RULES ON COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS | NOTIFIED

The Ministry of Corporate Affairs (MCA) has recently notified the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (Rules) setting out the revised procedure for compromises, arrangement and amalgamations under the Companies Act, 2013 (Companies Act), in pursuance of the notification of Chapter XV of the Companies Act, 2013 on 15 December, 2015.

• Filing of application: Companies have to inter alia file (i) an application, (ii) an affidavit, (iii) a copy of the Scheme of compromise, merger, amalgamation or arrangement (Scheme) etc accompanied by disclosures pertaining to relevant material facts such as the pendency of any proceedings against the company with the National Company Law Tribunal (NCLT) or with any other forum.
• Hearing of the Application at NCLT the Tribunal: The Tribunal may give directions to convene or dispense with the meeting of shareholders/ creditors along with fixing the time and place of the meeting, appoint a chairperson for the meeting etc. However, in the recent case of JAV Trading Vs C&S Electric, the Principal Bench of NCLT has held that - the rules do not confer upon the NCLT the power to dispense with meetings of specific classes of shareholders/members.
• Notices to members/creditors: The notice of the meeting and the Scheme should be sent to each member / creditor of the company at least 1 month before the date of the meeting. The Company must also, 30 days prior to the meeting, publish the notice of the meeting in 2 newspapers and also upload the same notice on their website. In case the company is a listed company, the same notice shall also put up on SEBI’s website and also on the website of the stock exchange where the Company’s securities are listed.
• Notices to statutory authorities: The notice and the Scheme should be sent to the regulatory authorities like the Central Government (CG), Registrar of Companies (ROC), Income-tax authorities (in all cases); and Reserve Bank of India (RBI), SEBI, Competition Commission of India, stock exchanges, as applicable and other regulators if directed by NCLT. The aforesaid regulatory authorities shall make a representation within 30 days of receipt of notice and other documents.
• Affidavit of Service: The chairperson appointed for the meeting shall file an Affidavit before NCLT that all requisite notices and advertisements have been complied with. The said affidavit is to be submitted 7 days before the date of the meeting.
• Filing of Report and Petition: The chairperson of the meeting shall submit a report to NCLT about the result of the said meeting within the time fixed by NCLT. The proposed arrangement reached by the members / creditors must be filed by the Chairperson within 7 days of filing of the report with the Tribunal.
• Hearing of the Petition: NCLT shall (i) fix a date for the hearing of the Petition. The notice of the hearing shall be advertised in the same newspaper in which the notice of the meeting was advertised, at least 10 days before the date fixed for the hearing; (ii) also serve notices of hearing of Petition to members/ creditors who have objected to the Scheme and to Central Government and other regulators/ statutory authorities who have made representation, as stated above.
• Procedure after Final hearing: Every company shall file a statement with ROC stating whether the Scheme is being complied with in accordance of directions issued by NCLT or not. Such statement is to be filed before NCLT within the end of 210 days of the financial year.
• Merger or Amalgamation of certain companies: In case of a merger between 2 or more small companies or between a holding company and its wholly owned subsidiary company or such classes of companies as may be prescribed under Section 233 of the Act (Fast track merger), the following procedure have to be followed:
  • A notice of the proposed scheme inviting objections or suggestions, if any, is , to be sent by ROC, Official Liquidator (OL) and any other affected persons of the Transferor Company and Transferee Company within 30 days from the date of issue of notice, which is to be considered by the Company in its General Meetings. The scheme has to be approved by members holding 90% of the total number of shares.
  • A declaration of solvency is required to be filed by the Transferee and Transferor Company with the ROC before convening meeting of its members and creditors for the approval of the said scheme.
  • The notice and explanatory statement accompanied with a (i) statement disclosing facts of the companies, (ii) capital structure, details of promoters, directors etc, (iii) copy of Scheme and (iv) declaration of solvency shall be sent to the members/ creditors, 21 days prior to the meeting of the members and/or creditors to approve the Scheme.
  • The Transferee Company shall within 7 days of conclusion of meeting of members/creditors file the following documents with CG: (i) copy of Scheme as approved by members and creditors and (ii) report of the result of each of the meetings.
  • Where no objection/suggestion is received from ROC and OL for the Scheme and the CG is of the opinion that the Scheme is in the general interest of the public , the CG shall issue a confirmation order of such Scheme of merger or amalgamation.
  • The Confirmation order is to be filed with ROC within 30 days of receipt of confirmation order.

MHCO COMMENT

The rules are aimed at simplifying the procedure relating to Scheme matters. However, with the disclosures and the procedure prescribed in the Rules and recent approach taken by Principal Bench in JAV Trading Case, it seem to be cumbersome process. Further, the process has been entirely shifted from the High Court to NCLT including the ongoing matters. This is a major shift and indeed a great relief and is certainly aimed at reducing the burden of the High Courts with respect to Company Law related matters. Overall, it is expected that this important change in law would indeed bring in substantial degree of efficiency in Scheme related matters.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

SUPREME COURT APPROVES STRUCTURED INVESTMENTS

Supreme Court of India in its recent judgment of IDBI Trusteeship Vs Hubtown Limited (HubTown Case) seems to have approved that foreign investments in structured investments indirectly providing assured returns will be now permitted even though otherwise prohibited under the Foreign Direct Investments in India (FDI).
Brief facts of the HubTown Case are as follows:

• In 2009 and 2010, a non-resident foreign entity, Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV (FMO) invested in equity shares and Compulsorily Convertible Debentures (CCDs) of Vinca Developer Private Limited (Vinca). Upon conversion of the CCDs in Vinca, FMO would be entitled to 99% of the equity of Vinca which in turn will further entitle FMO to 99% of the voting and economic rights of Vinca.
• These monies invested by FMO in Vinca were used by Vinca to purchase Optionally Partially Convertible Debentures (OPCDs) bearing a fixed rate of interest in its wholly owned subsidiaries Amazia Developers Private Limited (Amazia) and Rubix Trading Private Limited (Rubix). IDBI Trustee Limited (IDBI) was appointed as a debenture trustee in relation to the OPCDs for the benefit of the Vinca. Further, corporate guarantee was executed by Hubtown Private Limited (HubTown) in favour of IDBI to secure the OPCDs.
• Amazia and Rubix defaulted in payment of interest in relation to the OPCD's and accordingly IDBI as debenture trustees on behalf of Vinca invoked the aforesaid corporate guarantee. In view of the default, IDBI filed a summary suit against HubTown before the Bombay High Court.
• HubTown submitted before the Bombay High Court that the investment structure was a `colourable and artificially structured transaction.` The transaction was so structured that:
  • FDI amount received by Vinca from FMO`s investment in Vinca (by way of equity shares and CCDs) would be directed towards Amazia and Rubix against issue of OPCDs bearing a fixed rate of return at 14.5% per annum which was prohibited under the existing FDI laws.
  • On conversion of the CCDs, FMO would become the owner of Vinca and thereafter be entitled to the amount received by Vinca by way of the fixed rate of return from Amazia and Rubix.
  • FMO through its Nominee Directors could solely deal with the OPCDs and IDBI.
  HubTown submitted that if the entire transaction is looked at as a whole, it clearly shows that the purpose of the transaction was to enable FMO to secure a fixed rate of return on its FDI investments in townships/construction of housing, which is in violation of FEMA Regulations as FDI investments do not permit fixed rate of return in equity investments.
• Based on the aforesaid submissions of HubTown, the Bombay High Court vide an Order dated 8 May 2015, held that the above transaction through Vinca to Amazia and Rubix was a colourable device structured only to enable FMO to secure repayment (through Vinca) of its FDI amount and its interest thereon, and is in violation of FEMA Regulations and the FDI Policy which only permitted FDI in townships/real estate development sector to be made in the form of equity and precluded any assured return thereon as it is the case herein. Accordingly, Bombay High Court granted HubTown to unconditionally defend the summary suit which otherwise is not permitted under Civil Procedure Code, 1908 if the claim amount is undisputed.
• This order was challenged before Supreme Court. The Supreme Court held an entirely different approach and viewed the transaction at every individual stage contrary to the Bombay High Court, which viewed the transaction as a whole. The Supreme Court concluded that none of the stages of the transaction, if viewed distinctively, would violate the FDI Policy or FEMA Regulations.
• In view of the facts and circumstances of the given case, the Supreme Court stated that FMO`s investment in Vinca (an Indian Company) is itself not violative of FEMA Regulations. Furthermore, payments under the corporate guarantee is made for and behalf of Vinca to IDBI (an Indian Company), thus no violation of FEMA Regulations.
• Once FMO becomes a 99% holder of Vinca (post conversion of CCDs), at that stage FMO may utilise the funds received pursuant to the overall structure agreement in India. If this is the case, there is no breach of FEMA Regulations. Lastly, at a stage when FMO wishes to repatriate such funds, RBI permission would be necessary. However, if RBI permission is not granted, then again there would be no violation of FEMA Regulations as the funds would remain within the Indian economy itself.
• This being the case, the Supreme Court concluded that IDBI needs to be protected. HubTown would be granted leave to defend the suit only if it deposits in the Bombay High Court the principal sum invested by FMO in Vinca within a certain specified period.

MHCO COMMENT:

This Judgement is a landmark development in the life of structured investments in India and lays down the future approach which the Courts will be adopting in comprehending similar transactions. However, the order of the Bombay High Court was more admissible to the facts and circumstances of the given case, since it did not bypass the underlying intention with which FMO invested in Vinca i.e. to receive a fixed rate of return on its investments which is in violation of FDI Policy and the FEMA Regulations.

(The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)

SEBI ISSUES GUIDELINES FOR MERGERS BETWEEN LISTED AND UNLISTED COMPANIES

Listed companies which propose to enter into a Scheme of Arrangement such as Mergers, Amalgamations and Demergers under the Companies Act, require prior approval from SEBI and the Stock Exchanges on which the securities of the concerned company are listed under the SEBI (Listing and Obligations and Disclosure Requirements) Regulations 2015 ("LODR Regulations").

Under the LODR Regulations, the listed company shall ensure that the Scheme of Arrangement does not violate the Securities Laws or the requirements of the Stock Exchange. The Stock Exchanges review the Scheme of Arrangement filed with it by the listed company, and thereafter, issue a No-Objection Letter or Observation Letter approving the Scheme of Arrangement, after incorporating the comments from SEBI in respect of the same.

However, in order to avoid the formalities attached to fresh listing of securities of a company, unlisted companies amalgamate with a listed company to dodge the disclosure requirements and the time consuming process of an Initial Public Offering (IPO). Therefore, SEBI has, in its recent Press Release, proposed additional conditions to be followed for the scheme of arrangement s between listed and unlisted companies to prevent backdoor listing by unlisted companies through mergers with listed companies.

SEBI has proposed the following measures:

• In case of merger of an unlisted company with a listed company, the unlisted company shall comply with the requirement of disclosure of material information as specified in the format for abridged prospectus. This is to ensure that the unlisted company makes full and proper disclosures as is required under an IPO.
• The pre-scheme public shareholders of the listed company and the Qualified Institutional Buyers (QIBs) of the unlisted company, shall, together, hold not less than 25% of the total shareholding in the merged company. The objective is to have wider public shareholding and to prevent very large unlisted company to get listed by merging with a very small company.
• The unlisted company can be merged with a listed company if it is listed on a stock exchange having nationwide trading terminals.
• The pricing of the shares issued shall be as per the pricing formula specified under the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (“ICDR Regulations”). This is to prevent issue of shares to select group of shareholders instead of all shareholders pursuant to the scheme.
• To ensure larger participation of public shareholders, their approval through e-voting is required in the following cases:
  • When the merger of an unlisted company with a listed company results in reduction of the shareholding of the pre-scheme public shareholders of the listed company to less than 5% of the merged company.
  • When the scheme of arrangement involves transfer of whole or substantially the whole of the undertaking of a listed company and consideration for such transfer is not in the form of listed equity shares.
  • When the scheme of arrangement involves merger of unlisted subsidiary with listed holding company where the shares of the unlisted subsidiary have been acquired by the holding company directly or indirectly from the promoters/promoter group.
• Companies would be required to submit compliance report confirming compliance with the circular and Accounting Standards duly certified by Company Secretary, CFO and Managing Director.
• With a view to simplify the process, schemes which provide for merger of a Wholly owned Subsidiary (WoS) with the parent company shall not be required to be filed with SEBI. Such schemes shall be filed with stock exchanges for the limited purpose of disclosures only.

MHCO COMMENT:

The aforesaid guidelines issued by SEBI are a positive step towards minimizing back door listing by unlisted companies. The stringent disclosure requirements by unlisted companies shall help to protect the interests of the public shareholders and strict adherence to the pricing guidelines prescribed under ICDR Regulations, shall ensure that the valuation and pricing of shares is not skewed in favour of the unlisted company.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.