Private mergers and acquisitions in India: overview
Q&A guide to private mergers and acquisitions law in India.
The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.
To compare answers across multiple jurisdictions, visit the Private mergers and acquisitions Country Q&A tool.
This Q&A is part of the global guide to private mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-mjg.
Corporate entities and acquisition methods
The main corporate entities involved in private acquisitions are companies incorporated under the Companies Act 1956 (Companies Act 1956) or the Companies Act 2013 (Companies Act 2013):
Public companies (listed under the Companies Act 2013 or unlisted).
One person companies.
In addition, limited liability partnerships established under the Limited Liability Act 2008 are gaining popularity.
Restrictions on share transfer
Under company law, an essential characteristic of a private company is a restriction on its members from freely transferring their shares. Such a restriction must be recorded in the private company's articles of association to bind the company. These restrictions are generally by way of a right of first offer or right of refusal given to the other shareholders.
Foreign ownership restrictions
The Foreign Direct Investment (FDI) Policy issued by the Government of India, and other exchange control laws, restrict foreign ownership. Specific sectors have a limit beyond which foreign investment is restricted. For example, FDI is permitted in the:
Print media sector up to 26%.
Insurance and defence sectors up to 49%.
Private banking sector up to 74%.
In certain sectors (such as gambling, lottery and real estate) FDI is prohibited, while in certain other sectors there is no limit (such as mining, railway infrastructure, education and hotels and tourism).
The most common way to acquire a company is through an acquisition by share purchase. An acquisition of the business of a company is done through either:
An asset purchase.
A slump sale (that is, acquiring the business as a going concern without assigning specific values to each asset).
A demerger through a court process.
Share purchases: advantages/asset purchases: disadvantages
In a share purchase, the buyer acquires the target company without disturbing the target company's operations (except where a licence or contract has a specific restriction on a change in ownership or management control). In an asset purchase, the assets belong to a new legal entity following the acquisition. Therefore, the buyer may need to acquire new licences, permits and consents from relevant authorities to carry out the operations with the assets in its control.
In a share purchase, the employees are not affected as there is no change in their employer and generally no change in their employment terms. Therefore, employee consent is not required unless the terms of their employment change. In an asset purchase, the employees and all their benefits must be transferred to the buyer entity. For this, the buyer and seller must obtain employee consent, unless either the:
employment agreement allows for a transfer;
prescribed conditions are met.
In a share purchase (where there is a change of control), business contracts, leases or licences entered into by the target company both:
are not must separately assigned in favour of the buyer;
remain enforceable by and against the target company.
This is unless those contracts, leases or licences specifically require the consent of the counterpart.
In an asset purchase, business contracts, leases or licences must be assigned to the new company or the buyer. This requires counterpart consent and incurs stamp duty and potential tax liabilities.
A share purchase may also be cost effective from a stamp duty perspective, as:
the share transfer attracts stamp duty at the rate of 0.25% of the value of the consideration given for the shares;
if the shares are held in dematerialised form, no stamp duty is payable on the transfer.
In an asset purchase, the stamp duty may vary depending on how the document is structured and where the document is executed/assets lie. The rate is usually between 3% to 7% for movable property and 5% to 10% for immovable property.
Share purchases: disadvantages/asset purchases: advantages
The main advantage of an asset purchase is that the buyer can exclude certain assets and liabilities. In a share purchase, the buyer does not have this flexibility.
In an asset purchase through slump sale, the capital gains tax liabilities are often lower than in a share purchase.
In an asset purchase, the corporate obligations do not automatically follow the assets and will not be transferred to the buyer. However, statutory and tax obligations may be attached to these assets following the sale. In a share purchase, all obligations (including corporate, statutory and tax) continue with the target company and are therefore acquired by the buyer.
Sales of companies by auction are not common and sales are generally private.
Investment bankers sometimes carry out processes similar to auctions. They identify potential buyers and provide them with a memorandum of information. Based on this memorandum, potential interested buyers can bid to acquire the target company through this process. Shortlisted bidders can undertake a due diligence and then submit a final offer.
Letters of intent
A letter of intent (also called a memorandum of understanding or a term sheet) is an in-principle agreement between the parties to the acquisition. It outlines the principal terms of the transaction before the drafting of the definitive agreement.
Letters of intent outlining the parties' intentions are not an enforceable contract per se (unless any consideration is paid, in which case the letter generally becomes binding). They include certain non-binding provisions such as purchase price, payment mechanism, conditions precedent, and representations and warranties from the sellers. However, the parties usually specify that certain provisions in the letter of intent are binding and are enforceable, such as:
Confidentiality or non-disclosure.
Costs and expenses provisions.
Term and termination of the letter of intent.
Exclusivity agreements are used to ensure that the seller negotiates solely with the buyer for a specified or a pre-determined period of time. This gives the buyer some protection against a seller carrying on negotiations for the company/assets with multiple potential parties. This can be included as a clause in the letter of intent or may form a separate agreement.
Non-disclosure agreements (also called confidentiality agreements), are almost always executed between the parties before any confidential information is shared. The parties to an acquisition can enter into a separate non-disclosure or confidential agreement, or include this as a provision or clause in the acquisition documents.
Non-disclosure agreements generally include exceptions (that is, information which if disclosed would not render the disclosing party in breach of its obligations under the agreement). These exceptions are:
Information disclosed to the party by a third party.
Any information that is to be disclosed in a court proceeding or administrative process due to a judicial order or decree.
Generally, the parties to a transaction decide which asset and liabilities will be excluded from the purchase. In certain cases, tax liabilities attached to an asset could transfer to the acquirer. There may be certain cases in which an asset cannot be transferred without liability such as a contract having outstanding obligations.
Under Indian law, assignment of rights does not require approval of the counter party whereas a liability cannot be assigned without the approval of the counter party.
Creditor consent is not mandatory, except in cases of a court-applied merger or demerger. However, agreements entered into with the creditors often restrict any sale or disposition of assets and liabilities without creditor consent, especially when large amounts are owed.
In cases of merger or demerger under the Companies Act 1956, where a scheme of arrangement or compromise must be filed and approved by the court, the scheme of arrangement must be approved by a majority of creditors representing three-fourths in value of the then outstanding loans. The corresponding provision under the new Companies Act is not yet notified, so the Companies Act 1956 continues to apply in this case.
Typically, most share sale agreements include at least the following conditions precedent:
The seller must conduct legal, financial and technical due diligence.
Necessary approvals from various governmental authorities and regulatory bodies such as the Competition Commission of India, or approval from tax authorities, where applicable.
Consent of shareholders or any third parties, where pre-emptive rights are attached.
The seller's representations and warranties must be true, accurate, complete and not misleading in all respects at closing.
Corporate approvals with appropriate resolutions by both parties approving the transaction.
Seller's title and liability
The seller's title to shares is subject to certain implied warranties:
The seller has the right to sell the shares.
The buyer will have quiet possession of the shares.
The shares are free from any charge or encumbrances.
Buyers generally negotiate to impose a higher restriction than implied by law (for example, to ensure there is no other agreement contrary to the warranty of seller's title to shares), but no specific wording is necessary.
Generally, the sellers cannot be held liable for pre-contractual misrepresentation as there is no binding contract between the parties. The definitive agreements also almost always contain an "entire agreement clause" which states that the agreement supersedes all prior agreements, negotiations, and so on. However, if certain statements are specifically included in the agreement as stated by the seller or specifically stated to be relied on by the buyer, then the buyer can claim for damages. The burden of proof in these cases is high and the buyer must prove that the seller's misrepresentation was with intent to deceive..
Claims against advisers for pre-contractual misrepresentation and misleading statements cannot be made unless the buyer can prove both:
Fraud on the part of the seller.
That the adviser was actively a part of the fraud.
The main documents in an acquisition transaction are (the party who generally prepares the first draft is indicated in brackets):
A letter of intent or term sheet (buyer).
A share purchase agreement, applicable in an acquisition through share sale (buyer).
Asset transfer agreement or business transfer agreement, applicable in an acquisition through asset sale (buyer).
Board resolutions (respective parties).
Disclosure letter (seller).
Amended articles of association of the target company (seller).
A confidentiality or non-disclosure agreement, if not included as a provision in the share purchase or asset transfer agreement (buyer).
Tax indemnity, indemnifying the buyer against pre-closing tax liabilities of the target (buyer).
Conveyance deed, applicable in cases of immovable property acquisition through asset transfer (buyer).
Record of transfer for movable property (buyer).
Non-compete agreements (buyer).
Due diligence questionnaire (buyer).
Employment agreement (buyer).
The main documents in a demerger are:
Scheme of arrangement (buyer).
Joint application for demerger to a competent court of law, along with notices to shareholders, creditors and statutory authorities (buyer/seller).
Substantive clauses in share and asset acquisition agreements are similar. However, the conditions precedent, representations and warranties, indemnities and liabilities in an asset acquisition agreement focus on the particular asset or undertaking being purchased.
Substantive clauses in an asset or share acquisition agreement are:
Agreement for the sale and purchase of shares of the company (share acquisition).
Agreement for sale and purchase of assets (asset acquisition).
Description of the assets (asset acquisition).
Identification of the assets or the business undertaking (asset acquisition).
Identification of the specific liabilities that the buyer will assume (asset acquisition).
Purchase price and payment mechanism.
Seller representations and warranties.
Signing and closing covenants.
Term of the agreement, termination and consequences of termination.
Tax implications and payment.
Transition of management.
Indemnity and limit on liability.
Non-compete and non-solicitation.
Dispute resolution/governing law.
Stamp duty and other costs.
The parties to a share purchase agreement can provide for a foreign governing law. Judicial precedents suggest that an agreement can be governed by foreign laws, if the foreign governing law has a connection to the provisions of the agreement and is not designed to defeat Indian laws.
However, certain Indian law provisions automatically apply to foreign law governed agreement, such as foreign exchange laws and tax laws.
Warranties and indemnities
Seller warranties/indemnities are generally included in the acquisition agreement:
In a share purchase, warranties/indemnities relate to the company and its entire business operations, as well as all its assets and liabilities. Given the risk of purchasing the business with all known and unknown liabilities, the buyer usually negotiates with the seller for indemnity against unknown liabilities.
In an asset purchase, warranties/indemnities focus specifically on the state and fitness of the assets/business undertaking, as well as implied warranties. Where most liabilities are left behind with the seller, limited warranties and indemnities are usually given.
Warranties generally cover the following main areas:
Accuracy of statements and disclosures in the agreement and disclosure letter.
Assets (movable and immovable).
Authority to contract.
Conduct of business, including related party transactions and arms-length basis transactions.
Finances, loans and borrowings.
Licences and approvals.
Organisational and corporate matters.
Title to assets/shares.
Indemnities cover loss or damage due to a misrepresentation of warranties or breach of any covenant.
Limitations on warranties
There are no statutory monetary limitations on warranties. Warranties can be limited under an acquisition agreement by capping the indemnities or pre-agreeing to a limit on damages payable.
Parties can also agree that no indemnities can be claimed for breach of warranties resulting in claims below the minimum thresholds provided in the agreement.
To claim under an indemnity, the party claiming must prove loss suffered. A party cannot claim damages for indirect or consequential loss.
Qualifying warranties by disclosure
In acquisition transactions, sellers generally provide a disclosure schedule that qualifies the seller's warranties. The seller cannot be held liable for any loss or damage suffered if the facts which caused the warranty to be breached were disclosed under the disclosure schedule. This is unless, despite the disclosure, either:
It is specifically agreed that the seller will be liable for the event.
There is a specific indemnity in this regard.
The remedy generally available for breach of warranty is a claimfor damages. However, the buyer can also rely on escrow arrangements, holdback provisions or bank guarantees, if the acquisition agreement included these provisions.
Time limits for claims under warranties
Claim to warranties are barred if a claimfor damages is not brought within three years from the date when the breach occurred. Further, the acquisition agreement can also include a certain period after which warranties expire.
Consideration and acquisition financing
Forms of consideration
Cash is the preferred and most common consideration offered. In some cases there are asset, intellectual property and share swaps.
Where there is a foreign buyer, payment in the form of non-cash consideration requires prior approval from the Reserve Bank of India.
Factors in choice of consideration
Choice of consideration depends on the object and type of the transaction. Factors include:
Tax, such as in a choice of non-cash consideration.
The buyer's inability to tender a full cash amount.
Cash can be raised from the company's shareholders through a rights issue, an underwritten public offer or private placement. Cash can also be raised by issuing other instruments such as debentures (convertible and non-convertible) or preference shares. Any finance raised through debt (including non-convertible debentures or preference shares) from foreign lenders/investors are subject to the Reserve Bank of India's External Commercial Borrowing Regulations (which sets, among other things, minimum tenure, permitted rates of interest and end use).
Consents and approvals
Where a buyer raises cash to fund an acquisition by an issue of shares, the following consents or approvals may be required:
Approval of the board of directors and shareholders.
Approval of the Reserve Bank of India or Foreign Investment Promotion Board (FIPB), if the securities are to be issued to non-residents.
Approval of the stock exchange where the shares are listed or to be listed.
Requirements for a prospectus
The following requirements/factors apply:
In the case of public issues, the offer is made through a prospectus in accordance with the guidelines issued by the Securities and Exchange Board of India (SEBI) and the Companies Act.
The prospectus must provide the information prescribed under section 26 of the Companies Act, for example:
name and address of the company's registered office and key personnel;
dates of opening and closing of the share issue;
statement of the board of directors regarding the bank account, details of underwriting issue and financial information (including capital structure, reports and minimum subscription amount).
Companies can make a public offer of securities by issuing shares in dematerialised forms under the Depositories Act 1996.
Companies can issue a shelf prospectus along with an information memorandum. This is valid for one year.
Companies can also issue a red herring prospectus (that is, an initial prospectus that does not include key details such as price or number of shares offered) before the issue of the prospectus.
The form of application of the purchase of shares must be accompanied by a prospectus.
A public company cannot provide financial assistance (directly or indirectly) for purchase or subscription of its shares or shares of its holding company.
Private companies are exempt from the provision above (see above, Restrictions). A private company can provide financial assistance to a potential buyer to acquire its shares. However, a company cannot give another body corporate or person a loan (or a guarantee or security in connection with a loan), or acquire by way of subscription, purchase or otherwise, securities of other body corporate, exceeding either (whichever is more):
60% of its paid up share capital, free reserves and securities premium account.
100% of its free reserves and securities premium account.
Signing and closing
The main documents produced and executed at signing in acquisitions through share sale are the:
Share purchase agreement.
Board resolution or power of attorney for the authorised signatories of both parties.
The main documents produced and executed at signing in an acquisition through an asset sale are the:
Individual asset purchase agreement.
Board resolution or power of attorney for the authorised signatories of both parties.
The following documents are usually produced and executed at the time of closing:
Share certificates and share transfer forms.
Shareholder resolutions of the selling company approving the asset sale (for sale of whole or substantially whole assets), if required.
Certificate confirming representations and warranties, and other certificates as required (such as a material adverse change certificate and a release of claim certificate).
Opinions of counsel (usually in the case of financial investments).
Record of transfer of movable property and conveyance deeds for immovable property (in an asset sale), and the relevant regulatory filings and disclosures.
Income tax clearance certificate or Competition Commission of India (CCI) approval, if required.
Documents are executed through authorised signatories of a company who are in turn authorised vide a board resolution or power of attorney. Documents which are primarily declaratory in nature or are under oath need to be notarised by a notary public.
Stamp duty is must paid on all contacts, arrangements declaration and affidavits. Such stamp duty must be paid before the parties in India executed the document and if such documents are executed outside India then within three months of the document (or in some states a photocopy or electronic copy) is received in India. The rate of stamp duty differs from state to state, depending on the nature of the document executed.
Generally, documents relating to transfer of immovable property must be registered with the registrar of assurances at the place where the immovable property is situated.
Documents executed under an oath, such as affidavits and declarations executed outside India, should be attested under an apostile (HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (Apostille Convention)).
There are no additional formalities for any other documents except as specified above or for any documents executed in India by a foreign person.
To be admissible as evidence in Indian courts, a document that is must stamped under the Stamp Act must be duly stamped within three months of being received in India.
The formalities required to transfer title to shares are:
Physical shares. The share transfer form must be executed by both parties and stamp duty must be paid. The share transfer form and share certificate must then be submitted to the company for it to record the change in ownership and endorse the name of the new owner on the share certificate.
Dematerialised shares. The seller must deliver an instruction slip to its depository participant, specifying the number of shares to be transferred. The ownership will then be changed in the depository's records.
Non-residents. If a party is a non-resident, Form FCTRS must be filed with the Reserve Bank of India within 60 days of the payment of consideration.
Stamp duty at the rate of 0.25% of the consideration is charged on a share sale (Indian Stamp Act). If the shares are transferred as dematerialised shares, then no stamp duty is payable (Depositories Act). Stamp duty is usually paid by the seller.
Stamp duty is imposed on each asset transfer at the rate applicable in the relevant state.
Movable asset transfer. The stamp duty on movable property transfers is either a fixed nominal amount or 3% to 7% of the consideration.
Immovable asset transfer. Stamp duty on immovable property transfers is between 5% to 10% of the consideration. Immovable property transfers are also liable to a registration charge, which is based on rates set by the state government where the property is situated and calculated based on the size of the immovable property.
Business transfer. Stamp duty is not imposed on the transfer of each movable asset, but on the whole transaction at a nominal amount. However, for immovable property transfers as part of the business transfer, stamp duty and registration charges must be paid on the transfer of that particular immovable property and not on other elements of the business transfer.
If shares to be transferred are dematerialised, then no stamp duty will be payable on the share transfer.
If assets are being transferred by delivery, which is merely recorded, then a nominal amount of tax may be payable. In an asset sale, the rate of the stamp duty differs between states. Therefore, higher stamp duty can be avoided by choosing to execute the agreement in the state with lowest stamp duty. For immovable properties, the registration charge depends entirely on the location of that immovable property and allows no alternative.
Corporate taxes are governed by the Income Tax Act 1961.
Assuming that shares are not held as stock-in-trade but as a capital asset, any profits arising on the sale are taxed as capital gains.
Sale of a capital asset may be taxed as either short term capital gains (STCG) or long term capital gains (LTCG), depending on their classification.
A short term capital asset being Indian shares is a capital asset held for not more than 24 months (or 12 months in the case of shares in a listed company) immediately preceding the date of transfer. A capital asset held for more than 24 months is a long term capital asset.
STCG is charged to tax at the standard rate of tax, which is determined on the basis of the transferor's total taxable income. The highest tax bandis currently 30% (plus applicable surcharge and cess). However, in case of listed shares, STCG is charged to tax at a rate of 15% (plus applicable surcharge and cess) subject to certain conditions. LTCG is charged to tax at the rate of 20% (plus applicable surcharge and cess) with indexation benefit. A reduced rate of 10% (plus applicable surcharge and cess) is applicable if no indexation benefit is taken. In the case of listed shares, LTCG is exempt from tax, subject to certain conditions.
If shares are sold for consideration which is less than the fair market value (FMV) of the shares, then the difference between the consideration and the FMV is taxed in the hands of the buyer as income from other sources (at the applicable tax band rate).
Certain special rates of long term and short term capital gains tax apply to same categories of investors such as non-resident Indian, institutional investors, and so on.
Business income. When the assets are held as stock-in-trade, profit arising from the sale of assets is business income and taxed at 30% (if the entity is an Indian company).
Capital gains. When assets are held as investment assets, profits arising from their sale results in capital gains:
STCG is taxed at the standard rate of tax, which is determined on the basis of the total taxable income of the transferor.
LTCG is taxed at 20%.
If assets are transferred under a slump sale, LTCG or STCG must be paid based on the period of holding of the undertaking (rather than the period of holding of the individual assets transferred). In the case of a slump sale, tax on capital gains is payable based on the formula provided under the Income tax Act 1961. In the case of LTCG taxable under a slump sale, indexation benefit is not available.
The main corporate tax exemptions are:
Long term capital gains (LTCG) exemption. LTCG gains arising on the sale of listed shares is exempt from tax if it is sold through a recognised stock exchange. If this is the case, securities transaction tax (STT) is paid.
Capital gains tax exemptions under the Income Tax Act 1961. There are various specified transactions under the Income tax Act 1961 that are not regarded as transfers and therefore not subject to capital gains tax. For example:
any transfer of a capital asset to an amalgamated company (as defined under the Income Tax Act 1961), provided that the amalgamated company is an Indian company;
any transfer of shares held in an Indian company by an amalgamating foreign company to the amalgamated foreign company, subject to certain conditions;
any transfer of shares by the shareholders of an amalgamating company as consideration for the allotment of shares of the amalgamated company, provided that the amalgamated company is an Indian company;
any transfer of a capital asset in a demerged company (as defined under the Income Tax Act 1961) to the resulting company, provided that the resulting company is an Indian company;
any transfer of shares held in an Indian company by a demerged foreign company to the resulting foreign company, subject to certain conditions.
any transfer of shares by the resulting company in a demerger to the shareholders of the demerged company, if the transfer is made in consideration of the demerger of the undertaking.
Capital gains relief. Gains arising from the transfer of long term capital assets are exempt from capital gains tax if the gains are invested both (along with other requirements):
by a resident transferor in the specified assets, bonds and so on;
within the specified time period.
Foreign shareholders. A foreign shareholder selling shares in an Indian company may pay a lower or nil rate of capital gains tax if he is resident in a jurisdiction that has entered into a double tax agreement with India (for example, Mauritius, the Netherlands and Singapore), subject to fulfilling the prescribed conditions.
Securities transaction tax (STT) applies in respect of certain transactions, such as:
Purchase or sale of an equity share in a company, entered into in a recognised stock exchange.
Sale of unlisted equity shares under an offer for sale to the public included in an initial public offer.
Currently, the rate of STT on sale of:
Listed equity shares is 0.1%.
Unlisted shares under a public offer is 0.2%.
Value added tax (VAT) is levied on an intra-state sale of goods. In an asset sale, the seller pays VAT on a transfer of assets (under the applicable state VAT legislation). The rate of VAT levied varies from state-to-state, depending on the seller's location and the nature of the goods. The VAT rates applicable to different kinds of goods are listed in schedules of the relevant VAT acts. For example, under the Maharashtra VAT Act, the rate varies from 1% to 60%. Goods for common consumption are taxed at 5.5% and goods not specifically included in any of the schedules are taxed at 12.5%.
Companies in the same group can surrender losses to each other for tax purposes in certain cases. For example, in a slump sale, accumulated business loss or depreciation of the transferring company can be carried forward and set-off by the acquiring company. In the case of amalgamation or demerger, the transferee can carry forward the transferor's losses or depreciation.
Generally, transfer of an employee to a buyer entity requires the employee's consent, if he both:
Falls within the definition of "workman" under the Industrial Disputes Act 1947 (ID Act).
Has been in service for at least a year.
If consent is not taken, the employee is entitled to notice and compensation as if he had been retrenched. However, this does not apply when, on transfer of the employee to the buyer entity as a result of the asset sale:
The employee's services are not interrupted.
The employment's terms and conditions are not less favourable than before the transfer.
The new employer is legally liable by the terms of the transfer to pay the employee's retrenchment compensation, on the basis that the employment/service has been continuous and not been affected by the transfer.
Generally, no consent is required in a share sale, as the employer and the employment contract do not change. However, if the employment terms change, then the employee's consent is required (or notice and compensation must be given as if he had been retrenched).
In a business sale, an employee cannot be dismissed unless he has been given notice and compensation as if he had been retrenched. In such a case, both of the following must be given:
One month's notice in writing or payment in lieu of notice.
Compensation equivalent to 15 days' average pay for every completed year of continuous service. (Once an employee completes six months' employment, this period is counted as one year and the employee is entitled to 15 days' compensation.)
For circumstances in which notice and compensation are not required, see Question 31, Asset sale.
Employees have the same protection as in a business sale.
Transfer on a business sale
The employee's consent is required for transfer to the buyer entity, unless the terms of employment, expressed or implied, provide for automatic transfer of employees.
Private pension scheme
Generally, companies prefer to participate in the Public Provident Fund Scheme under the Employees' Provident Fund and Miscellaneous Provisions Act 1952 (EPF Act). Under this, for eligible employees, both the employer and employee contribute 12.5% of the employee's salary, up to a certain limit. Companies can set up their own private provident fund or pension scheme, provided that the employees are entitled to benefits that are not less favourable than those they are entitled to under the EPF Act.
Pensions on a business transfer
The buyer entity must honour the existing/equivalent pension rights and make the necessary contribution. If it does not, the employment conditions are affected, resulting in the obligation to give a notice and compensation to the employee as if he had been retrenched.
Acquisition of shares or assets by one or more enterprises (including by way of merger and amalgamation) is deemed to be a combination if it meets certain thresholds (Competition Act) (see below, Thresholds). The parties proposing to enter into a combination must give prior notice to the Competition Commission of India (CCI) within 30 days of either:
Executing the acquisition document which amounts to combination.
The board of directors approving the proposal for a merger or acquisition which may amount to a combination.
The CCI must respond or pass an order within 210 days from the date of the notice. If the CCI fails to do this, it is deemed to have approved the combination.
Any combination that causes or is likely to have an appreciable adverse effect on competition in the relevant markets is treated as void.
The Competition Act provides the financial thresholds to determine whether a transaction is a combination or not. If the target enterprise has Indian assets of less than INR3.5 billion, or Indian turnover of less than INR10 billion, the transaction is exempt from the CCI notification requirement.
The de minimis target-based exemptions are valid until March 2021. The notification thresholds are:
Where the acquirer and the enterprise whose shares, assets, voting rights or control being acquired have either:
combined assets in India of INR20 billion; or
combined turnover in India of INR60 billion.
Where the acquirer and the enterprise whose shares assets, voting rights or control being acquired have either:
combined worldwide assets of US$1 billion, including combined assets in India of INR10 billion; or
combined worldwide turnover of US$3 billion, including combined turnover in India of INR30 billion.
Where the group to which the target enterprise would belong after the acquisition has either:
assets in India of INR80 billion; or
turnover in India of INR240 billion.
Where the group to which the target enterprise would belong after the acquisition has either:
worldwide assets of US$4 billion including assets in India of INR10 billion; or
worldwide turnover of US$12 billion including turnover in India of INR30 billion.
For the purposes of the group threshold calculations, two enterprises are considered a group if one enterprise, directly or indirectly, both:
Holds more than 50% of the share capital of the other enterprise.
Has power to:
appoint more than 50% of the board of directors of the other enterprise; and/or
control the management of the other enterprise.
Notification and regulatory authorities
The CCI has issued the following notifications relating to combinations:
CCI (Procedure in regard to the transaction of Business relating to Combinations) Regulations 2011.
CCI (Manner of Recovery of Monetary Penalty) Regulations 2011.
CCI (Determination of Cost of Production) Regulations 2009.
CCI (Lesser Penalty) Regulations 2009.
CCI (Meeting for transaction of Business) Regulations 2009.
CCI (General) Regulations 2009.
CCI (Procedure of Engagement of Experts and Professionals) Regulations 2009.
These notifications provide the detailed procedure to determine a combination, and to give notice, orders and filings.
The CCI reviews combinations that have or are likely to have an adverse effect on completions in the relevant market(s). CCI approval is required for all combinations that exceed the assets/turnover thresholds (see above).
The Director General (DG) of CCI conducts an investigation into the combination. The Secretary has custody of the CCI's records and exercises such other functions as it may be assigned by the Chairperson of the CCI.
Transactions meeting the thresholds and amounting to combinations cannot be completed unless approval from CCI is obtained.
The substantive test for a combination is whether it has or is likely to have an adverse effect on competition in the relevant market.
In assessing the effect on competition, the CCI takes into account the following factors, among others:
Entry barriers such as sunk cost/technological leads.
Actual and potential competition.
Effective competition after the combination.
Degree of countervailing power.
Nature and extent of innovation.
Removal of vigorous competitors.
Nature and extent of vertical integration.
Likelihood that the combination will increase prices or profit margins.
In an acquisition by sale of shares, all liabilities are transferred to the buyer. Therefore, the buyer is liable for all environmental liabilities associated with the company. However, in an acquisition by asset sale, only the liabilities attached to the asset purchased follow the buyer.
If the buyer wishes to be excluded from this liability, then it must rely on any indemnities provided in the agreement.
Government of India
Description. Legislation passed by the parliament of India.
Ministry of Corporate Affairs
Description. All legislation relating to companies law and partnership law.
Securities and Exchange Board of India
Description. All data and guidelines relating to listed companies.
Income Tax Authorities
Description. All information regarding income tax laws.
Competition Commission of India
Description. All information regarding competition/anti-trust laws.
Aliff Fazelbhoy, Senior Partner
Professional qualifications. India, Advocate and Solicitor; England and Wales, Solicitor
Areas of practice. General corporate; tax; M&A; private equity; employment.
Languages. English, Hindi
Professional associations/memberships. Bar Council of Maharashtra & Goa; Bombay Incorporated Law Society; Law Society of England & Wales; Indian Chapter of International Fiscal Association.
Publications. Representative author for International Bureau of Fiscal Documentation.
Ryna Karani, Partner
Professional qualifications. India, Advocate
Areas of practice. General corporate; M&A; private equity; banking and finance (including project finance); real estate.
Languages. English, Hindi, Gujarati
Professional associations/memberships. Bar Council of Maharashtra & Goa; Member of Bombay Bar Association; Member of Society of Women's Lawyers – India; independent director of several Indian public and private companies.