the creditors, debenture holders or other investors.

• According to section 58 of the Companies Act, the tribunal has the power to put restrictions on the shares of the entity or corporate house. In Makin tosh Burn Limited vs Sarkar and Chowdhury Enterprises Pvt. Ltd.¹³, the apex court held that the enlistment of a share can’t be rejected merely on the ground that it would lead to infringement of law but other reasonable and sufficient grounds are required to be proved for the exclusive rejection of a share.
• There are a number of advantages of the tribunal sanctioning the scheme of mergers as it can bind all the creditors and shareholders, the company can be rescued from financial straits and the most importantly the court sanctioning the scheme has power to supervise the implementation of the mergers and such arrangements.

Comparison between 1956 and 2013 Act

Section 391 and 394 the Companies act, 1956 governs the mergers and demergers yet the present act’s section 230- 240 governs all the processes of mergers, demergers and other such amalgamations along with the constitution of National Company Law Tribunal which was not there before the Companies Act, 2013. Though, most of the provisions of the 1956 and 2013 act are similar related to merger but there are certain changes in the 2013 act with respect to the process of mergers.

• Fast track mergers have been introduced by the recent act which was not the part of the previous act. Section 233 of the 2013 act deals with this category of mergers. In the merger of two or more small companies¹⁴ or holding and wholly owned subsidiary company then the members holding 90% of the total shares or the 9/10^th creditors should approve the merger and file the application of same before the regional director, MCA and approval of tribunal is required for that.

• As per 1956 act if the merger is executed between the listed and unlisted companies then the unlisted company was required to get listed after merger but the 2013 act provides that such unlisted companies can remain unlisted provided the unsatisfied shareholders are given option to exit the company.¹⁵
• The previous act restricted the merger of Indian companies with the foreign companies yet the foreign companies can get merged with the Indian Companies, this restriction is removed by the 2013 act and now the two- way cross amalgamations as per Section 234 of the Companies Act, 2013 is permitted.
• Now, in accordance with the recent act e- voting and voting by postal ballot is permitted.
• The other professionals such as the Chartered Accountants, Company Secretaries and Cost Accountants can also appear before the tribunal, they can take up the merger and acquisition cases of the companies.

Current status of NCLT on mergers

NCLT deals with disputes or issues arising by the actions against the provisions of Companies Act, 2013, the Insolvency and Bankruptcy Code, 2016 and the provisions of the Limitation Act,1983 and for some purposes the tribunal is bound by the provisions of the Civil Procedure Code. 1908. In recent times, a large number of cases before the tribunal is of mergers and amalgamations as all the mergers schemes are necessarily approved by the NCLT. Mostly in the times of recession small companies are getting merged to enlarge their business and to pool and combine their assets basically to maximize their profits. Due to the increased mergers, NCLT is overburdened with the cases and applications of the mergers and such amalgamations. Due to the long processes of the mergers, the discussions are going on to reduce the burden of the NCLT by restricting its power of sanctioning the scheme of mergers. By reducing the burden of the NCLT, the legislature wants to make the environment of business more comfortable and easier. It is not wrong to say that if the prescribed changes would take effect, the process of mergers will affect in a large way. As the NCLT before sanctioning the scheme of the merger minutely checks all the documents and processes. It is a question of concern whether the regional officer would minutely check all the processes or not as NCLT comprises of both judicial and technical members that makes them competent to adjudicate all the merger applications and cases.

Recent Mergers

Sun Pharmaceuticals acquires Ranbaxy¹⁶ – The companies have got the sanction of merger from different authorities.

This is a classic instance of a share swap deal. According to the deal, Ranbaxy shareholders will get 4 shares of Sun Pharma for every 5 shares held by them, leading to 16.4% dilution in the equity principal of Sun Pharma.

Aim of the acquisition: This is a good acquisition for Sun Pharma as it will help the company to seal in its therapeutic gaps in the US, get better access to evolving markets and also reinforce its presence in the domestic market. Sun Pharma will also become the number 1 generic company in the dermatology space.

Objectives of the Mergers and Acquisitions:

• Sun Pharma enters into newer markets by filling in the gaps in the contributions of the company, through the acquired company
• Enhancing of products offering of Sun Pharma creating more visibility and market share in the industry
• Turnaround of a concerned business from the perspective of Ranbaxy

This acquisition although will take time to consolidate, it should in due course commence showing results through overall growth depicted in Sun Pharma’s top-line and bottom-line reporting.

CMC merges with TCS¹⁷ – This is an instance where there is a merger in the same industry (horizontal). It was done to combine the IT businesses. The objective of this merger, as stated by the management of CMC, was that the amalgamation will enable TCS to consolidate CMC’s operations into a single company with rationalized structure, enhanced reach, greater financial strength and flexibility. Further it also specified that, it will aid in attaining economies of scale, more focused operational efforts, standardization and simplification of business processes and productivity improvements.

Acquisition of General Insurance Business of Bharti AXA by ICICI Lombard¹⁸– Bharti AXA is a general insurance company listed with the IRDAI and is a joint venture held by Bharti General Ventures Private Limited (51%) and Societe Beaujon (49%). According to the Ministry of Corporate Affairs, the Competition Commission of India (CCI) approves acquisition of General Insurance Business of Bharti AXA General Insurance Company Limited (Bharti AXA) by ICICI Lombard General Insurance Company Limited (ICICI Lombard) as per Section 31(1) of the Competition Act, 2002.

ICICI Lombard is a general insurance company listed with the Insurance Regulatory and Development Authority of India (IRDAI) and is involved in providing a comprehensive and well-diversified variety of general insurance products, including marine, health, motor, fire, personal accident, engineering and liability insurance, through several dispersal networks.

Pursuant to the proposed combination, the entire general insurance business of Bharti AXA would be relocated by way of a demerger to ICICI Lombard in consideration of issuance of shares by ICICI Lombard to Bharti AXA.

Many such mergers and acquisitions are approved by the NCLT and Competition Commission of India. Such as, acquisition of 100% shares and control of tech Data Corporation by Tiger Midco LLC, Reliance Retail acquires Future Group’s retail business, Adani Group to acquire 74% stake in Mumbai International Airport, merger of Indus Towers and Bharti Infratel is the recent merger, etc.

Road to case laws

1. In Ajanta Pharma Ltd. vs Gabs Investment Private Ltd.¹⁹, the Mumbai bench of NCLT rejected the scheme of merger on the ground that the merger was proposed only for the purpose of tax avoidance that is against the public interest. Though the merger was approved by the shareholders without raising any objection, yet the tax authority raised the objection and contended that scheme of shares of the company would be transferred to the shareholders without paying the tax. The NCLT then in the public interest rejected the scheme of merger. The court then explained the term “impermissible avoidance arrangement” under the General Anti Avoidance Rules to tell which applications or schemes are to be rejected.
2. In the case of G.V. Films Ltd. vs Metage Special Emerging Market Fund Ltd.²⁰, in this case the tribunal found that the shareholders of a company are scattered in the whole of India and if the notice of the arrangement/ amalgamation is published in vernacular language that is accessible to only fewer shareholders and the others remain ignorant, it is the failure of the procedure of the proper arrangement. The court held that the directors should make sure that the communication of the merger is communicated to all the shareholders.
3. In the landmark case of Miheer H Mafalal vs Mafalal Industries Ltd.²¹, the Supreme Court critically explained the role of the national tribunal while considering the application for the merger or amalgamation. The court enumerated certain guidelines relating to the mergers i.e.,

• The tribunal has to see that all the statutory provisions are complied with.
• The scheme must be backed by majority votes i.e., necessary to get sanction for the merger.
• The scheme must be backed by majority votes i.e., necessary to get sanction for the merger.
• The necessary evidences, resolutions, materials are to be placed before the NCLT. The proposed scheme should not be contrary to the law and public policy and to know the real purpose of the merger the corporate veil can be lifted. The tribunal must be satisfied that all the shareholders, creditors, members are acting bona fide and not coercing the minority for anything.

Conclusion

NCLT is a vital part of the regulatory framework that revolves around the corporate tools and activities as it upholds the true spirit of the rule of law that is the basic structure of the Constitution by ensuring that all the members, shareholders, creditors, etc. are fully informed about the scheme of the mergers and other such amalgamations. With this mergers and acquisitions are also the important agents of the corporal strategies which must be performed as per the rules and procedures prescribed by the statutes and other regulatory bodies in addition to this existence of an authority like the National Company Law Tribunal is important to resolve all the disputes arising out of these processes and to make the entities to follow all the norms. Thus, the formation of NCLT is a paradigm shift in the corporate restricting process.