Planning & Strategy

Rule 27 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 requires a Registered Valuer to determine the fair offer price for minority shares under Section 236. For unlisted companies, this considers the highest price paid by the acquirer in the last 12 months, return on net worth, book value, earnings per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

Valuation Factors (Registered Valuer): -

1.Highest Price Paid : The majority shareholder purchased 6% from the shareholders at ₹ 120 per share.

2.Book Value : The Company's book value per share is ₹ 105/ -;

3.Earnings Per Share (EPS) : The company’s EPS is ₹ 10, and the industry P/E ratio is ₹ 15. Fair value based on earnings = ₹ 10 * 15 = ₹ 150/ -;

Final Offer Price: The Registered Valuer determines the price, considering the highest price paid is higher than the book value and aligns with earnings, sets the offer price at ₹ 150 per share.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 2(b) (Syllabus 2022).

A scheme of merger and amalgamation is approved by majority shareholders, in a meeting, duly convened and conducted under the supervision of the Tribunal. The Tribunal shall sanction the scheme only if the same is approved by the required shareholders’ majority.

Every shareholder has the freedom to voice his opinion in the meeting or through an affidavit submitted to the Tribunal. Dissenting shareholders represent those members who do not agree with the resolution, i.e., they vote against the resolution. Such dissenting members are given opportunity to express their opinions during the decision-making process.

However, there have been some occasions where shareholders holding a small number of shares, have made frivolous objections against the scheme, just to defer the implementation of scheme.

On various such instances, the Courts have overruled their objections, but companies had to bear the consequences in the form of time and cost over-runs.

In 2003, Parke-Davis India Ltd. and Pfizer Ltd. were considering implementation of a scheme of merger. The minority shareholders of Parke-Davis India Ltd. objected to the scheme on the grounds that approval from requisite majority as prescribed under the Companies Act, 1956 had not been obtained. They filed a petition before the division bench of the Bombay High Court. The division bench of the Bombay High Court by its order executed a stay order in March 2003 restraining the company from taking further steps in the implementation of the scheme. Later, the dissenting shareholders filed a Special Leave Petition with the Supreme Court. Finally, the Supreme Court dismissed the petition filed by the shareholders. Parke-Davis then proceeded to complete the implementation of the scheme of amalgamation with Pfizer.

«Similarly, in the case of the merger of Tomco with HLL, the minority shareholders put forward an argument that, as a result of the amalgamation, a large share of the market would be captured by HLL.

However, the Court turned down the argument and observed that there was nothing unlawful or illegal about it.

To curb such practice of frivolous objections, Section 230(4) of the Companies Act, 2013 provides that in a scheme of arrangement any person or persons holding at least 10% of the shareholding or 5% of the total outstanding debt can put objection to the proposed scheme.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(c) (Syllabus 2017).

Rule 26 A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 deals with purchase of minority shareholding held in DEMAT form. According to Rule 26A:

(1)The company shall within two weeks from the date of receipt of the amount equal to the price of shares to be acquired by the acquirer, under section 236 of the Companies Act, 2013 verify the details of the minority shareholders holding shares in dematerialised form.

(2)After verification under sub-rule (1), the company shall send notice to such minority shareholders by registered post or by speed post or by courier or by email about a cut-off date, which shall not be earlier than one month after the date of sending of the notice, on which the shares of minority shareholders shall be debited from their account and credited to the designated DEMAT account of the company, unless the shares are credited in the account of the acquirer, as specified in such notice, before the cut-off date.

(3)A copy of the notice served to the minority shareholders under sub-rule (2), shall also be published simultaneously in two widely circulated newspapers (one in English and one in vernacular language) in the district in which the registered office of the company is situated and also be uploaded on the website of the company, if any.

In the particular case, compliance is not sufficient as notice in newspaper and on website of the company is also required. Further, some of the shareholders are not holding their shares in dematerialised form.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(b) (Syllabus 2022).

Rule 27 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides that for the purposes of sub-section (2) of section 236 of the Companies Act,2013 the registered valuer shall determine the price (hereinafter called as offer price) to be paid by acquirer, person or group of persons referred to in sub-section (1) of section 236 of the Companies Act, 2013 for purchase of equity shares of the minority shareholders of the company, in accordance with the following rules:

(1)In case of a listed company;

(i)The offer price shall be determined in the manner as may be specified by the Securities and Exchange Board of India under the relevant regulations framed by it, as may be applicable; and

(ii)The registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

(2)In the case of an unlisted company and a private company,

(i)the offer price shall be determined after taking into account the following factors: -

(a)the highest price paid by the acquirer, person or group of persons for acquisition during last twelve months;

(b)the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-a-vis the industry average, and such other parameters as are customary for valuation of shares of such companies; and

(ii)the registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(c) (Syllabus 2022).

a)Proposed Merger of Tainwala Polycontainers Ltd (TPL) with Tainwala Chemicals and Plastics (India) Ltd (TCPL)

Alone minority shareholder of Tainwala Polycontainers Ltd (TPL), Dinesh V Lakhani , had apparently forced the company to call off its merger plans with Tainwala Chemicals and Plastics (India) Ltd (TCPL). Lakhani had opposed the proposed merger on several grounds including allegations of willful suppression of material facts and malafide intention of promoters in floating separate companies (TPL and TCPL). A division bench of the Bombay High Court had stayed the proposed TPL-TCPL merger. After almost two years of courtroom battle, the company decided to withdraw the amalgamation petition without citing any reasons.

(b)(i) Merger of Parke Davis India Limited and Pfizer Limited in 2003, Parke

Davis India Limited and Pfizer Limited were considering implementation of a Scheme of Merger. The Minority shareholders of Parke-Davis India Ltd objected to the Scheme on the grounds that the approval from the requisite majority as prescribed under the Companies Act, 1956 had not been obtained. They filed an urgent petition before the division bench of the Bombay High Court. The division bench of the Bombay High Court by its order executed a stay order in March 2003 restraining the company from taking further steps in the implementation of the scheme of amalgamation, which was further extended till September 2003. The dissenting shareholders filed a Special Leave Petition with the Supreme Court. The turmoil came to an end when the Supreme Court dismissed the petition filed by the shareholders. Parke- Davis then proceeded to complete the implementation of the scheme of amalgamation with Pfizer.

(ii)Merger of TOMCO with HLL

In the case of the merger of Tomco with HLL, the minority shareholders put forward an argument that, as a result of the amalgamation, a large share of the market would be captured by HLL. However, the court turned down the argument and observed that there was nothing unlawful or illegal about it.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 2A(ii) (Old syllabus).

No need to take the views of majority if there is allegation of ultra vires acts by the Management held in Dhaneswari Cotton Mills Ltd. v. Nilkamal Chakravarthy [1937] 7 Comp. Cas. 417 (Cal).

Similarly, the allegation of fraud is an exception as was held in Cook v. Deeks (1916)1AC 554 (PC) . Where majority is wrongdoer and pocket property of company, an individual shareholder has right to file a suit. Menier v. Hooper's Telegraph Works (1874)9 Ch. App. 350 (CA).

A minority of shareholder in saddle of power cannot be allowed to pursue a policy of venturing into a litigation to which the majority of the shareholders were opposed. Life Insurance Corp of India v. Escorts Ltd (1986) 59 Comp Cas. 548 (SC).

Nevertheless, the principle of Majority Rule prevails normally as held in Foss Vs. Harbottle [1843] 2 Hare 461 (Ch.) until and unless proved beyond doubt the exceptions.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(c) (Syllabus 2017).

(i)The rights of dissenting shareholders can be resolved by resorting to Section 235 of the Companies Act, 2013 in the manner provided under Rule 26 of Companies (Compromise, Arrangement, and Amalgamation) Rules, 2016.

(ii)If nine-tenths of the shareholders are agreeable to the merger, then the acquiring company can, after serving notice, duly acquire the shares of the dissenting group.

(iii)The dissenting shareholders need to be served notice in the manner prescribed under the Rule 26.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 5(b) (Syllabus 2017).

As per section 235 of the Companies Act, 2013, the dissenting shareholders have been put at the limit of 10% of the value of the shares of the company. In case of listed companies, SEBI takes cognizance of even a single shareholder to initiate investigation for remedial action under SEBI (SAST) Regulations, 2011. In case of all companies, if promoters resort to take over under section 235 of the Companies Act, 2013, a transferee company, which has acquired 90% shares of a transferor company, through a scheme or contract, is entitled to acquire shares of remaining 10% shareholders.

Dissenting shareholders have been provided with an opportunity to approach Tribunal. If the price fixed is not acceptable, even a single shareholder can approach National Company Law Tribunal to seek clarification and justice.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 3(b) (Old syllabus).

Mode of registration of offer of schemes or contract involving the transfer of shares are provided under section 238 (1) of the Companies Act, 2013 (the Act). It states that in relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235 of the Act, - (a) every circular containing such offer and recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information and in such manner as may be prescribed; (b) every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available; and (c) every such circular shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered:

Provided that the Registrar may refuse, for reasons to be recorded in writing, to register any such circular which does not contain the information required to be given under clause (a) or which sets out such information in a manner likely to give a false impression, and communicate such refusal to the parties within thirty days of the application.

Section 238(2) of the Act states that an appeal shall lie to the Tribunal against an order of the Registrar refusing to register any circular under sub-section (1) of section 238 of the Act.

Section 238(3) of the Act states that the director who issues a circular which has not been presented for registration and registered under clause (c) of sub-section (1) of section 238 of the Act, shall be liable to a penalty of one lakh rupees.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(a) (Syllabus 2017).

Check-list for a transferee company in the takeover process is given as under:

1.Minutes of Board meeting containing consideration and approval of the offer sent to the transferor company.

2.Offer of a scheme or contract sent to the transferor company.

3.Notice to dissenting shareholders if any, of the transferor company.

4.Notice to the remaining shareholders of the transferor company, who have not assented to the proposed acquisition, if any.

5.Form No: CAA 14 received from the transferor company, which has been circulated to its members by that company.

6.Minutes of general meeting of the company containing approval of the shareholders to the offer of scheme or contract sent to the transferor company.

7.Court order, if any.

8.Register of Investments.

9.Duly filled in and executed instrument(s) of transfer for shares held by the dissenting shareholders.

10.Balance Sheets showing investments in the shares of the transferor company.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(d) (Syllabus 2017).

Dissenting Shareholders means the holders of the shares who have validly exercised and not effectively withdrawn or lost their rights to dissent from the merger and to receive payment of the fair value of their shares. In terms of Section 44A(3) of the Banking Regulation Act, 1949, a dissenting shareholder is entitled, in the event of the scheme being sanctioned by the Reserve Bank of India, to claim within 3 months from the date of sanction, from the banking company concerned, in respect of the shares held by him in that company, their value as determined by the Reserve Bank of India when sanctioning the scheme and such determination by the Reserve Bank of India as to the value of the shares to be paid to the dissenting shareholders shall be final for all purposes.

To enable the Reserve Bank of India to determine such value, the amalgamating/ amalgamated banking company shall submit the following:

a.A report on the valuation of the shares of the amalgamating / amalgamated company made for this purpose by the valuers appointed for the determination of the swap ratio.

b.Detailed computation of such valuation.

c.Where the shares of the amalgamating / amalgamated company are quoted on the stock exchange -

i.Details of the monthly high and low of the quotes on the exchange where the shares are most widely traded together with number of shares traded during the six months immediately preceding the date on which the scheme of amalgamation is approved by the Boards.

ii.The quoted price of the share at close on each of the fourteen days immediately preceding the date on which the scheme of amalgamation is approved by the Boards.

d.Such other information and documents as the Reserve Bank of India may require.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2A(i) (Syllabus 2017).

As per section 230(4) of the Companies Act, 2013 it is provided that in a scheme of arrangement any person or persons holding at least 10% of the shareholding or 5% of the total outstanding debt can put objection to the proposed scheme. But this does not mean that others are disabled. There exists inbuilt safeguard in the form of serving notices to every individual shareholder and creditor, so also to various statutory authorities and sectoral regulators. Stakeholders with lesser than specified percentage of shareholding may utilize such forums. Public notices issued in Newspapers also open a forum to raise objections that are just and genuine but not frivolous. Securities and Exchange Board of India (SEBI) has powers to undertake investigation, if a complaint is received from an investor or otherwise against substantial acquisitions.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2(b) (Old syllabus).

A shareholder attending the meeting either can assent or dissent the resolution but cannot suggest any alteration in the scheme. It was held by Mumbai High Court in the matter of Dinesh Veajlal Lakhani v. Parke Davis (India) Ltd [2005] 66 CLA 91 (Bom) that the swap ratio forms integral part of scheme of amalgamation and the procedural provisions are embodied in the relevant rules. The exchange ratio is a matter of expert determination. Since it constitutes the foundation of the scheme of amalgamation any amendment to it will nullify that basis. Thus, the shareholder has no other right beyond assenting or dissenting the resolution put for voting.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 3(e) (Old syllabus).

Valuation and Deal Structure:

•Advantages of Using Stock Component:

Clinics' shareholders with those of Aarogya Healthcare, as they will become shareholders in the combined entity and benefit from its future success.

•Disadvantages of Using Stock Component:

acquisition, which would reduce the value of the deal for Swasth Jeevan Clinics' shareholders.

•Factors for Determining Exchange Ratio:

o Relative Valuation of Both Companies : A thorough valuation of both Aarogya Healthcare and Swasth Jeevan Clinics is essential to determine a fair exchange ratio. This should consider factors such as revenue, profitability, growth prospects, and asset values.

o Market Conditions and Investor Sentiment : The prevailing market conditions and investor sentiment towards the healthcare sector and Aarogya Healthcare's stock should be taken into account. A higher exchange ratio may be necessary to attract Swasth Jeevan Clinics' shareholders if the market is uncertain.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 1(b) (Syllabus 2022).

Option is a derivative contract. An option gives the holder the right but not the obligation to buy or sell something in the future.

There are two types of Options:-

1.Put option - is one which gives holder the right to sell particular number of shares (or any other commodity) at a given price and typically one buys put options, if the price of the stock is expected to decline.

2.Call option - gives the holder the right to buy the shares at a predetermined period of time and at a predetermined price. Typically, one buys call options if the price of the underlying stock is expected to rise.

The term derivative has been defined under section 2(ac) in Securities Contracts (Regulation) Act, 1956 as follows:

(A)a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B)a contract which derives its value from the prices, or index of prices, of underlying securities.

(C)commodity derivatives; and

(D)such other instruments as may be declared by the Central Government to be derivatives;

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2A(ii) (Syllabus 2017).

Track I: Medium term foreign currency denominated FCB with minimum average maturity of 3/5 years.

Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.

Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

Various types of ECB: ECBs can be raised as:

1.Loans, e.g., bank loans, loans from equity holder, etc.

2.Capital market instruments, e.g.

(a)Securitized instruments (e.g. floating rate notes / fixed rate bonds / non-convertible, optionally convertible or partially convertible preference shares/debentures

(b)FCCB

(c)FCEB

3.Buyers’ credit / suppliers’ credit.

4.Financial lease.

However, ECB framework is not applicable in respect of the investment in non-convertible debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2(b) (Syllabus 2017).

'Depository Receipt' means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian.

Here, Permissible Securities means equity shares and debt securities, which are in dematerialized form and rank pari passu with the securities issued and listed on a Recognized Stock Exchange.

‘Depository Receipt’ includes 'Global Depository Receipt' as defined in section 2(44) of the Companies Act, 2013 ‘as any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorised by a company making an issue of such depository receipts’.

A company may issue depository receipts provided it is eligible to do so in terms of the Scheme and relevant provisions of the Foreign Exchange Management Rules and Regulations.

The rules relating to the GDR are contained in Depository Receipts Scheme, 2014, which was issued vide Notification No. F. No. 9/1/2013-ECB dated 21st October, 2014.

Eligibility:

1.The following persons are eligible to issue or transfer permissible securities to a foreign depository for the purpose of issue of depository receipts:

(a)any Indian company listed or unlisted, private or public;

(b)any other issuer of permissible securities;

(c)any person holding permissible securities; which has not been specifically prohibited from accessing the capital market or dealing in securities.

2.Unsponsored depository receipts on the back of listed permissible securities can be issued only if such depository receipts:

(a)give the holder the right to issue voting instructions; and

(b)are listed on an international exchange.

A company may issue depository receipts provided it is eligible to do so in terms of the Scheme and relevant provisions of the Foreign Exchange Management Rules and Regulations

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2(b) (Syllabus 2017).

ECBs are commercial loans raised by eligible resident entities from recognised nonresident entities and should conform to parameters such as minimum maturity etc.

Minimum Average Maturity Period of ECB are as under:

-ECB raised by manufacturing companies up to USD 50 million or its equivalent per financial year-1 year

-ECB raised from foreign equity holder for working capital purposes, general corporate purposes or for repayment of Rupee loans- 5 Years

-ECB raised for Working capital purposes or general corporate purposes and onlending by NBFCs for working capital purposes or general corporate purposes- 10 years

-ECB raised for repayment of Rupee loans availed domestically for capital expenditure and on-lending by NBFCs for the same purpose-7 years

ECBs can be raised as:

1.Loans. e.g., bank loans, loans from equity holder, etc.

2.Capital market instruments, e.g.

(a)Securitized instruments (e g. floating rate notes / fixed rate bonds / nonconvertible. optionally convertible or partially convertible preference shares/ debentures

(b)FCCB

(c)FCEB

3.Buyers’ credit / suppliers’ credit.

4.Financial lease.

However, ECB framework is not applicable in respect of the investment in nonconvertible debentures (NCDs) in India made by Registered Foreign Portfolio Investors (RFPIs).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 2(a) (Syllabus 2017).

External Commercial Borrowings (ECB) : ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis. The framework for raising loans through ECB comprises the following three tracks.

Track 1 : Medium term foreign currency denominated ECB with Minimum average maturity of 3/5 years. Manufacturing sector companies may raise foreign currency denominated ECBs with minimum average maturity period of 1 year.

Track 2 : Long term foreign currency denominated ECB with minimum average maturity of 10 years

Track 3 : Indian Rupees denominated ECB with minimum average maturity of 3/ 5 years. Manufacturing sector companies may raise INR denominated ECBs with minimum average maturity period of 1 year.

The ECB Framework enables permitted resident entities to borrow from recognised non-resident entities in the forms such as Loans including bank loans; Securitised instruments (floating rate notes and fixed rate bonds, non-convertible, optionally convertible preference shares/debentures) ; Buyers’ credit; Suppliers’ credit; Foreign Currency Convertible Bonds (FCCBs); Financial Lease and Foreign Currency Exchangeable Bonds (FCEBs).

However, ECB framework is not applicable in respect to the investment in nonconvertible debentures in India by Registered Foreign Portfolio Investors.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(a) (Old syllabus).

Masala bonds are rupee denominated bonds sold to offshore investors, who assumes foreign exchange risk to earn higher interest rates compared with dollar based overseas bond. In 2017, Reserve Bank of India (RBI) revised the norms for masala bonds.

The RBI declared that from October 03, 2017 masala bonds will no longer form part of the limit for Foreign Portfolio Investment (FPI) in corporate bonds and it will form part of External Commercial Borrowings. However, Masala Bond Proceeds cannot be utilised for the purpose of Real Estate Activities, Capital Market or Domestic Equity Investment, Purchase of Land, certain activities prohibited as per Foreign Direct Investment guidelines and relending for the activities prohibited.

HDFC was the first to issue such bonds, followed by National Highways Authority of India and National Thermal Power Corporation. Thus, the raising of funds through Masala Bonds is to tap overseas cheap funds.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 1(a) (Syllabus 2017).

A Depositary Receipt (DR) is a negotiable certificate issued by a bank representing shares in a foreign company traded on a local stock exchange. The depositary receipt gives investors the opportunity to hold shares in the equity of foreign countries and gives them an alternative to trading on an international market. A Depository Receipt is a foreign currency denominated instrument tradeable on a stock exchange generally in Europe or U.S.A.

The major benefit of using Depository Receipt as a means of funding for mergers are

1.The collection of issue proceeds in foreign currency which may be utilized for meeting foreign exchange component of project cost, repayment of foreign currency loans, meeting commitments overseas and similar purposes.

2.The GDR investor does not have to bear any exchange risk as a GDR is denominated in US dollar with equity shares comprised in each GDR denominated in Rupees.

3.The investor reserves the right to exercise his option to convert the GDR and hold the equity shares instead.

4.It facilitates raising of funds of market related prices of minimum cost as compared to a domestic issue and permits raising of further equity on a future date for funding of projects like expansion or diversification through mergers and takeovers etc.

5.It also helps to expand investor base with multiple risk preferences, improves marketability of the issue, and enhances prestige of the company and credibility with international investors.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2A(iii) (Old syllabus).

External Commercial Borrowings (ECB) are commercial loans raised by eligible resident entities from recognised non-resident entities confirming to parameters with minimum maturity, permitted and non-permitted end-uses, minimum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis. Reserve Bank of India issued Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 for borrowing and lending between a person resident in India and a person resident outside India. Minimum Average Maturity Period (MAMP) of ECB are 3/5/7/10 years.

ECB framework permits resident entities to borrow from recognised non-resident entities in any form including bank loans, Securitised instruments, buyers' credit, suppliers' credit, Foreign Currency Convertible Bonds (FCCBs), Financial Leases and Foreign Currency Exchangeable Bonds (FCEBs).

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(d) (Old syllabus).

Several modes are available to fund the mergers and takeovers, especially for an entity that has built-up balance sheet of robust financials. Further issue may be through equity shares either as rights, preferential or with differential rights. Cost of such funds is not fixed because more the revenue, more dividend can be given to shareholders.

Funds can also be borrowed by issuing instruments such as bonds and debentures. However, bond holders and debenture holders need to be paid coupon rates that is charged to revenue account. Further, borrowings can be made from banks and financial institutions that have fixed tenure. Merit of such funds coming under project finance is evaluated by banks or financial institution before extending finance. At the same time, one should also note that adoption of such process, in some cases, is an uninvited interference to dilute the management.In addition, default in payment of interest or instalment triggers the borrower as non-performing asset, which invites a case to be taken for insolvency under Insolvency and Bankruptcy Code, 2016. The Company may borrow funds through the deposits from its directors, their relatives, business associates, shareholders and from public in the form of fixed deposits, external commercial borrowings (ECB) , issue of securities, loans from Central or State financial institutions, banks, rehabilitation finance, etc..

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2(a) (Old syllabus).

Funding through swaps or stock to stock mergers

In stock swap mergers or stock to stock mergers, the holder of the target company’s stock receives shares of the acquiring company's stock. The majority of mergers during the past few years have been stock for stock deals. A merger arbitrage specialist will sell the acquiring company's stock short, and will purchase a long position in the target company, using the same ratio as that of the proposed transaction. If the purchasing firm is offering a half share of its stock for every share of the target company, then the merger arbitrageur will sell half as many shares of the purchasing firm as he or she buys of the target company. By going long and short in this ratio, the manager ensures that the number of shares for which the long position will be swapped is equal to the number of shares sold short. When the deal is completed, the manager will cover the short and collect the spread that has been locked in.

As with all mergers, stock swap mergers may involve event risk. In addition to the normal event risks, stock swap mergers involve risks associated with fluctuations in the stock prices of the two companies.

The terms of the deal involve an exchange of shares and are predicted on the prices of the two companies' stock at the time of the announcement, drastic changes in the share price of one or both of the companies can cause the entire deal to be re-evaluated. Merger arbitrageurs derive returns from stock swap mergers when the spread or potential return justifies the perceived risk of deal's failing.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 2A(iii) (Old syllabus).

Mergers and acquisitions have one common goal of creating synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

Becoming bigger: Many companies use M&A to grow in size and leapfrog their rivals. While it can take years or decades to double the size of a company through organic growth, this canbe achieved much more rapidly through mergers or acquisitions.

Pre-empted competition: This is a very powerful motivation for mergers and acquisitions, and is the primary reason why M&A activity occurs in distinct cycles.

Domination: Companies also engage in M&A to dominate their sector. However, since a combination of two behemoths would result in a potential monopoly, such transaction would have to face regulatory authorities.

Tax benefits: Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.

Economies of scale: Mergers also translate into improved economies of scale which refers to reduced costs per unit that arise from increased total output of a product.

Acquiring new technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility: Companies buy other companies to reach new markets and grow revenues and earnings. A merger may expand two companies’ marketing and distribution, giving them new sales opportunities. A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2A(iii) (Syllabus 2017).

Mergers and acquisitions can have multifarious goals however arriving at a synergy that makes the combined value of the merged entity much higher than those of individual entities is always a target. The success of a merger or acquisition depends on whether the planned synergy is achieved or not. Synergy may take the form of revenue enhancement or cost savings or some other form which benefits the companies. By merging, the companies hope to benefit from the following:

1)Becoming bigge r : Many companies use M&A to grow in size and compete their rivals. While it can take years or decades to double the size of a company through organic growth, this can be achieved much more rapidly through mergers or acquisitions.

2)Pre-empted competition : This is a very powerful motivation for mergers and acquisitions, and is the primary reason why M&A activity occurs in distinct cycles.

3)Domination : Companies also engage in M&A to dominate their sector. However, since a combination of two behemoths would result in a potential monopoly, such a transaction would have to face regulatory authorities.

4)Tax benefits : Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.

5)Economies of scale : Mergers also translate into improved economies of scale which refers to reduced costs per unit that arise from increased total output of a product.

6)Acquiring new technology : To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

7)Improved market reach and industry visibility : Companies buy other companies to reach new markets and grow revenues and earnings. A merger may expand two companies’ marketing and distribution, giving them new sales opportunities. A merger can also improve a company’s standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2022, Q. 1(c) (Syllabus 2017).

The following items are essential and should be considered carefully if the company wants to get the best possible business acquisition:

Strategy : The single most important action is to define a clear strategy with realistic objectives.

Profile : Create a profile or an outline of an ideal acquisition target and get some initial indications of how much such an opportunity might cost. Budget : Prepare a budget for expenses associated with doing a deal. Plan : Before starting the process, it is important to create a plan that clearly shows how the acquisition will be financed. Approval : Get necessary internal approvals of essential authorities like board of directors and shareholders. Team selection : The right project team could serve the maximum results. Hence getting a good team is essential for completing the project successfully. Combining internal assistance along with external support will help in getting best results. Formalities : Study in detail the legal formalities required before starting the process is necessary. Tax Liability : Getting complete information about the possible tax consequences beforehand can help in planning and also reduction in tax liability.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2021, Q. 1(d) (Old syllabus).

While formulating scheme of arrangement for either amalgamation or merger, financial aspects are of prime importance. Aspects that yield benefits such as increase in productivity, improved profitability, and enhanced dividend paying capacity to the resulting company and aimed at :

(a)Pool the resources to achieve economies of production, administrative, financial and marketing management.

(b)Secure the required credit on terms from financial institutions, banks, suppliers, job workers etc.

(c)Reducing cost of production, management, marketing having the combined strength of qualified and competent technical and other personnel.

(d)Research and development activities for product development to ensure a longlasting, dominant and profit making position in the industry.

(e)Improving productivity and profitability in order to maintain a regular and steady dividend.

(f)Concentrate on the core competence of the merged or the amalgamated company.

(g)Consolidate resource base to improve generation, mobilisation and utilisation of physical, financial, human, knowledge, information and other important tangible and intangible resources.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 2A(ii) (Old syllabus).

All mergers and acquisitions have one common goal to create synergy that makes the value of the combined companies greater than the sum of the two parts. Synergy may be in the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

•Bigger size : Many companies use M&A to grow in size and leapfrog their rivals.

While it can take years or decades to double the size of a company through organic growth, this can be achieved much more rapidly through inorganic growth, i.e., mergers or acquisitions.

•Preempted competition : This is a very powerful motivation for mergers and acquisitions, and is the primary reason why M&A activity occurs in distinct cycles.

•Domination : Companies also engage in M&A to become a dominant player or market leader in their respective sector or industry. However, since a combination of two behemoths would result in a potential monopoly, such a transaction would come under purview of regulatory authorities.

•Tax benefits : Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.

•Economies of scale : Mergers also translate into improved economies of scale which refers to reduced costs per unit that arise from increase in total output of a product.

•Acquiring new technology : To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

•Increase in market share : Merger aids in increasing the market share of the merged company. This rise in the market share is achieved by providing an adequate supply of goods & services as needed by clients. Entering into an agreement with clients for continuous supply of goods and services.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 1(c) (Syllabus 2017).

All mergers and acquisitions (M&A) have one common goal, i.e., they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved or not. Synergy may be in the form of revenue enhancement and cost savings. By merger, the companies expect to reap the following benefits:

1.Becoming bigger : Many companies use M&A to grow in size and leapfrog their rivals. While it can take years or decades to double the size of a company through organic growth, this can be achieved much more rapidly through mergers or acquisitions, i.e., through inorganic growth.

2.Domination : Companies also engage in M&A to dominate their respective sector/ industry. However, since a combination of two behemoths may result in a potential monopoly, such a transaction may have to face regulatory challenges.

3.Tax benefits : Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.

4.Economies of scale : Mergers also translate into improved economies of scale which refers to reduced costs per unit that arise from increased total output of a product.

5.Acquiring new technology : To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

6.Improved market reach and industry visibility : Companies buy other companies to reach new markets and increase their revenues and earnings. A merger may expand two companies' marketing and distribution channels thereby giving new sales opportunities. A merger can also improve a company's standing in the investment community, i.e., bigger firms often have an easier time raising capital than smaller ones.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 1(d) (Syllabus 2017).

A leveraged buyout (LBO) is the acquisition of a company in which the buyer puts up only a small amount of money and borrows the rest. The buyer can achieve the desirable result because the targeted acquisition is profitable and throws off ample cash used to repay the debt. The expectation with leveraged buyouts is that the return generated on the acquisition will more than outweigh the interest paid on the debt, hence making it a very good way to experience high return whilst only risking a small amount of capital.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2021, Q. 3(e) (Old syllabus).

Leveraged Buy-out

A leveraged buyout (LBO) is the purchase of a company using a large amount of debt or borrowed cash to fund the acquisition. In other words, it’s when a company use a large amount of borrowed funds to purchase another company instead of using its own money or raising capital from investors. A leveraged buyout, is an acquisition of a company or its division majorly financed with borrowed funds. The acquirer resorts to a combination of a small investment and a large loan to fund the acquisition. The loan capital is availed through a combination of repayable bank facilities and/or public or privately placed bonds.

Alternatively, the acquiring company could float a Special Purpose Vehicle (SPV) as a 100% subsidiary with a minimum equity capital. The SPV can leverage this equity to gear up significantly higher debt to buyout the target company. The target company's assets can be used as collaterals for availing the loan and once the debt is redeemed, the acquiring company has the option to merge with the SPV. The debt will be paid off by the SPV using the cash flows of the target company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Bharti - Zain deal

Bharti started its telecom services business by launching mobile services in India in 1995. Zain established in 1983 was the first mobile operator in Kuwait. In 2010 Bharti Airtel entered into exclusive agreement with KSC (Zain) for the acquisition of Zain Africa International BV (Zain Africa).

The acquisition deal was done as a leveraged buyout and the loan for financing the transaction was availed by two Special Purpose Vehicles (SPVs). The acquisition was routed through SPVs keeping Bharti Airtel’s standalone financials intact. However, it did not relieve Bharti from its responsibility as a borrower.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(a) (Old syllabus).

Leveraged buyout

When one refers to something (a company, a property or an investment) as ‘highly leveraged’ it means that item has more debt than equity.

A leveraged buyout (LBO) is the acquisition of a company in which the buyer putsup only a small amount of money and borrows the rest. The buyer can achieve this desirable result because the targeted acquisition is profitable and may provide ample cash that can be used to repay the debt. The expectation with leveraged buyout is that the return generated on the acquisition will more than outweigh the interest paid on the debt, hence making it a very good way to experience high returns whilst only risking a small amount of capital.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 3(c) (Syllabus 2017).

In terms of section 239 of the Companies Act, 2013 that corresponds to Section 396A of Companies Act, 1956, the books and papers of a company that has been amalgamated with or whose shares have been acquired by another company shall not be disposed of without obtaining prior permission of Central Government. Before granting such approval the Government is empowered to appoint a person to examine the books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion, formation or the management of the affairs of the transferor company or its amalgamation, or the acquisition of its shares.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 5(e) (Syllabus 2017).