Corporate restructuring –Account of Merger of Subsidiary with Holding Company

Corporate restructuring –Account of Merger of Subsidiary with Holding Company

Provision related to mergers under the New Companies Act has not been notified (i.e., section 230 to section 234 of Companies Act, 2013), so currently sections 391 to 394 of Companies Act, 1956 (”Act”) would continue to be in force, wherein merger of all companies, irrespective of nature and size requires court approval which includes mergers of a Wholly Owned Subsidiary (“WOS- Transferor company”) in to a Holding Company (“Transferee Company”).

Procedure require a company petition, which may file by the transferor company (WOS) in the High Court of jurisdiction where the transferor company has a registered office, presenting. It is pertinent to mention that the Memorandum of Association (“M/A”) must provide the power to amalgamate in its objects clause; if M/A is silent, amendment in M/A must take place.

A separate petition (under section 391 (1) of the Act) may be filed seeking directions of the Court for dispensation of the requirement or convening, of general meeting of Shareholders and Secured creditors of the Company; and to hold a separate meeting of the Unsecured Creditors of the Company for the purpose of considering and if thought fit approving with or without modifications, the Scheme of Amalgamation/merger. Meeting if convened may, inter-alia, include meetings of the creditors or member or any class of them, which should have relevant material to enable the voters to arrive at an informed decision for approving the scheme (approval of creditors however may be required in terms of the loan agreements). The majority decision (approval by simple majority or three-fourths majority in value) of the concerned class of voter should be just & fair to the class as a whole so as to legitimately bind even the dissenting member of the class. Here, the Court may appoint chairman for both the companies who would convene shareholders meeting, who shall give the report to the court the result of the meeting.

Following documents with affidavit are required to be placed on record with Company petition confirming sanction of scheme:

1.      Scheme of arrangement entered between one company and its members and the other company and it members.

2.      Copies of the Resolutions passed by the Board of Directors of the Transferor Company and the Transferee Company approving the Scheme & to authorize filling application to the court for directions to convene a general meeting (as aforesaid). However directors who are given necessary powers by the AoA may present a petition on behalf of the company without first obtaining the approval of the company in general meeting or if the shareholders are few in numbers.

3.      Details with regard to the date of incorporation of Transferor and Transferee Company, their authorized, issued, subscribed and paid up capital.

4.      Copies of the Memorandum and Articles of Association of the Transferor and Transferee Company as well as their latest audited Annual Accounts and an affidavit in support of company application giving particulars of financial position of transferor and transferee company.

5.      Statement of proceedings under Sections 235 to 251 of the Companies Act, 1956 pending against the Transferee Company and Transferor Company.

So far as the share exchange ratio for amalgamation is concerned, the Scheme may provide that the Transferee Company shall not be required to issue any shares, since the Transferor Company is a wholly owned subsidiary of the Transferee Company, accordingly all the equity shares held by the Transferee Company in the Transferor Company shall be cancelled.

Commencement of the proceedings (procedure as laid down in Company (court) Rules, 1959):

1.      Court could then direct to issue a notice in the petition to the Regional Director, Northern Region and Official Liquidator and a copy of the petition to be served upon the Registrar of Companies. Citations of the petition may upon the discretion of court be published in one English and Hindi Newspaper operating within jurisdiction of High Court.

2.      Affidavit of Service and Publication is to be filed showing compliance regarding service of the petition on the Regional Director, the Registrar of Companies and the Official Liquidator, and also regarding publication of citations in the newspapers. Copies of the newspaper cuttings, in original, containing the publications have to be filed along with the Affidavit of Service.

3.      Pursuant to the notices issued, the Official Liquidator may seek any information from the Transferor Company. And based on the information received, the Official Liquidator would file a report wherein he would state if he has received any complaint against the proposed Scheme from any person/party interested in the Scheme in any manner, and that the affairs of the Transferor Company do not appear to have been conducted in a manner prejudicial to the interest of its members, creditors or to public interest.

4.      In response to the notices issued in the petition, the Regional Director, Ministry of Corporate Affairs would file his Affidavit, where, inter-alia, he may state that the Transferor Company and the Transferee Company are Non Banking Finance Companies and registered with the Reserve Bank of India and may be required to give an undertaking for compliance of all the Rules and Regulations of the Reserve Bank of India being the concerned regulator of its activities for proposed amalgamation/merger or the Transferor Company is a wholly owned subsidiary of the Transferee Company and if the Transferee Company is a wholly owned subsidiary of a Foreign Company then accordingly the Transferee Company may be asked to give an undertaking for compliance of any approval from Reserve Bank of India as required under FEMA, or Transferor Company may be asked to give an undertaking for necessary compliance/approval from Competition Commission of India with regards to proposed merger/amalgamation; if deemed fit and proper by the Hon'ble High Court.

5.      In response to the above mentioned observations the Transferor and Transferee Company should undertake that they will comply with all the applicable Rules and Regulations of Reserve Bank of India or the Transferor and Transferee Company would comply with all applicable regulations under FEMA as may be required by the Reserve Bank of India. In view of the above said undertaking, the observation made by the Regional Director would no longer survive.

6.      Here it is pertinent to state that, as per Regulation 4 read with Schedule I category (8A) (as inserted via Amendment Regulations, 2012) of The Competition Commission of India (Procedure with regard to transaction of business relating to combinations) 2011 ("Regulations") any merger or amalgamation involving a holding company and its subsidiary wholly owned by enterprises belonging to the same group and/or mergers or amalgamations involving subsidiaries wholly owned by enterprises belonging to the same group need not file any notice with the Commission as it is not likely to cause an appreciable adverse effect on competition in India.

7.      Authorized signatory of the Transferor Company, would the file an affidavit confirming that the Transferor Company has not received any objection pursuant to citations published in the newspapers.

8.      After complying the entire requirement given as aforesaid, the court then grant sanction to the Scheme under Sections 391 and 394 of the Companies Act, 1956.

The scheme which is sanctioned under sections 391 to 394 of the Act, is not in the nature of an order accepting a compromise under Order 23 of the Code of Civil Procedure, 1908.

9.      Certified copy of the order will be filed with the Registrar of Companies within 30 days from the date of receipt of the same. In terms of the provisions of Sections 391 and 394 of the Companies Act, 1956, and therefore in terms of the Scheme, the Transferor Company and the property, rights and powers concerning the same will then be transferred to and vest in the Transferee Company without any further act or deed. Similarly, in terms of the Scheme, all the liabilities and duties pertaining to the Transferor Company will be transferred to the Transferee Company without any further act or deed.

Stamp Duty:

1.    The order may not be construed as an order granting exemption from payment of stamp duty or taxes or any other charges, if payable in accordance with any law; or permission/compliance with any other department which may be specifically required under any law. Therefore, upon Scheme becoming effective, an application is to be made before Tehsildar having jurisdiction over the properties of the transferor company, to effect mutation of the same in its records in favour of the transferee.

The Transferor Company shall stand dissolved without following the procedure of winding up.

Stamp Duty Notification of 1937:

As per the provision of the Notification No. 1 of 16 January 1937 & Notification no.13 dated 25 December 1937, no stamp duty is payable if the transaction is covered related to certain transactions among holding & subsidiary companies. It states that the stamp duty chargeable under the Article 23 and 62 of Schedule I of the Stamp Duty Act on instruments evidencing transfer of property between companies limited by shares is exempted in cases where:

• At least 90 percent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or,

• Where the Transfer take place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 percent of the issued share capital of the other.

• Where the transfer takes place between two subsidiary company of each of which not less than 90 percent of the share capital is in the beneficial ownership of a common parent company.

Provided that to avail the aforesaid exemption a certification of compliance with the aforesaid condition was required to be obtained from the designated authority.

However, the Government of Delhi has through a vide Notification dated 1 June 2011, withdrawn with immediate effect the stamp duty exemption in the aforesaid notification.

Nonetheless, in other states, in case of mergers of wholly owned subsidiary into its holding company, no shares are issued in consideration for the transfer, whereof the current view is that no stamp duty is payable on such mergers.

The Income tax Act:

Under Income tax provisions, the mergers/amalgamation is governed under sections 2(1B), 72A, 45, 47 of the income tax act, which provides:

          i.            carry forward and set off of accumulated loss & unabsorbed depreciation i.e., In respect of the assessment year in which the merger is effected, the transferee when submitting its returns, can claim the benefit of Section 72A of the Income Tax Act to have the unabsorbed depreciation of transferor company as its the depreciation.

        ii.            That under Section 47 (vi) & Sec. 47(vii), the transferor company need not pay any capital gain, & also  on issue of shares to the shareholders of shares to the transferor co. does not attract capital gain i.e., which states that any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company shall be exempted if -

a)      the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

b)       the amalgamated company is an Indian company

SEBI Regulations:

In case of amalgamation or merger or demerger under the Act, SEBI Takeover Regulations have no applicability as laid down in Regulation 10 (d) (ii) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Provisions under Companies Act, 2013

The generic procedure, involves:

ü  Prior notice required to ROC, OL and persons affected by scheme of both companies before shareholders’ meetings and their objections / suggestions to be placed before shareholders.

ü  Meeting notice to be sent to Registrar and Official Liquidators inviting suggestion / objections to scheme.

ü  Approval from >=90% shareholders and >=90% of creditors (value)

ü  On CG’s or any other person’s application, Tribunal may decide if regular Court process should be followed.

ü  Any objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent of the shareholding or having outstanding debt to not less than five per cent of the total outstanding debt as per the latest audited financial statement.

(b) Merger of “small companies” and holding with wholly-owned subsidiaries (section 233:

Section 233 of the 2013 Act prescribes a simplified fast track procedure for their merger which requires consent of shareholders holding 90% in value and creditors representing 9/10th of debt in value as well as approval of the Scheme by the Regional Director, Ministry of Corporate Affairs in case no objections are received from the Official Liquidator and Registrar of Companies. Approval of the Tribunal is not required for such mergers.

It is helpful for the merging entities, which may not be required to

        i.            file documents required to be filed under the listing agreement, in the case of listed companies,

      ii.            give notice to various authorities,

    iii.            provide auditor’s certificate of compliance with applicable accounting standards.

However, if the Regional Director is of the opinion that the Scheme is not in the interest of the stakeholders, he may approach the tribunal, who could follow the merger procedure prescribed under the 2013 Act.