Tax Insights
from India Tax & Regulatory Services
www.pwc.in
‘Appointed date linked to Effective date’ in merger scheme–which was contingent on receipt of RBI license – Scheme allowed by High Court
June 23, 2016
In brief
The Madras High Court (HC) sanctioned the scheme of merger (Scheme) of A Limited and B Limited into C Limited, wherein the appointed date was linked to the effective date.
In detail
Facts
A Limited (transferor company 1), B Limited (transferor company 2) (collectively transferor companies), and C Limited (transferee company) had filed Petitions with the HC for merger of both
transferor companies with the transferee company.
The transferor companies and the transferee company were collectively referred to as the petitioner companies.
The holding company of the petitioner companies, i.e. D Limited (Hold Co.) had applied to the Reserve Bank of India (RBI) for grant of license to establish a Small Finance Bank (SFB) in the private sector.
RBI granted in-principle approval subject to certain conditions, to be complied with within 180 days, which inter alia, included the merger of transferor
companies with the transferee company to be effected prior to the commencement of the SFB business.
Clause 1.2 of the Scheme defined the appointed date with reference to the effective date.
Clause 1.7 of the Scheme defined effective date to mean a working day immediately preceding the date of commencement of SFB business.
The Scheme provided that the share exchange ratio would be arrived at based on the book value of the shares of the petitioner companies, as on the effective date.
The Scheme also envisaged dissolution of transferor companies on the 30th day from the effective date or, in the alternative, transferor companies would file separate applications with
the HC for dissolution without winding up.
Issue before the High Court The following concerns were raised by the Regional Director (RD) in relation to the Scheme before the HC:
There was no clear date fixed in the Scheme, which would work as an effective date.
Since the share exchange ratio was linked to the effective date, the Scheme did not immediately articulate as to what would be the share exchange ratio.
The dissolution of the transferor companies was 30 days after the effective date.
High Court’s ruling
The HC sanctioned the Scheme considering the following:
The Scheme could not provide clear appointed date as the in-
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principle approval did not guarantee issue of banking license.
A perusal of section 394 of the Companies Act, 1956, showed that the HC, either while sanctioning the Scheme, or by a subsequent order, was entitled to make provisions for all or any of the matters, including dissolution without winding up of the transferor companies, which may be necessary to ensure that amalgamation was fully and effectively carried out.
However, such sanction of the Scheme or passing an Order by the HC was subject to a Report from the RD and the Official Liquidator (OL) that the affairs of the transferor
company was not conducted in a manner prejudicial to the interest of its members or the public.
The RD, in its affidavit, has stated that the ROC had submitted a report that the
petitioner companies had been regular in filing their statutory returns. The RD Report did not point any misdemeanour or infraction of any provisions of the law by the petitioner companies. The RD had not shown that there was any impediment in law in accepting the tenability of provisions incorporated in the Scheme relating to “appointed date”, “effective date” and the share exchange ratio.
The OL’s Report indicated that the affairs of the transferor companies were not carried on in a manner prejudicial to its member or the public.
The HC held that section 394(1) gave it leeway to sanction a scheme of amalgamation where the actual date of amalgamation/
merger was delayed till such time the necessary pre- requisites were fulfilled.
●As regards the dissolution of transferor companies, the HC
accepted the alternative proposal and ordered the transferor companies to file separate applications for their dissolution within 30 days of the effective date.
The takeaways
The HC has the leeway to sanction a scheme of
amalgamation where the actual date of amalgamation/ merger may be delayed till such time that necessary pre-requisites, if any, are fulfilled.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact:
Tax & Regulatory Services – Mergers and Acquisitions Gautam Mehra, Mumbai +91-22 6689 1154
[email protected] Hiten Kotak, Mumbai +91-22 6689 1288 [email protected]
Tax Insights
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