What are the key laws and regulations that govern mergers and acquisitions in your jurisdiction?
The key law and regulations that govern and are of significance to mergers and acquisitions in India are the Companies Act, 1956, the Companies Act, 2013, the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’), the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’), the Foreign Exchange Management Act, 1999 (‘FEMA’), the Competition Act, 2002 (‘Competition Act’), the Indian Contract Act, 1872 (‘Contract Act’), and the Income Tax Act, 1961 (‘Income Tax Act’). The applicability of these laws depends on the nature of the entities (whether listed, unlisted or private company) involved in the merger or acquisition and the nature of the transaction.
The Companies Act, 1956 and the Companies Act, 2013 are the principal legislations which provide for mergers and acquisitions that are either required to be carried out by involvement of the court of law or effected through private arrangements. The provisions of the Companies Act, 2013 pertaining to mergers have not yet come into effect; therefore, the mergers provisions of the Companies Act, 1956 are still applicable and govern the mergers of Indian companies.
The SEBI Act and the Takeover Code also apply if one of the parties to the merger or acquisition is a listed company, in which case the provisions of the listing agreement of the stock exchange on which the stock of the company is listed are required to be complied with. The Takeover Code provides for acquirers to make disclosures of shareholdings and encumbrances and public announcements, and to make open offers in cases of acquisition of shares or voting rights beyond a certain threshold percentage, consolidation of holdings, and acquisition of control over a company.
Cross-border mergers and acquisitions or acquisition of an Indian company by a person resident outside India have to comply with the provisions of FEMA and the regulations, guidelines, directions and circulars made under FEMA that regulate foreign investments in India. The Foreign Direct Investments Policy issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, is the guiding and regulatory Policy on the specific limits of investment in, or acquisition of, an Indian company by a person resident outside India in a particular sector or activity.
The Competition Act controls business combinations, i.e. mergers, acquisitions and amalgamations, which cause, or are likely to cause, an appreciable adverse effect on competition within the relevant market in India. Hence, an approbation of the Competition Commission of India, a quasi-judicial authority constituted under the Competition Act, has to be sought in case the combinations meets the prescribed financial thresholds. De minimis provisions for exemption of certain combinations are also envisaged under the Competition Act.
Further, the provisions of the Income Tax Act have considerable commercial bearing on transactions involving mergers and acquisitions in India, especially on the applicable of capital gains tax. In cross-border transactions, provisions of the Double Taxation Avoidance Agreement signed between India and the relevant country may also be applicable.
Acquisitions pursuant to private arrangements may also attract he application of the Contract Act.