Tata steel – SAIL deal: An instance of how laws can constrict M&A

The tata steel – sail deal continues to make news, even as both the companies
continue to consider various options to combine. For watchers of M&A (merger
and acquisition), the deal is a case study of how Indian acquirers have to consider
takeover code and other laws in different country, such as the UK. This, apart from
taking care that Indian laws are complied with.
While the Indian Companies Act, 1956, usually governs mergers in India,
international deals involve additional compliances with rules laid down under the
FEMA (Foreign Exchange Management Act, 1999) and associated law. Further,
listed companies are also subject to the rules and regulations laid down by the
SEBI (Securities and Exchange Board of India).

Merger/Amalgamations:
A merger/ Amalgamations is regulated by the Companies Act, 1956 (CA56), and
the company (Court)Rules, 1959 (Rules). A company may merge with another
body corporate, whether or not an Indian company, provided the surviving entity
of the merger is a company within the meaning of the CA56. A scheme of
amalgamation (scheme)requires approval of the High Court (Court) of the States
where the registered offices of amalgamating companies are situated. The steps for
amalgamation of companies under the CA56 and the Rules are following:
(1) Apply to the Court (by the TATA STEEL company) for directions to convene
a meeting of the members or creditors of the tata steel company, for purposes of
considering and approving the Scheme. Notice of the application must also be
given to the Regional Director, Company Law Board, whose representation is
considered by the Court before passing final orders.
(2) Pursuant to the Court’s directions the tata steel company would need to give
21days notice of the meetings by advertisement in newspapers and then hold
meetings their respective members or creditors of SAIL company, according to the
dates times, venues and quorum fixed for the meetings by the Court. After
approval of the Scheme by the requisite majority (1) the Chairman of each, eating
files his meetings report with the Court.
(3) Within seven days of submission of the chairman’s report to the Court, a
final petition filed with the Court conforming the Scheme with a request for
appropriate orders and directions by the Court. The Court fixes a date for hearing
the petition and the notice of the hearing must be advertised in the newspaper(s) at
least 10 days before the date fixed for the hearing.
(4) While considering the Scheme, the Court considers whether the applicant has
disclosed to the Court by affidavit all material facts relating to the company, such
as the latest financial position of the company, any investigation proceedings
pending by the Company Law Board and that the Scheme does not violate any
provisions of law is not contrary to public policy but is fair, just and reasonable.
If the Court receives no adverse representation from the Regional Director, the
Court may sanction the Scheme with appropriate orders and directions necessary
for its proper working, including transfer of properties or liabilities, dissolution of
the transfer company without the procedure of winding up, allotting of shares,
debentures or other like interests, etc.
Thereafter, the tata steel company are required to file the order(s) of the Court
sanctioning the Scheme with their respective Registrars of Companies and, upon
such filing, the order of the Court becomes effective and legally binding. This
Court process takes 3 – 6months.
Tax Consideration:
The Court order, being in effect a conveyance, is an instrument liable to stamp
duty that varies from state to state. However, if (1) at least 90% of the issued share
capital of the tata steel company is in the beneficial ownership of the sail company,
or (2) transfer is between a parent company and a subsidiary company, one
of which is the beneficial owner of not less 90% of the issued share capital of the
other, or (3)transfer is between two subsidiaries where not less than 90% of the
issued share capital of each is in the beneficial ownership of a common company
of the other, then no stamp duty is payable, provided an exemption certificate is
obtained from the officer appointed by the State Government on their behalf.
The tata steel company may carry forward losses incurred before the
amalgamation. However, to do this at least 51% of the shareholders of the tata steel
company (prior to the merger / amalgamation) should beneficially hold at least
51% of the votes on 31St March of each of the future fiscal years in which the past
losses are to be carried forward.
If the sail company is carrying forward losses, then the following conditions
must be met to enable the tata steel company to carry forward losses of the sail
company(post-merger)
1.The tata steel company holds continuously for a minimum period of five years
from the date of amalgamation(merger) at least 75% of the book value of fixed
assets of the sail company acquired in the Scheme;
2.The tata steel company continuous the business of the sail company for a period
of five years from the date of amalgamation;
3.The tata steel company, owing an industrial undertaking of the sail company by
way of amalgamation, achieves the level of production of at least 50% of the
installed capacity of this undertaking before the end of four years from the date
of amalgamation and continues to maintain this minimum level of production till
the end of five years from the date of amalgamation.
However, the Central Board of Direct Taxes, on an application made by the tata
steel company, can in suitable cases relax the condition of achieving the level of
production or the period during which it is to be achieved or both. The
precondition for this is that genuine efforts are made by the tata steel company to
attain the prescribed level of production and there are circumstances preventing
such efforts from attaining this level.
4.The tata steel company furnishes to the Assessing Officer a certificate verified by
an accountant, with reference to the books of accounts and other documents
showing particulars of production, along with the return of income. These should
relate to the assessment year relevant to the previous year during which the
prescribed level of production is achieved and to subsequent assessment years
relevant to the previous year’s falling within five years from the date of
amalgamation.