PROJECT REPORT ON COMPROMISE,ARRANGEMENT&AMALGAMATION IN FULFILLMENT OF THE REQUIREMENTS FOR THE COMPLETION OF 21 MONTHS TRAINNING PROGRAMME Stemi h ay Rien ey eye) CS Sheetal Jain Ferre ML) -Y EYP.) aaACKNOWLEDGEMENT | would like to give my earnest acknowledgement for the opportunities | got during training period under CS Sheetal Jain, I'm also thankful to them for being such wonderful mentors and providing me with their able guidance and constant support, | take this opportunity to express my deep gratitude for your assistance and cooperation in this endeavor ‘And thank you for the educating and constructive 8 manths. wi Registration No. 440839678/01/2020Particulars: Page No. From |To 1 Introduction 04 Oa 2. Meaning of Corporate Restructuring 3. Important Definitions 4 ‘Types of Corporate Restructuring Strategies or Types of Merger a7 [os 5. Reasons or Object or Advantages of Merger and Amalgamation 10 Ju 6 Regulatory Framework for Mergers and Amalgarnations nf 7. Provisions Relating to Compromise, Arrangement and Amalgamation Under [12 | 21 ‘Companies Act 2013 8 ‘Approvals to Be Taken in Scheme of Amalgamation 2 [2B 9. Procedure for Merger and Amalgamation 24 «(6 10. | Content inthe Scheme of Compromise and Arrangement 2 «27 ite Filing of Various Forms in the Process of Merger/ Amalgamation a7 [30 12 | Stamp Duty Aspects of Mergers and Amalgamations 30 —*| 30 13. _| Taxation Aspects of Mergers and Amalgamations 31/341] INTRODUCTION There are primarily two ways of grawth of business arganization, i.e. organic and inorganic growth. Organic growth is through internal strategies, which may relate to business or financial restructuring within the ofganization that results in enhanced customer base, higher sales, increased revenue, without resulting in change of corporate entity. Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling it to skip few steps on the growth ladder. Restructuring through mergers, amalgamations etc., constitute one of the most important methods for securing inorganic growth. ‘A company is said to be growing organically when the growth is through the internal sources without change in the corporate entity. Organic growth can be through capital restructuring or business restructuring. Inorganic growth is the rate of growth of business by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions and takeovers and ather carporate restructuring strategies that may create a change in the corporate entity The business environment is rapidly changing with respect to technalogy, competition, products, peaple, geographical area, markets, and customers. It is not enough if companies keep pace with these changes but are expected to beat competition and innovate in order to continuously maximize shareholder value. Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size quickly, employ new technology with respect to products, people and processes. Thus, the inorganic growth strategies are regarded as fast track corporate restructuring strategies for growth. 2] MEANING OF CORPORATE RESTRUCTURING: Restructuring as per Oxford dictionary means "to give a new structure to, rebuild or rearrange", As per Collins English dictionary, meaning of corporate restructuring is a change in the business strategy of an organization resulting in diversification, closing parts of the business, etc, to Increase Its long-term profitability, Corporate Restructuring is defined as the process involved in changing the organization of a business,1) Q 3) 4) 5) 6) 2 8) Corporate Restructuring can involve making dramatic changes to a business by cutting out or merging departments. It implies rearranging the business for increased efficiency and profitability. In other wards, it is a comprehensive pracess, by which a company can consolidate its business operations and strengthen its position for achieving corporate objectives-synerajes and continuing as competitive and successful entity IMPORTANT DEFINITIONS Merger: Merger is the combination of two or more companies which can be merged together either by ‘way of amalgamation or absorption or by formation of a new company. Demenger: It means division/segregated of any one business entity into one or more components, Amalgamation: Amalgamation is the process through which two or more companies jointly forming a new company and existence of ald companies is end. Arrangement: “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 methads. Compromise: Compromise means settlement of dispute between Company and its shareholder or class of shareholder or creditor or class of creditors. Corporate Restructure: Corporate restructuring is the process of significantly changing 2 compary’s, business model, management team or financial structure to address challenges and increase shareholder value. Record Date: Appointed Date or Transfer date: This is usually the first day of the financial year preceding the financial year for which audited accounts are available with the companies. In other words, this is 4 cut-off date from which all the movable and immovable properties including all rights, powers, privileges of every 5kind, nature and description of the transferor-company shall be transferred or deemed to be transferred without any further act, deed or thing to the transferee company 9} Effective Date:This is the date on which the transfer and vesting of the undertaking of the transferor company shall take effect ie. all the requisite approvals would have been obtained, i, date of filing of High Court order with ROC. 4] TYPES OF CORPORATE RESTRUCTURING STRATEGIES OR TYPES OF MERGER: 1) Merger: Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption or by formation of a new company. The combining of two or more companies, is generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock, ‘Types of Merge! {Horizontal Merger:it is 2 merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firm's operations in the same industry. Horizantal mergers are designed to achieve economies of scale and result in reducing the number of competitors in the industry. {li)Vertical Merger:it is @ merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production ar distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration ofits activities. On the other hand, forward integration may result if 2 company decides to take over the retailer or Customer Company. Vertical merger provides a way for total integration to thase firms which are striving for owning of all phases of the praduction schedule together with the marketing netwark {lil}Co generic Merger:it is the type of merger, where two companies are in the same or related industries but do not offer the same products, but related products and may share similar distribution channels, 6providing synergies for the merger. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resaurces. {Iv) Conglomerate Merger:These mergers involve firms engaged in unrelated type of activities Ie. the business of two companies are not related to each other horizontally or vertically. In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. Conglomerate mergers are merger of different kinds of businesses under one flagship company. The purpase of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. It does not have direct impact on acquisition of manopoly pawer and is thus favored throughout the warld as a means of diversification 2) Demerger: - It is @ form of corporate restructuring in which the entity's business operations are segregated into one or more components. A demerger 's often done to help each of the segments operate mare smocthly, as they can facus on a mare specific task after demerger. 3) Reverse Mergers:-Reverse merger is the opportunity for the unlisted companies to become public listed company, without opting for Initial Public offer (IPO). In this process, the private campany acquires majority shares of public company with its own name. 4) _Disinvestment:-Disinvestment means the action of an organizatian or government selling ar liquidating an asset or subsidiary. Itis alsa known as “divestiture” 5) Takeovers:-Takeover occurs when an acquirer takes over the control of the target company. It is also known as acquisition, Normally this type of acquisition is undertaken to achieve market supremacy. It may be friendly or hostile takeover 6) Friendly takeover; In this type, one company takes over the management of the target company with the permission of the board. 7) Hostile takeover: In this type, one company takes over the management of the target company without its knowledge and against the wish of their management. 78) Jointventure:-A joint venture is an entity formed by two ar mare companies to undertake financial activity together. The parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the company. It may be Project based joint venture or Functional based joint venture, 9) Strategicalliance:-Any agreement between two ar mare parties to collaborate with each other, in order to achleve certain objectives while continuing to remain independent organizations is called strategic alliance 10) Franchising:-Franchising may be defined as an arrangement where one party (franchiser] grants another party (franchisee) the right to use trade name as well as certain business systems and process, to produce and market goods or services according to certain specifications. ‘The franchisee usually pays @ one-time franchisee fee plus a percentage of sales revenue as royalty and gains 11) SlumpSale:-Slump sale means the transfer of one ar mare undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. If a company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined lump sum consideration, then it results in @ slump sale, 5] REASONS OR OBJECT OR ADVANTAGES OF MERGER AND AMALGAMATION: Mergers must form part of the business and corporate strategies aimed at creating sustainable competitive advantage for the company. Mergers and amalgamations are important strategic decisions leading to the maximization of a company’s growth. Mergers and amalgamations are usually intended to achieve any or all of the following purposes: (1) Synergistic operational advantages — Coming together to praduce a new or enhanced effect compared to separate effects.(2) Economies of scale (scale effect) — Reduction in the average cost of production and hence in the unit casts when output is increased, to enable to offer praducts at more competitive prices and thus to capture a larger market share. (3} Reduced Expenses: Reduction in production, administrative, selling, legal and professional expenses. (4} Benefits of integration — Combining two or more companies under the same control for their mutual benefit by reducing competition, saving costs by reducing overheads, capturing a larger market share, pooling technical or financial resources, cooperating on research and development, etc. (5} Optimum use of capacities and factors of production. (6} Tax advantages — Carry forward and set off of losses of a loss-making amalgamating company against profits of a profit-making amalgamated company, &.g. Section 72A of the Income-Tax Act, 1961 (7) Financial constraints for expansion — A company which has the capacity to expand but cannot do so due to financial constraints may opt for merging into another campany which can provide funds for expansion, (8) Strengthening financial position. (9) Diversification. (10) Advantage of brand-equity. (11) Loss of objectives with which several companies were set up as independent entities. (12) survival, (13) Competitive advantage: (14) Eliminating or weakening competition (15) Revival of a weak or sick company, (16) Sustaining growth. REGULATORY FRAMEWORK FOR MERGERS AND AMALGAMATIONS 1} The Companies Act, 2013National Company Law Tribunal Rules, 2016 Companies (Compromise, Arrangements and Amnalgamations} Rules, 2016 4) Income Tax Act, 1961 5) SEBI (Listing Obligations and Disclosure Requirements] Regulations, 2015 6) Competition Act, 2002 7] PROVISIONS RELATING TO COMPROMISE, ARRANGEMENT AND AMALGAMATION UNDER COMPANIES ACT 2013 Section Provision 230 (1) | Where compromise or arrangement is proposed:- (a) between a company and its creditors or any class of creditars; or (b) between a company and its members or any class of members, The Tribunal may, on the application of the a) Company or b) Any creditor or c] Member of the company, or 4d) liquidator (in the case of wound up] grant Order for a meeting of the creditors or class of creditors, or Meeting of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs. 230(2) | The company or any ather person, by wham an application is made under sub section (1), Shall 10disclase to the NCLT by affidavit that- a all material facts relating to the company, such as the latest financial position of the company, the latest auditor's report on the accounts of the company and the pendency of any investigation or proceedings against the campany 6] reduction of share capital of the company, if any, included in the compromise or arrangement c} Any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured creditors in value, including- i) a Creditor’s Responsibility Statement in the prescribed form { Form No. CAA.1 ) ii) safeguards for the protection of other secured and unsecured creditors, lill report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board; iv] where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and v) a valuation report in respect of the shares and the property and all assets, tangble and intangible, movable and immovable, of the company by a registered valuer. uu230 (3) Where a meeting is praposed ta be called in pursuance of an order of the Tribunal under sub- section (1) of section 230, notice should be given in Form No. CAA. Notice of the Meeting a notice of such meeting shall be sent to All “Creditors or class of creditors andl -Members or class of members and, - Debenture-holders of the company individually at the address registered with the company which shall be aecompanied by Da statement disclosing the details of the compromise or arrangement, (Statement of disclosure} > 8 copy of the valuation report, if any, > explaining their effect on creditors, key managerial personnel, pramoters and nan-promoter members, and the debenture-holders (Effect of compromise and arrangement on Creditor, KMP, Promoters and Non Promoters Members and Debenture holder) > the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and (Effect of compromise and arrangement) 12230 (4) > any other matters as may be prescribed Notice and other documents shall placed on Website of the Company (if any):- Pravided that such natice and other documents shall also be placed on the website of the company, if any, Document shall be sent to SEBI and Stock Exchanges where securities are listed in case of a listed company, these docurnents shall be sent to the Securities and Exchange Board (SEBI) and stock exchange where the securities of the companies are listed, for placing on their website and shall also be published in newspapers in such manner as may be prescribed: Notice of Meeting is issued by way of an Advertisement Provided further that where the notice for the meeting is also issued by way of an advertisement, it shall indicate the time within which capies of the compromise or arrangement shall be made available to the concerned persons free of charge from the registered office of the company. A notice under sub-section [3)shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of ‘the compromise or arrangement within one month from the date of receipt af such notice: Provided that any objection to the compromise or arrangement shall be made only by persons holding not less than ten percent of the shareholding or having outstanding debt amounting to not less than five percent of the total outstanding debt as per the latest audited financial 13230(5) 230(6) 230(7) statement Anotice under sub-section (3) along with all the dacuments in such farm as may be prescribed shall also be sent to the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrer, the respective stock exchanges, the Official Liquidator, the Competition Commission of India established under sub-section (1) of section 7 of the Competition Act, 2002, if necessary, and such other sectoral regulators or authorities which are likely to be affected by the compromise or arrangement and shall require that representations, if any, to be made by them shall be made within a period of thirty days from the date of receipt of such notice, failing which, it shall be presumed that they have na representations to make on the proposals Where, at a meeting held in pursuance of sub-section (1), majarity of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, a8 the case may be, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order, the same shall be binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator, ['appainted under this Act or under the Insolvency and Bankruptcy Code, 2016, as the case may be, ‘Jand the contributories of the company An order made by the Tribunal under sub-section (6)shall provide far all or any of the following matters, namely: (a) where the compromise or arrangement provides for conversion of preference shares into equity shares, such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable: (b) the protection of any class of creditors; 14