Analyzing M&A Through Companies Act And Sebi (Sast) Regulations

After Companies Act, 2013 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 came into force, the Merger and Acquisition has experienced a major changes. This regulatory system is an important tool in administrating the process and significant aspects of M&A in India.

The act which regulates the company is the Companies Act, 2013 states extensive provisions for mergers, acquisition, amalgamations, and the restructuring of the companies or corporate, providing smooth transitions and safeguarding the stakeholders throughout these intricate procedures. Section 230 – 240 of this Act deals with different situations which are related to compromises and arrangements, providing guidelines for companies to deal with the shareholders and the creditors.

However, the SEBI(SAST) Regulations, 2011 determine a legislative system for acquiring substantial shares in the listed companies, focusing on the public announcement requirements for open offers, accountability, and transparency in the acquisition of the shares. These legislature focuses to prevent minority shareholder’s interests while safeguarding fair and organized capital markets.

Interpreting the convergence of these two important statues is fundamental for stakeholders associated with M&A activities.

SECTIONS FOR MERGER AND AMALGAMATION IN THE COMPANIES ACT, 2013

Sections 230 to 240[1] addresses the relevant provision of merger and amalgamation[2]

Section 230 addresses the power to compromise or make arrangements with creditors and members 

Section 230[3] details, accompanies ability to compromise, or make settlement with its creditors and members. Under this clause, a firm reach, compromise, or settlement with its creditors, members, or any combination of the two.

Scope of Section 230

Section 230 deals with the company’s right to enter into a scheme

i.  within self and the creditors or any class of them;

ii.  within self and its members or any class of them.

The arrangement contemplated by the section includes a reorganization of the share capital of a company by consolidation of its shares of different classes or by sub-division of its shares into different classes of shares or by both.

The section also applies to compromise or arrangement entered by companies under winding- up.

Therefore, an arrangement under this section can take a company out of winding-up.

• Section 230(1)[4] states that where the company is being wound up, the liquidator makes an application to the Tribunal for convening meetings of members/creditors as the liquidator takes charge of the company once the winding up
• Section 230(2)[5] states the disclosures to the Tribunal by applicant through affidavit under sub-section 1:

1. company’s material facts,
2. company’s share capital reduction,
3. any scheme of corporate debt restructuring agrees to by not less than 75% of the secured creditors in share value.

• Section 230(3)[6] states that the notice of the meeting shall be sent to all the members/creditors, debenture

Note – In case of listed company, the notice and other documents shall be put down online on the website of the company.

• Section 230(4)[7] states that the notice given to the person for voting allows voting by individuals, proxy, postal ballot within a month from the date of the receipt of such notice.
• Section 230(5)[8] states that the notice that is given to the regulators asking for their representation, have 30 days to submit their representation or else they will be presumed non-responsive.
• Section 230(6)[9] states that in a meeting if 3/4^th of the creditors or members approves a compromise and the tribunal sanctions it, then its binding on all including liquidators.
• Section 230(7)[10] states the order of the tribunal sanctioning the scheme to provide for the certain matters

1. where the scheme provides for conversion of equity shares from preference shares, preference shareholders shall be given a choice to obtain the dividend in cash or accept equal value of equity shares, one or other;
2. the protection of creditors;

• Section 230(8)[11] states the company must file the order of the tribunal within 30 days of receiving the order.
• Section 230(9)[12] states that the Tribunal can call a meeting of the creditors, 90% of creditors agrees to the compromise.
• Sub-Section (10)[13] states the tribunal shall not sanction buyback until and unless it is in compliance with section 68.

Section 231[14] addresses the power of the Tribunal to enforce  compromise or arrangement[15]–

• Section 231(1)[16] states that the tribunal shall have the power to supervise the implementation and can modify it as required for the apt execution.
• Section 231(2)[17] states that if tribunal finds that a scheme cannot be implemented or the company is unable to pay off its debt then the tribunal may order for winding up.

Section 232[18] addresses the merger and amalgamation of companies[19] –

• Section 232(1)[20] states that the Tribunal may order a creditors or members meeting, when an application is made for a compromise or arrangement provides a company restructuring, merger, or amalgamation, and includes transferring or dividing assets or liabilities.
• Section 232(2)[21] states the circulation of documents for members/creditors meeting where an order has been made by the tribunal, merging companies or the companies with respect of which a division is proposed.
• Section 232(3)[22] states the sanctioning of scheme by Tribunal by a subsequent
• Section 232(4)[23] states that if an order under section 232 mandates, then the property shall be transferred to the transferee company, and the liabilities of the property shall become to the transferee company.
• Section 232(5)[24] provides that the certified copy of the order must be filed within 30 days with the registrar of the company.
• Section 232(6)[25] states the effective date of the scheme.
• Section 232(7)[26] states the annual statement certified by CA/CS/CWA to be filed with Registrar every year until the completion of the scheme indication whether or not the scheme is being complied with the order of the tribunal.
• Section 232(8)[27], Companies can be fine up to Rs. 25 lakhs, while officers can face imprisonment for up to a year, fine up to 3 lakhs, or both.

Section 233[28] addresses the merger or amalgamation of certain companies[29] –

Section 233(1)[30] prescribes streamline procedure for Merger or amalgamation of

• two or more small companies, or
• between a subsidiary and its holding, or
• such other class of companies;

1. both the transferor and transferer company, within 30 days shall invite objections or suggestions through notice of the proposed scheme from the registrar and official liquidator;
2. the company in their general meeting shall consider the objections and suggestions and the members holding at least 90% of the total shares shall approve the scheme;
3. the company shall file a declaration of solvency with the registrar;
4. the majority of 9/10^th in value shall approve the scheme in a meeting convened by the company by a notice of 21 days approved in

• Section 233(2)[31] states a copy of the scheme shall be filed by the transferee company with the Central Government, Registrar and the Official
• Section 233(3)[32] states that the Central Government to issue confirmation order, where there are no objections or suggestions from registrar or official
• Section 233(4)[33] states that the objections if any by the registrar or official liquidator to be communicated to the central
• Section 233(5)[34] application by Central Government to the tribunal, within a period of 60 days stating the objections received that the scheme is not in public interest or of the creditors.
• Section 233(6)[35] states the tribunal’s action to Central Government’s application, if the tribunal is in the opinion that the scheme should be considered, shall approve the scheme by passing order as it deems
• Section 233(7)[36] states that the registrar having the jurisdiction over transferee company has to be communicated and shall register the scheme and issue the
• Section 233(8)[37] states that without the process of winding up, the scheme shall be deemed to have effect of dissolution of the transferor
• Section 233(11)[38] states that the transferee company shall file an application showing the revised authorized capital with the registrar and pay the determined fees.

Section 234[39] addresses the merger or amalgamation of a company with a foreign company[40] –

• Section 234(1)[41] states that this section shall apply to merger & amalgamations between companies registered under this Act.
• Section 234(2)[42] states that a foreign company may merger with an Indian company with the approval of RBI.

Section 235[43] addresses the right to buy shares of shareholders who object to a scheme agreed by the majority[44] –

Section 235 of the companies act of 2013 governance the acquisition of shares by shareholders who disagree with the scheme or contract, approved by the majority shareholders who own at least 9/10 of the shares involved in the transfer. This acquisition of shares consist of application to the tribunal, notices that were sent to dissident shareholders, consideration’s deposits, obtained by the transfer corporation in a different bank account, and so on.

Section 236[45] addresses the buying of minority shareholding[46] –

Section 236 of the Act assert when a shareholder acquirer a majority of shares in the company, they shall inform the company, and make an offer purchase the shares of the remaining minority shareholders, and pay them a sum of amount which is equivalent to their shares value.

SECTIONS FOR ACQUIRING A MAJORITY STAKE ACCORDING TO THE SEBI(SAST) REGULATIONS, 2011

These SEBI Regulations assert the process for shareholder to acquire a majority shares to be adhered by an acquirer or controlling of the interest in another company.

Open offer thresholds (Regulation 3)[47]

The threshold limit for acquisition of shares/voting rights are given below beyond which an obligation to make an open offer is triggered.

Acquisition of 25% or more shares or voting rights – An acquire, who (along with any PACs) holds less than 25% of the target entities shares or voting rights and admits to acquiring shares or acquires shares that in addition to his PACs existing shareholding, would allow him to exercise 25% or more of the target entities shares or voting rights must make a public announcement of making an open offer to obtain the shares from acquiring such additional shares[48].

Acquisition of more than 5% shares or voting rights in a financial year – An acquirer who (along with PACs, if any) holds 25% or more but less than the maximum permitted non- public shareholding in a target entity, may obtain more shares in the target entity that would allow him to exercise more than 5% of the voting rights in any fiscal year starting on April 1 by making an open offer and then making a public announcement to obtain the shares[49].

Indirect acquisition of shares or control (Regulation 5)[50]

1. The acquisition of which would or else attract the duty to make a public announcement of an open offer for acquiring shares under these regulations, acquiring shares or voting rights in an entity or company for the purpose of utilizing or directing the exercise of a certain percentage of voting rights in a target entity may be considered an indirect acquisition of shares or voting rights in the target entity which would otherwise be subject to regulation 3 and 4[51].
2. For indirect acquisitions subject to sub-regulation (1) –
3. The target entity’s net assets value as a percentage of the merged company’s net asset value;
4. The target entity’s sales turnover as a percentage of the merged company’s sales turnover; or
5. If the target entity’s market capitalization exceeds 80% of the business value, based on fresh audited annual financial statement and compliance requirements for the open offer, the indirect acquisition will be treated as a direct acquisition under these regulations[52].

Voluntary Offer (Regulation 6)[53]

A voluntary open offer under regulation six is an offer, made by a person who alone, or with others acting in concert with him 25% or more shares or voting rights in the target company, but less than the maximum permissible non-public shareholding limit for number of shares as to ensure that the acquires aggregate shareholding after the offer does not exceed the maximum permissible non-public shareholding[54].

Restrictions on voluntary open offer

In the absence of attracting the rules of the regulations to make a public announcement of a voluntary offer cannot be made if the acquire or his PACs have obtained any shares of the target fir in the year preceding the offer.

During the offer period the purchaser is not permitted to obtain any shares other than those acquired through the open offer.

Following the completion of an open offer, other than another voluntary open offer, the acquire is likewise prohibited from obtaining any shares for a period of six months[55].

CONCLUSION

The two regulatory framework i.e. the Companies Act, 2013 and the SEBI (SAST) Regulations, 2011 establish a organized legal prospective for governing merger and acquisitions in India. These frameworks guarantees that companies engage in corporate restructuring while sticking to legislative requirements that protects the interests of all the stakeholders, especially the minority ones.

By providing smooth guidelines for mergers of the corporate and substantial acquisition of shares, these legislation guarantees transparency and integrity in the business markets. As a result, shareholders can better navigate the intricacies of M&A transactions, taking insightful decisions that associate with both the objectives of the business and regulatory adherence. Eventually, the collaboration of these two legislative provisions is important in encouraging investor belief and carrying the sustainable development of the corporate ecosystem of India.

Author:– Devansh Aeron, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[1] The Companies Act, 2013.

[2] https://www.icsi.edu/media/portals/0/CORPORATE%20RESTRUCTURING.pdf

[3] The Companies Act, 2013, s.230.

[4] The Companies Act, 2013, s.230(1).

[5] The Companies Act, 2013, s.230(2).

[6] The Companies Act, 2013, s.230(3).

[7] The Companies Act, 2013, s.230(4).

[8] The Companies Act, 2013, s.230(5).

[9] The Companies Act, 2013, s.230(6).

[10] The Companies Act, 2013, s.230(7).

[11] The Companies Act, 2013, s.230(8).

[12] The Companies Act, 2013, s.230(9).

[13] The Companies Act, 2013, s.230(10).

[14] The Companies Act, 2013, s.231.

[15] IBID

[16] The Companies Act, 2013, s.231(1).

[17] The Companies Act, 2013, s.231(2).

[18] The Companies Act, 2013, s.232.

[19] IBID

[20] The Companies Act, 2013, s.232(1).

[21] The Companies Act, 2013, s.232(2).

[22] The Companies Act, 2013, s.232(3).

[23] The Companies Act, 2013, s.232(4).

[24] The Companies Act, 2013, s.232(5).

[25] The Companies Act, 2013, s.232(6).

[26] The Companies Act, 2013, s.232(7).

[27] The Companies Act, 2013, s.232(8).

[28] The Companies Act, 2013, s.233.

[29] IBID

[30] The Companies Act, 2013, s.233(1).

[31] The Companies Act, 2013, s.233(2).

[32] The Companies Act, 2013, s.233(3).

[33] The Companies Act, 2013, s.233(4).

[34] The Companies Act, 2013, s.233(5).

[35] The Companies Act, 2013, s.233(6).

[36] The Companies Act, 2013, s.233(7).

[37] The Companies Act, 2013, s.233(8).

[38] The Companies Act, 2013, s.233(11).

[39] The Companies Act, 2013, s.234.

[40] IBID

[41] The Companies Act, 2013, s.234(1).

[42] The Companies Act, 2013, s.234(2).

[43] The Companies Act, 2013, s.235.

[44] IBID

[45] The Companies Act, 2013, s.236.

[46] IBID

[47] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last amended on November 9, 2022], Regulation 3.

[48] https://www.sebi.gov.in/sebi_data/faqfiles/mar-2022/1648620806406.pdf

[49] IBID

[50] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last amended on November 9, 2022], Regulation 5.

[51] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last amended on November 9, 2022], Regulation 5(1).

[52] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last amended on November 9, 2022], Regulation 5(2).

[53] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 [Last amended on November 9, 2022], Regulation 6.

[54] https://ca2013.com/toc-regulation-6/

[55] Supra note 50