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India Inc’s Mergers and Acquisitions industry has witnessed a remarkable growth in the last few years. In between 2015 and 2019, the aggregate value of M&A deals stands at USD 310 billion. However, this billion-dollar industry in not unfettered by the legal restraints. On December 19, 2019, the National Company Law Tribunal (“Tribunal”), Ahmedabad turned down the scheme of arrangement filed under § 230 and § 232 read with § 234 of the Companies Act, 2013 (“Act”) for approval of the tribunal. The Scheme of Arrangement envisaged the transfer of two specified investment undertakings of the petitioner, Sun Pharmaceuticals Industries Ltd. to two overseas resulting companies. However, the rejection of the scheme by tribunal elicits an interesting question, ‘Are Doors still closed for Cross-Border Demergers?’.
234 of the Act read with rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Rules”) indenture cross-border mergers. The section provides that the provision of chapter XV shall apply mutatis mutandis to the schemes of arrangement involving cross-border mergers and amalgamations. Henceforth, the petitioner, a listed Indian company, seeking to consolidate the holding structure of its direct or indirect wholly-owned subsidiaries files an application under § 230 and § 232 read with § 234 of the act soliciting the tribunal’s sanction on the scheme. Be that as it may, the Ahmedabad bench of the tribunal turned down the scheme on the ground that § 234 of the Act does not permit ‘Outbound Demergers’. The structure of the transaction has been delineated in the figure underneath,
Figure 1: Pre-transaction Organisational Structure.
Figure 2: Had the scheme been approved, this would have been the post-transaction organisational structure.
The tribunal observed that § 230 and § 232, applicable only to domestic companies, contain the terms ‘compromise’ and/or ‘arrangement’ which includes ‘demerger’ but section 234 contain the terms ‘merger’ and/or ‘amalgamation’. The tribunal interpreted it in a way that the § 234 does not authorize ‘demerger’ of Indian companies with foreign companies and vice versa.
Further, the tribunal noted that the rule 25A only mention ‘mergers’ and ‘amalgamations’, hence, demerger is not authorized either under the Act or the rules. Besides, the tribunal also observed that the definition of ‘cross-border merger’, as per Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (draft regulation), did include the word ‘demerger’ but the notified regulations excluded the word ‘demerger’ from the definition. Therefore, it is evident that the exclusion of the term ‘demerger’ from the Act and the Regulations are intentional on the part of legislators.
On December 31, 2018, the tribunal adjudicated on a similar issue involving whether § 234 sanctions “demerger”. It is observed, on a close reading of § 232(1)(b), that “the whole or any part of the undertaking” could be transferred and this permissible transfer of part of the undertaking implies ‘demerger’. Therefore, it can be said that the § 234 permits ‘demergers’ as the section itself confirm that the provisions of chapter XV shall apply mutatis mutandis to cross-border mergers. Therefore, the latter order of the tribunal is incongruous to its order pronounced a year before.
Further, the tribunal itself in the latter order observed that the term ‘arrangement’ is inclusive of ‘demerger’. Subsequently, the exclusion of the term from S. 234 of the Act provides that the legislators have intentionally left out the term ‘demerger’.
However, the FEM (Cross-Border Merger) Regulations, 2016 defines “Cross-Border Mergers” as,
“any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013”
It is evident from the above definition that the regulation permits the ‘demerger’ with the foreign company as it is inclusive in the term ‘arrangement’. Therefore, the tribunal’s order is inconsistent in itself.
Besides, the report of the J.J. Irani Committee on Company Law states that the de-mergers should be treated on par with mergers and acquisitions and accordingly the committee mentioned in its report that the law and rules catering to mergers and acquisitions are also intended to cover demergers.
The judgment pronounced by the tribunal is out-turn of a strictly literal interpretation of the Act and is inconsistent with the progressive nature of the Act. Authorizing Cross-Border Mergers but Cross-Border Demergers does not make much sense. However, as mentioned by the tribunal, the role of NCLT is to administer the law not to legislate it. At this backdrop, it is submitted that the MCA should issue a clarification with regards to the legality of ‘Cross-Border Demergers’ as the tribunal’s interpretation is going to have a significant impact on India Inc’s M&A industry.
 “arrangement includes a reorganisation of the company‘s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods.”
 Regulation 2(iii), FEM (Cross-Border Merger) Regulations, 2018.
ABOUT THE AUTHOR
Vishal Singh author is fourth-year student at Dr Ram Manohar Lohiya National Law University, Lucknow. His areas of interest are Corporate Finance Law and Securities Law.
In Content Picture Credit: Indian Corporate Law