Change of law and guard
Source: By Vaibhav Gupta: The Financial Express
The provisions governing schemes of arrangement, reconstructions and reorganisations in the Companies Act 2013 (new law) have been notified recently, with effect from December 15, 2016. This changes the way corporate restructuring via mergers and demergers will be implemented in India. The National Company Law Tribunal (NCLT) now assumes the jurisdiction of high courts in relation to corporate restructuring schemes including mergers, demergers and capital reduction. This will lessen the burden on the high courts and ensure speedy disposal since the tribunal can make its own procedures.
However, given that NCLT and NCLAT are fairly new bodies, functional since just June 1, 2016; their effectiveness in dealing with complex restructuring schemes needs to be tested. Further, since NCLT benches are currently seated only in some states with jurisdiction over other states, pendency of matters cannot be ruled out, till the time additional benches are constituted. Amongst some of the changes that the new law brings about, the provisions relating to making private of a listed company by way of merger, contractual mergers and cross-border mergers open up interesting possibilities with wide ramifications for strategising restructuring transactions.
Upon merger of a listed company into an unlisted company, the practice so far has been that the shares of the unlisted company are required to be listed post merger. The new law, however, enables the unlisted company to remain unlisted, provided the shareholders of the merged listed company are given an exit opportunity. This is an interesting proposition in light of the fact that a separate set of de-listing regulations promulgated by Sebi that take care of the process and price discovery mechanism in case of exit of public shareholders from listed companies, are already in place. Whether the new provision presents any arbitrage possibilities between a fixed pre-determined price exit and a reverse book built price exit, and how Sebi responds to such schemes will be interesting to watch.
While there have been precedents listed companies’ businesses have been made private by way of de-merger, such analogies do not exist for merger transactions where the listed company itself gets delisted without following Sebi’s de-listing guidelines. The new law also enables mergers by way of a contract for a specified set of companies. This is a welcome move as such companies can now merge without the need for an NCLT approval, which is expected to reduce administrative hassles, timelines and costs for such companies. Also, they are not required to obtain auditors’ certificate with regard to compliance with the applicable accounting standards. In terms of process, the scheme needs to be approved by the shareholders, creditors, registrar of companies, official liquidator and the Union government. In the event of any objections, the government may refer the scheme to NCLT which can direct the companies to follow normal merger process. In such a scenario, the merger timelines for such companies may stretch significantly.
The provisions relating to cross-border mergers are yet to be notified; however, it leads to an interesting scenario as to whether, with the change in guard from high courts to NCLT, the Indian high courts have the jurisdiction over cases involving merger of foreign companies into Indian companies, till the time the relevant provisions in the new law are notified. One can argue that until the corresponding provisions of the old Companies Act are notified under the new law, the existing provisions should continue to operate—hence, merger of foreign company into Indian company should still fall under the jurisdiction of high courts till the provisions under the new law get notified.
Further, once the cross-border merger provisions get notified, merger of Indian companies into foreign companies—not allowed so far—will also be allowed. Such mergers will be subject to RBI approval and the consideration for such mergers can either be cash or depository receipts or a combination of the two. However, there is a need to make corresponding amendments under other laws, like income tax laws and exchange control norms to prevent unnecessary exposures on such transactions.
So far, we have seen many Indian companies creating treasury stock trusts via merger route for consolidating their shareholding. The new law puts a clear restriction on creation of such treasury shares in course of merger transaction and any inter-company investments need to be mandatorily cancelled. The language of the new law though leaves some ambiguity to house treasury shares under a trust created for the benefit of the shareholders.
The new law has also now plugged the option of effecting share buybacks through the high court route to avoid the 25% restriction on the amount that can be repatriated under the regular corporate law provisions, which was followed by many companies so far. Coupled with the change in the income tax provisions on such buybacks in the current Budget, this mode of cash repatriation is now virtually shut.
In terms of key changes to the approval requirements and procedures, the new law provides that the notice of scheme needs to be sent to the income tax authorities and to various regulatory authorities such as RBI, Sebi, CCI, if required, requesting their representation. The authorities will have 30 days to respond, in the absence of which, it shall be presumed that they have no representations to make on the scheme. Also, all companies involved in merger/ de-merger exercise will now be mandatorily required to obtain auditors’ certificate on the scheme’s compliance with the applicable accounting standards.
One look at the new law makes it clear that the lawmakers have tried to crystallise the restructuring process, based on the practical insights gained while implementing such schemes under the old law. Now, for raising objections, the minimum thresholds of 10% and 5% for shareholders and creditors have been specified. This should reduce frivolous objections being raised by small stakeholders under the garb of stakeholder activism. Further, meetings of creditors will be dispensed with if 90% of creditors, in value, have provided their consent. This is again a welcome move as different courts so far follow different thresholds for such exemptions.
With the NCLT as the approving authority, one legal issue that might become relevant is centre on stamp duty on restructuring schemes. The stamp duty laws in some states currently levy stamp duty on share issuances happening under merger schemes approved by high courts. The applicability of such provisions with the new law coming into force can become a matter of debate and litigation. The position is likely to get aggravated where companies involved in the scheme have registered offices in states different from the state in which the bench of the approving NCLT is located. In such situations, the jurisdictional authority of the state levying stamp duty may be under question. Further, it will be interesting to see the position of stamp duty levy on shares issued under contractual mergers.
Evidently, the new provisions seek to bring in some alignments with international practices, particularly on contractual mergers and overseas mergers; if implemented with the right earnest, they should go a long way in simplifying and expanding the scope of transaction possibilities in India. While this is just a beginning, we hope to see proactive intervention by the government to clarify and address implementation issues and challenges along the lines we have witnessed with the new law so far.
