Corporate Restructuring

STUDY MATERIAL
PROFESSIONAL PROGRAMME
CORPORATE RESTRUCTURING
VALUATION AND INSOLVENCY
MODULE 1
PAPER 3
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CORPORATE RESTRUCTURING, VALUATION AND INSOLVENCY
Corporate Restructuring is a non-recurring exercise for an organisation but it has a lasting impact
on the business and other concerned agencies due to its numerous considerations and immense
advantages viz., improved corporate performance, better corporate governance etc. The regulatory
provisions and the multitude of judicial and unresolved issues enunciate that the professionals dealing
with restructuring should possess unequivocal and explicit knowledge of the objective approach and
perspective of the subject.
The purpose of this study material is to provide an in-depth understanding of all aspects and
intricacies of law and practical issues affecting and arising out of Corporate Restructuring, Valuation as
well as Insolvency, aims at through each phase of preparation, stressing upon and dealing, exhaustively
with key concepts, legislative aspects and procedures, duly annotated with judicial references.
Company Secretaryship being a professional course, the examination standards are set very high,
with emphasis on knowledge of concepts, applications, procedures and case laws, for which sole
reliance on the contents of this study material may not be enough. Besides, as per the Company
Secretaries Regulations, 1982, students are expected to be conversant with the amendments to the
laws made upto six months preceding the date of examination. The material may, therefore, be
regarded as the basic material and must be read along with the original Bare Acts, Rules, Regulations,
Case Law, Student Company Secretary bulletin published and supplied to the students by the Institute
as well as recommended readings.
The subject of Corporate Restructuring, Valuation and Insolvency is inherently technical and is
subjected to constant refinement through new legislations, rules and regulations made there under, court
decisions on specific legal issues and corporate business dynamics. It, therefore, becomes necessary
for every student to constantly update himself with the various legislative changes made as well as
judicial pronouncements rendered from time to time by referring to the law/professional journals like
Company Law Journal, Corporate Law Advisor, SEBI and Corporate Laws, Company Cases etc.
This Study Material is based on the provisions which are notified under Companies Act, 2013. The
amendments made upto December, 2016 have been incorporated in this study material. However, it
may so happen that some developments might have taken place during the printing of the study
material and its supply to the students. The students are therefore, advised to refer to the e-bulletin
Student Company Secretary, `Chartered Secretary and other publications for updation of the study
material.
In the event of any doubt, students may write to the Directorate of Academic in the Institute for
clarification at [email protected].
Although care has been taken in publishing this study material, yet the possibility of errors,
omissions and/or discrepancies cannot be ruled out. This publication is released with an
understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies
or any action taken in that behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute shall
be obliged if the same are brought to its notice for issue of corrigendum in the e-bulletin Student
Company Secretary'.
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SYLLABUS
FOR
MODULE I - PAPER 3: CORPORATE RESTRUCTURING, VALUATION AND
INSOLVENCY
Level of Knowledge: Advance Knowledge
Objective: To acquire knowledge of the legal, procedural and practical aspects of Corporate
Restructuring, Valuation and Insolvency.
Detailed Contents:
PART A - Corporate Restructuring (50 Marks)

1. Introduction and Concepts
Meaning of Corporate Restructuring
Need, Scope and Modes of Restructuring
Historical Background
Emerging Trends
Planning, Formulation and Execution of Various Corporate Restructuring Strategies - Mergers,
Acquisitions, Takeovers, Disinvestments and Strategic Alliances, Demerger and Hiving off
Expanding Role of Professionals
2. Merger and Amalgamation
Introduction
Legal, Procedural, Economic, Accounting, Taxation and Financial Aspects of Mergers and
Amalgamations including Stamp Duty and Allied Matters
Interest of Small Investors
Merger Aspects under Competition Law
Jurisdiction of Courts; Filing of Various Forms
Amalgamation of Banking Companies and Government Companies
Cross Border Acquisition and Merger
3. Corporate Demerger and Reverse Merger
Concept of Demerger; Modes of Demerger - by Agreement, under Scheme of Arrangement
Demerger and Voluntary Winding Up
Legal and Procedural Aspects; Tax Aspects and Reliefs
Reverse Mergers Procedural Aspects and Tax Implications
4. Takeover
Meaning and Concept
Types of Takeovers; Legal Aspects SEBI Takeover Regulations
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Disclosure and Open Offer Requirements

Bail Out Takeovers and Takeover of Sick Units
Takeover Defences
Cross Border Takeovers
5. Funding of Merger and Takeover
Financial Alternatives; Merits and Demerits
Funding through various Types of Financial Instruments including Equity and Preference Shares,
Debentures, Securities with Differential Rights, Swaps, Stock Options; ECBs, Funding through
Financial Institutions and Banks
Rehabilitation Finance
Management Buyouts/Leveraged Buyouts
6. Financial Restructuring
Reduction of Capital
Reorganization of Share Capital
Buy-Back of Shares Concept and Necessity
Procedure for Buy-Back of Shares by Listed and Unlisted Companies
7. Post Merger Reorganization
Factors involved in Post Merger Reorganization
Integration of Businesses and Operations
Assessing Accomplishment of Post Merger Objectives; Measuring Post Merger Efficiency
8. Case Studies
PART B Valuation (30 Marks)
9. Introduction
Meaning, Objective & Scope of Valuation
Principles of Valuation
Preliminary Work relating to Valuation
Valuation Standards and Valuation Analysis
10. Valuation Techniques
Historical Earnings Valuation
Asset Based Valuation
Market Based Valuation
11. Regulatory and Taxation Aspects
Legal & Regulatory aspects related to Valuation such as SEBI Regulations/ RBI Regulations
Income Tax Implications
12. Valuations for Different Strategies
Merger & Acquisition, Demerger, Slump Sale
Liquidation and Corporate Insolvency
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Internal & External Restructuring

Valuation of Intangibles
Valuation of Securities
PART C Insolvency (20 Marks)

13. Introduction
Concept of Insolvency, Historical Developments
History of Bankruptcy Laws in USA, UK and India
14. Revival, Rehabilitation and Restructuring of Sick Companies
Sick Companies and their Revival with Special Reference to the Law and Procedure relating to
Sick Companies
15. Securitization and Debt Recovery
Overview of the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002; Process; Participants
Special Purpose Vehicle (SPV), Asset Reconstruction Companies (ARCs), Qualified Institutional
Buyers (QIB)
Overview of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Tribunal, Procedure; Compromises and Arrangements with Banks and Creditors
16. Winding Up
Concept; Modes of Winding Up; Administrative Machinery for Winding Up
Winding up Process and Procedure; Managing Stakeholders and Parties in Liquidation;
Conducting Meetings of Shareholders/Creditors; Dealing with Contracts; Managing Estate
Outsourcing Responsibilities to Professionals/Service providers such as Valuers, Security
Agencies
Best Practices in Performing Liquidation/Administrator Functions; Accountability and Liabilities;
Role of Liquidators and Insolvency Practitioners
Consequences of Winding Up; Winding Up of Unregistered Companies; Dissolution
17. Cross Border Insolvency
UNCITRAL Model Law on Cross Border Insolvency
UNCITRAL Legislative Guide to Insolvency Law
World Bank Principles for Effective Insolvency and Creditor Rights
Asian Development Bank Principles of Corporate Rescue and Rehabilitation
Bankruptcy under chapter 11 of US Bankruptcy Code
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LIST OF RECOMMENDED BOOKS

MODULE I
PAPER 3 : CORPORATE RESTRUCTURING, VALUATION AND INSOLVENCY
Recommended Readings and References:
1. A. Ramaiya : Guide to Companies Act, LexisNexis Butterworths,

Wadhwa, Nagpur
2. M.C. Bhandari : Guide to Company Law Procedures, LexisNexis
Butterworths Wadhwa Nagpur
3. ICSI : Handbook on Mergers Amalgamations and takeovers.
4. K. R. Sampath : Mergers/Amalgamations, Takeovers, Joint Ventures,
LLPs and Corporate Restructure, Snow White
Publications
5. S. Ramanujam : Mergers et al, LexisNexis Butterworths Wadhwa
Nagpur
6. Ray : Mergers and Acquisitions Strategy, Valuation and
Integration, PHI
Important Websites
(a) www.sebi.gov.in
(b) www.rbi.org.in
(c) www.finmin.nic.in
(d) www.dipp.nic.in
(e) www.mca.gov.in
(f) www.nclt.gov.in
(g) www.ibbi.govt.in
Students are advised to read relevant Bare Acts and Rules and Regulations relating thereto. Student
Company Secretary e-bulletin and Chartered Secretary should also be read regularly for updating the
knowledge.
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ARRANGEMENT OF STUDY LESSONS

MODULE I - PAPER 3: CORPORATE RESTRUCTURING, VALUATION AND INSOLVENCY
Lesson No. Subject
PART A - Corporate Restructuring

1. Corporate Restructuring Introduction & Concepts
2. Mergers and Amalgamations Legal and Procedural Aspects
3. Economic and Competition Law Aspects of Mergers and Amalgamations
4. Accounting Aspects of Amalgamations
5. Financial, Stamp Duty and Taxation Aspects of Amalgamation
6. Interest of the Small Investors in Mergers
7. Amalgamation of Banking and Government Companies
8. Corporate Demergers and Reverse Mergers
9. Takeovers
10. Funding of Mergers and Takeovers
11. Financial Restructuring
12. Post Merger Re-Organisation
13. Case Studies
PART B Valuation
14. Valuation Introduction and Techniques
15. Regulatory Aspects of Valuation with reference to Corporate Strategies
PART C Insolvency
16. Insolvency Concepts and Evolution
17. Corporate Insolvency and Resolution Process
18. Securitization
19. Debt Recovery
20. Winding Up
21. Cross Border Insolvency
Test Paper
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CONTENTS
Lesson 1
CORPORATE RESTRUCTURING INTRODUCTION & CONCEPTS
Page
Lesson Outline 1
Learning Objectives ... 1
Introduction 2
Meaning of Corporate Restructuring 2
Corporate Restructuring as a Business Strategy 2
Need and Scope of Corporate Restructuring 3
Planning, Formulation and Execution of Various Restructuring Strategies 4
Important Aspects to be considered while Planning or Implementing
Corporate Restructuring Strategies 4
Merger 5
Demerger 6
Reverse merger ... 6
Disinvestment 6
Takeover/acquisition 6
Joint Venture (JV) 6
Strategic Alliance 6
Franchising 6
Slump sale 7
Corporate Restructuring - Historical Background 7
Expanding Role of Professionals in Corporate Restructuring Process 7
Companies Act, 2013 8
Salient feature of Companies Act, 2013 relating to corporate restructuring 8
Winding Up 10
Lesson Round Up 11
Self Test Questions 11
Lesson 2
MERGERS AND AMALGAMATIONS LEGAL AND PROCEDURAL ASPECTS
Lesson Outline 13
Learning Objectives 13
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Regulatory Framework for Merger/Amalgamation 14

Provisions of the Companies Act, 2013 16
Approvals in Scheme of Amalgamation 26
Steps involved in Merger A Flow Chart 30
Judicial pronouncements 40
Filing of various forms in the process of merger/amalgamation 46
Lesson Round Up 49
Lesson 3
ECONOMIC AND COMPETITION LAW ASPECTS OF MERGERS AND AMALGAMATIONS
Lesson Outline 51
Economic Aspects 52
Reasons for Merger and Amalgamation 52
Underlying Objectives in Mergers 53
Competition Aspects of Combinations 56
Competition Act, 2002 57
Combination under Competition Act, 2002 57
Inquiry into Combination by the Commission 59
Procedure for Investigation of Combination 60
Inquiry into Disclosures under Section 6(2) 61
Power to Impose Penalty for Non-Furnishing of Information on Combination 63
Lesson Round Up 64
LESSON 4
MERGERS AND AMALGAMATIONS- ACCOUNTING ASPECTS OF AMALGAMATIONS
Lesson Outline 65
Applicability 66
Types of Amalgamation 67
Methods of Accounting for Amalgamation 67
The Pooling of Interest Method 68
The Purchase Method 68
Consideration for Amalgamation 69
Treatment of Reserves on Amalgamation 69
Goodwill on Amalgamation 70
Balance of Profit and Loss Account 70
Disclosure Requirements 71
Amalgamation after the Balance Sheet Date 71
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IndAS-103- for Bussiness Combinations 72

Lesson Round Up 73
Lesson 5
FINANCIAL, STAMP DUTY AND TAXATION ASPECTS OF AMALGAMATION
Lesson Outline 75
Financial Aspects of Mergers and Amalgamations 76
Stamp Duty Aspects of Mergers and Amalgamations 77
Taxation Aspects of Mergers and Amalgamations 82
Lesson Round Up 88
Lesson 6
INTEREST OF THE SMALL INVESTORS IN MERGER
Lesson Outlines 89
Introduction 90
Minority and Minority Interest under Companies Act 90
Rights of Minority Shareholders during Mergers/Amalgamations/Takeovers 91
Legal Provisions of the Companies Act, 2013 91
Protection of Minority Interest 92
The Tribunal Considers Minority Interest while approving the Scheme of Merger 92
Some Judicial Pronouncements 92
Majority Approval cannot Deprive Minority from Raising Objections 93
Fair and reasonable Scheme made in good faith 93
Lesson Roundup 94
Lesson 7
AMALGAMATION OF BANKING AND GOVERNMENT COMPANIES
Lesson Outlines 95
Learning Objectives ... 95
Amalgamation of Banking Companies 96
Background 96
Master Directions Issued by RBI for Amalgamation 97
Amalgamation between two Banking Companies 97
Approval by Reserve Bank of India 100
Amalgamation of an NBFC with a Banking Company 101
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Prior Approval of RBI in Cases of Acquisition or transfer of control of deposit taking NBFCs 102
Prior Approval of RBI for Acquisition and Change in Control of Management of NBFC 102
Procedure for Merger and Amalgamation Related to Government Companies 103
Lesson Round Up 105
Lesson 8
CORPORATE DEMERGERS AND REVERSE MERGERS
Lesson Outline 107

Introduction 108
Demerger under the Companies Act, 2013 108
Demerger under Income Tax Act 1961 109
Meaning of Demerged Company 110
Some ExamplesDemerger 111
The Meeting Pursuant to Court Order Approving Demerger 112
The Court Order Approving Demerger 112
Difference between Demerger and Reconstruction 112
Types of Demerger 113
Partial Demerger 113
Complete Demerger 113
Procedural Aspects of Demerger 114
Rules and Forms in Respect of Scheme of Demerger 123
Tax Aspects of Demerger 124
Tax Concessions to Demerged Company 124
Tax Concessions to the Shareholders of the Demerged Company 124
Tax Concessions to the Resulting Company 125
Judicial Pronouncements on Demerger 135
Disclosure of Ratio of Exchange of Shares 135
Application of AS-14 to Demergers 135
Reverse Merger 135
Salient Features of Reverse Mergers 138
Repeal of SICA Act, 1985 139
Lesson Round Up 139
Lesson 9
TAKEOVERS
Lesson Outline 141

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Page
Meaning and Concept of Takeovers 142

Emergence of Concept of Takeover 142
Objects of Takeover 143
Kinds of Takeover 144
Takeover Bids 144
Type of Takeover Bids 144
Factors Determining Vulnerability of Companies to Takeover Bids 145
Legal Aspects of Takeover 145
Takeover of Unlisted and Closely Held Companies 145
Takeover of Listed Companies 149
Requirements under SEBI Regulations 150
Meaning of Certain Terms 150
Disclosures Related Provisions 151
Computation of Trigger Limits for Disclosures 152
Open Offer Thresholds 153
Voluntary Offer 155
Restrictions on Voluntary Open Offer 155
Exemptions from Open Offer 155
Automatic Exemption under Regulation 10 156
Open Offer Process 161
Filing Draft Letter of Offer 161
Escrow Account 161
Dispatch of Letter of Offer to Share Holders 163
Offer Price 164
Size of an Open Offer 164
Post Offer Advertisement 166
Conditional Offer 166
Competing Offer 166
Payment of Consideration 167
Withdrawal of Open Offer 167
Obligations of the Acquirer 168
Obligations of the Target Company 168
Obligations of the Manager to the Open Offer 170
Defense Strategies to Takeover Bids 170
Defensive Measures 171
Types of Anti-Takeover Amendments 173
Cross Borders Takeovers 175
Lesson Round Up 177
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Page
Lesson 10
FUNDING OF MERGERS AND TAKEOVERS
Lesson Outline 179

Financial Alternatives 180
Financial Package 180
Process of Funding 180
Funding through various types of Financial Instruments 181
Funding Through Equity Shares 181
Preferential Allotment 181
Funding through Preference Shares 181
Funding through Options or Securities with Differential rights 181
Funding through Swaps or Stock to Stock Mergers 182
Funding through External Commercial Borrowings (ECBs) 182
Depository Receipts (DRs) 183
Funding through Financial Institutions and Banks 184
Funding through Rehabilitation Finance 184
Funding through Leveraged Buyouts 185
Lesson Round Up 186
Lesson 11
FINANCIAL RESTRUCTURING
Lesson Outline 187
Introduction 188
Need for Financial Restructuring 189
Restructuring of Under-Capitalized Company 190
Restructuring of Over-Capitalized Company 190
Alteration of capital 190
Reorganisation of Capital 191
Reduction of Share Capital 192
Modes of Reduction 192
Reduction of Share Capital without sanction of the Tribunal 193
Equal Reduction of Shares of one Class 194
Creditors Right to Object to Reduction 194
Confirmation and Registration 195
Conclusiveness of Certificate for Reduction of Capital 195
Liability of Members in Respect of Reduced Share Capital 196
Reduction of Share Capital and Scheme of Compromise or Arrangement 196
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Procedure for Reduction of Capital A Flow Chart 197

Buy-Back of Shares 198
Post buy back debt- equity ratio 198
Buy back of listed/unlisted companies 198
Time gap 199
Explanatory statement 199
Procedure 200
Filing declaration of solvency with SEBI/ROC rule 200
Dispatch of letter of offer 201
Time limit for completion of buy back 201
Method of buy back 202
Register of buyback 202
Return of buy back 202
Penal provisions 203
Income Tax Aspects 203
Buy-Back Procedure for Listed Securities 204
Special Resolution and its Additional Disclosure Requirements 204
Disclosures under Schedule II Part A 204
Methods of Buy-Back 206
Buy-Back from Existing Security-Holders through Tender Offer 206
Additional Disclosures 206
Public Announcement and Filing of Offer Documents 206
Offer Procedure 207
Escrow account 208
Payment to the security holder 209
Extinguishing of bought back securities 209
Buy-Back from Open Market 209
Buy-Back through the Stock Exchange 210
Buy-Back of physical shares or other specified securities 210
Escrow account (Regulation 15B) 211
Extinguishment of certificate (Regulation 16) 212
Buy-Back through Book-Building 212
Obligations of the Company 213
Obligations of the Merchant Banker 214
Lesson Round Up 215
Lesson 12
POST MERGER RE-ORGANISATION
Lesson Outline 217

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Page
Introduction 218
Factors in the Post Merger Reorganisation 218
Change of Name and Logo 218
Revised Organization Chart 219
Communication 219
Employee Compensation, Benefits and Welfare Activities 219
Aligning Company Policies 219
Aligning Accounting and Internal Database Management Systems 219
Re-Visiting Internal Processes 220
Re-Allocation of People 220
Engagement with Statutory Authorities 220
Record Keeping 220
Immoveable Property 220
Expansion of Existing Teams to Support Larger Organization 221
Revised ISO Certification and Similar Other Certifications 221
Re-Visiting Past Decisions/Government Approvals/Compliances 221
Contracts 222
Miscellaneous 222
Impact of Post Merger Reorganisation 222
Gain or Loss to Stakeholders 222
Implementation of Objectives 223
Integration of Businesses and Operations 228
Post Merger Success and Valuation 228
Human and Cultural Aspects 229
Measuring Post-Merger Efficiency 232
Measuring Key Indicators 233
Lesson Round Up 235
Lesson 13
CASE STUDIES
Lesson Outline 237

Case Studies
1. Demerger - Larsen & Toubro Limited 238
2. Overseas Acquisition Tata-Corus Deal 239
3. Merger of ICICI with ICICI Bank 240
4. Slump Sale (Business Transfer) By Piramal to Abbott 240
5. Multiple Corporate Restructuring Reddy Laboratories Limited 242
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Page
6. Leveraged Buy-Out Bharti-Zain Deal 243

7. Overseas Acquisition Daiichi-Ranbaxy 244
8. Acquisition of Patni by Igate 246
Lesson Round Up 250
Lesson 14
VALUATION INTRODUCTION AND TECHNIQUES
Lesson Outline 251

Introduction 252
Need and Purpose 252
When Valuation is Required? 252
Valuation/Acquisition Motives 253
Factors Influencing Valuation 253
Methods of Valuation (Valuation Techniques) 255
I. Valuation Based on Assets 255
II. Valuation Based on Earnings 257
III. Market Based Approach to Valuation 257
Market Comparables 258
Other Aspects as to the Methods of Valuation 259
Lesson Round Up 266
Lesson 15
REGULATORY ASPECTS OF VALUATION WITH REFERENCE TO
CORPORATE STRATEGIES
Lesson Outline 267
Introduction 268
Valuation Documentation 269
Objectives of Documentation in Valuation Exercise 269
List of Documents 270
Judicial Pronouncement on Valuation Principles/Valuation Reports 271
Regulatory Aspects as to Valuation 272
Pricing in Public Issue as per SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 272
Valuation for the Purpose of Issue of Sweat Equity Shares 275
Valuation under SEBI (Share Based Employee Benefits) Regulations 2014 275
Valuation under SEBI (Delisting of Equity Shares) Regulations 2009 275
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Valuation of Shares under the Sweat Equity Unlisted Companies

(Share Capital and Debentures) Rules, 2014 276
SEBI (SAST) Regulations 2011 276
Pricing under Consolidated FDI Policy 2015 277
What should be the Content of Valuation Report for Corporate Strategies? 277
Contents of Summarized Valuation Report 278
Valuation Strategies for Mergers 280
Ranbaxy Laboratories Limited A Case Study 281
Valuation for Liquidation/Insolvency 286
Valuation of Slump Sale 286
Valuation of Assets in a Demerger 286
Valuation of Brands 288
Functions of Brands 289
The Importance of Brand Valuation 289
Protect the Value of the Brand 289
Valuation Approach 292
Lesson Round Up 293
Lesson 16
INSOLVENCY CONCEPTS AND EVOLUTION
Lesson Outline 295

Insolvency/Bankruptcy the Concept 296
Historical Developments of Insolvency Laws in India 296
Reforms in Insolvency Law for Corporate Side 297
Justice Eradi Committee 297
Dr J J Irani Expert Committee on Company Law 301
A Brief on Historical Background on UK Insolvency Framework 306
US Bankruptcy Laws 307
The Evolution of U.S. Bankruptcy Law - A Time Line 309
Lesson Round Up 310
Lesson 17
REVIVAL AND RESTRUCTURING OF SICK COMPANIES
Lesson Outline 313

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Page
Historical Background 314

The Insolvency and Bankruptcy Code 2016 315
Important Definition 318
Institutions under Insolvency and Bankruptcy Code, 2016 320
Insolvency and Bankruptcy Board of India 320
Insolvency Professional Agencies 321
Insolvency Professionals 322
Information Utility 323
Adjudication Authorities 323
Insolvency Resolution and Liquidation for Corporate Persons 324
Persons who are not entitled to initiate corporate insolvency resolution 324
Application for initiation of Corporate Insolvency Resolution Process 325
Application by financial creditor 325
Application by operational creditor 326
Application by the corporate debtor 327
Corporate Insolvency Resolution Process 329
Lesson Round Up 338
Lesson 18
SECURITIZATION
Lesson Outline 342

Introduction 343
How Securitisation Gained Importance? 343
Statement of Objects and Reasons of SARFAESI Act 344
Apex Court Upheld Constitutional Validity of the Securitisation Act 345
Definitions 346
Asset Reconstruction Companies [ARC] 351
Registration of Securitisation or Asset Reconstruction Companies 352
Prior Approval for Substantial Change 353
Cancellation of Certificate of Registration 353
Acquisition of Rights or Interest in Financial Assets and Effects of Acquisition 355
Transfer of Pending Applications to Any One of Debts Recovery Tribunals
in Certain Cases 356
Measures for Asset Reconstruction 358
Other Functions of Securitisation or Reconstruction Company 358
Enforcement of Security Interest by a Creditor 360
Assistance by Chief Metropolitan Magistrate or the District Magistrate 364
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Manner and Effect of Takeover of Management 366

Highlights of the RBI Guidelines 367
Appeal to Appellate Tribunal 371
Right to Lodge a Caveat 372
Setting Up of Central Registry 373
Register of Securitisation, Reconstruction and Security Interest Transactions 374
Filing of Particulars 374
Satisfaction of Security Interest 375
Right to Inspect 376
Penalties 378
Penalties for Non-Compliance of Direction of Reserve Bank 378
Offences 378
Non-Applicability in Certain Cases 378
Civil Court not to have Jurisdiction 379
Limitation Act 379
Applicability of other Acts 379
Rule Making Power 380
Security Interest (Enforcement) Rules, 2002 381
Demand Notice 381
Reply to Representation of the Borrower 381
Procedure after Issue of Notice 382
Valuation of Movable Secured Assets 383
Sale of Movable Secured Assets 383
Issue of Certificate of Sale 384
Sale of Immovable Secured Assets 384
Time of Sale, Issue of Sale Certificate and Delivery of Possession, etc. 386
Appointment of Manager 387
Procedure for Recovery of Shortfall of Secured Debt 388
Application to the Tribunal/Appellate Tribunal 388
Lesson Round Up 389
Lesson 19
DEBT RECOVERY
Lesson Outline 391

Need and Object 392
Important Definitions 393
Establishment of Tribunal 395
Composition of Tribunal 395
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Establishment of Appellate Tribunal 396

Composition of Appellate Tribunal 397
Jurisdiction, Powers and Authority of Tribunal 397
Application to the Tribunal 399
Appellate Tribunal under Insolvency Code 406
Powers of the Tribunal and the Appellate Tribunal 407
Right to Legal Representation and Presenting Officers 408
Limitations 409
Recovery of Debt Determined by Tribunal 409
Validity of Certificate and Amendment thereof 409
Stay of Proceedings under Certificate and Amendment or Withdrawal Thereof 409
Other Modes of Recovery 410
Application of Certain Provisions of Income-Tax Act ... 412
Appeal against the Order of Recovery Officer 412
Act to have Over-Riding Effect 415
Lesson Round Up 415
Lesson 20
WINDING UP
Lesson Outline 417

Introduction 418
Is winding up and dissolution are synonymous? 418
Winding up under the Companies Act, 2013 418
Winding up by Tribunal: Grounds 419
Petition for the winding up 419
Powers of the Tribunal 419
Directions for filing statement of affairs 420
Company Liquidators and their appointments 420
Removal and replacement of liquidators 420
Winding up Committee 421
Submission of the reports by the Company Liquidator and directions of the Tribunal 422
Advisory Committees 423
Powers and duties of the company liquidator 424
Audit of Company liquidators accounts 425
Overriding Preferential Payments 427
Fraudulent preferences 429
Company Liquidation Dividend and Undistributed Assets Account 434
Liquidation Process under the Insolvency and Bankruptcy Code, 2016 436
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Lesson Round Up 439

Lesson 21
CROSS BORDER INSOLVENCY
Lesson Outline 441

Introduction 442
Development of United Nations Commission on International Trade
Law (UNCITRAL) Model Law 442
General Provisions 445
Access of Foreign Representatives and Creditors to Courts in State Enacting Model Law 446
Recognition of a Foreign Proceeding and Relief 448
UNCITRAL Legislative Guide on Insolvency Laws 455
US Bankruptcy Code 461
Lesson Round Up 462
TEST PAPER
Test Paper 467

Lesson 1
Corporate Restructuring Introduction
& Concepts
LESSON OUTLINE LEARNING OBJECTIVES
The objective of this study lesson is to enable the The speed of business dynamics demands, the
students to understand business organizations not only to revamp their
internal business strategies like effective market
Meaning of Corporate Restructuring expansion, increased customer base, product
Need & Scope of Corporate Restructuring diversification and innovation etc., but also expects
the corporates to devise inorganic business
Various Modes of Restructuring
strategies like mergers, acquisitions, takeovers etc.,
Historical Background that results in faster pace of growth, effective
utilization of resources, fulfillment of increasing
Emerging Trends
expectations of stakeholders. These restructuring
Planning formulation execution of various strategies work positively for the business both
Restructuring Strategies during the time of business prosperity and recession.
Role of Professionals in Restructuring Process This lesson would help you in understanding the
concept of corporate restructuring, available tools,
historical background & emerging trends in
restructuring strategies etc., the role of professionals
like company secretaries in the process of
restructuring right from the strategy development and
pre diligence stage till the post integration stage.
2 PP-CRVI
INTRODUCTION
There are primarily two ways of growth of business organization, i.e. organic and inorganic growth.
Organic growth is through internal strategies, which may relate to business or financial restructuring within
the organization that results in enhanced customer base, higher sales, increased revenue, without resulting
in change of corporate entity.
Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling it to skip
few steps on the growth ladder. Restructuring through mergers, amalgamations etc., constitute one of the
most important methods for securing inorganic growth.
Growth can be organic or inorganic
A company is said to be growing organically when the growth is through the internal sources without
change in the corporate entity. Organic growth can be through capital restructuring or business
restructuring.
Inorganic growth is the rate of growth of business by increasing output and business reach by
acquiring new businesses by way of mergers, acquisitions and take-overs and other corporate
restructuring strategies that may create a change in the corporate entity.
The business environment is rapidly changing with respect to technology, competition, products, people,
geographical area, markets, customers. It is not enough if companies keep pace with these changes but are
expected to beat competition and innovate in order to continuously maximize shareholder value. Inorganic
growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that
help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size
quickly, employ new technology with respect to products, people and processes. Thus, the inorganic growth
strategies are regarded as fast track corporate restructuring strategies for growth.
MEANING OF CORPORATE RESTRUCTURING
Restructuring as per Oxford dictionary means to give a new structure to, rebuild or rearrange".
As per Collins English dictionary, meaning of corporate restructuring is a change in the business strategy of
an organization resulting in diversification, closing parts of the business, etc, to increase its long-term
profitability.
Corporate Restructuring is defined as the process involved in changing the organization of a business.
Corporate Restructuring can involve making dramatic changes to a business by cutting out or merging
departments. It implies rearranging the business for increased efficiency and profitability. In other words, it is
a comprehensive process, by which a company can consolidate its business operations and strengthen its
position for achieving corporate objectives-synergies and continuing as competitive and successful entity.
Corporate Restructuring as a Business Strategy
Corporate Restructuring is the process of significantly changing a company's business model, management
team or financial structure to address challenges and increase shareholder value. Restructuring may involve
major layoffs or bankruptcy, though restructuring is usually designed to minimize the impact on employees, if
possible. Restructuring may involve the company's sale or a merger with another company. Companies use
restructuring as a business strategy to ensure their long-term viability. Shareholders or creditors might force
a restructuring if they observe the company's current business strategies as insufficient to prevent a loss on
their investments. The nature of these threats can vary, but common catalysts for restructuring involve a loss
Lesson 1 Corporate Restructuring Introduction & Concepts 3
of market share, the reduction of profit margins or declines in the power of their corporate brand. Other
motivators of restructuring include the inability to retain talented professionals and major changes to the
marketplace that directly impact the corporation's business model.
Corporate restructuring is the process of significantly changing a company's business model,

management team or financial structure to address challenges and increase shareholder value.
Corporate restructuring is an inorganic growth strategy.
NEED AND SCOPE OF CORPORATE RESTRUCTURING

Corporate Restructuring is concerned with arranging the business activities of the corporate as a whole so as
to achieve certain predetermined objectives at corporate level. Such objectives include the following:
orderly redirection of the firm's activities;
deploying surplus cash from one business to finance profitable growth in another;
exploiting inter-dependence among present or prospective businesses within the corporate portfolio;
risk reduction; and
development of core competencies.
When we say corporate level it may mean a single company engaged in single activity or an enterprise
engaged in multi activities. It could also mean a group having many companies engaged in related or
unrelated activities. When such enterprises consider an exercise for restructuring their activities they have to
take a wholesome view of the entire activities so as to introduce a scheme of restructuring at all levels.
However such a scheme could be introduced and implemented in a phased manner. Corporate
Restructuring also aims at improving the competitive position of an individual business and maximizing it's
contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business
i.e. natural monopolies, goodwill, exclusivity through licensing etc. to enhance the competitive advantages.
Thus restructuring would help in bringing an edge over competitors.
Competition drives technological development. Competition from within a country is different from cross-
country competition. Innovations and inventions do not take place merely because human beings would like
to be creative or simply because human beings tend to get bored with existing facilities. Innovations and
inventions happen out of necessity to meet the challenges of competition. Cost cutting and value addition are
two mantras that get highlighted in a highly competitive world. Monies flow into the stream of production in
order to be able to face competition and deliver the best possible goods at the convenience and affordability
of the consumers. Global Competition drives people to think big and it makes them fit to face global
challenges. In other words, global competition drives enterprises and entrepreneurs to become fit globally.
Thus, competitive forces play an important role. In order to become a competitive force, Corporate
Restructuring exercise could be taken up. Also, in order to drive competitive forces, Corporate Restructuring
exercise could be taken up.
The scope of Corporate Restructuring encompasses enhancing economy (cost reduction) and improving
efficiency (profitability). When a company wants to grow or survive in a competitive environment, it needs to
restructure itself and focus on its competitive advantage. The survival and growth of companies in this
environment depends on their ability to pool all their resources and put them to optimum use. A larger
company, resulting from merger of smaller ones, can achieve economies of scale. If the size is bigger, it
enjoys a higher corporate status. The status allows it to leverage the same to its own advantage by being
able to raise larger funds at lower costs. Reducing the cost of capital translates into profits. Availability of
funds allows the enterprise to grow in all levels and thereby become more and more competitive.
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Corporate Restructuring ..an Example

ABC Limited has surplus funds but it is not able to consider any viable projects. Whereas XYZ Limited has
identified viable projects but has no money to fund the cost of the project. The merger of ABC Limited and
XYZ Limited is a mutually beneficial option and would result in positive synergies of both the Companies.
Corporate Restructuring aims at different things at different times for different companies and the single
common objective in every restructuring exercise is to eliminate the disadvantages and combine the
advantages. The various needs for undertaking a Corporate Restructuring exercise are as follows:
(i) to focus on core strengths, operational synergy and efficient allocation of managerial capabilities
and infrastructure.
(ii) consolidation and economies of scale by expansion and diversion to exploit extended domestic and
global markets.
(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy
company.
(iv) acquiring constant supply of raw materials and access to scientific research and technological
developments.
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and
improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting the radical changes
brought out by information technology.
Planning, formulation and execution of various restructuring strategies

Corporate restructuring strategies depends on the nature of business, type of diversification required and
results in profit maximization through pooling of resources in effective manner, utilization of idle resources,
effective management of competition etc.
Planning the type of restructuring requires detailed business study, expected business demand, available
resources, utilized/idle portion of resources, competitor analysis, environmental impact etc., The bottom line
is that the right restructuring strategy provides optimum synergy for the organizations involved in the
restructuring process.
It involves examination of various aspects before and after the restructuring process.
Important aspects to be considered while planning or implementing corporate restructuring

strategies
The restructuring process requires various aspects to be considered before, during and after the
restructuring. They are
Valuation & Funding
Legal and procedural issues
Taxation and Stamp duty aspects
Accounting aspects
Competition aspects etc.
Human and Cultural synergies
Based on the analysis of various aspects, a right type of strategy is chosen.

Types of Corporate Restructuring Strategies
Various types of corporate restructuring strategies include:

1. Merger
2. Demerger
3. Reverse Mergers
4. Disinvestment
5. Takeovers
6. Joint venture
7. Strategic alliance
8. Franchising
9. Slump Sale
1. Merger
Merger is the combination of two or more companies which can be merged together either by way of
amalgamation or absorption or by formation of a new company. The combining of two or more companies, is
generally by offering the stockholders of one company securities in the acquiring company in exchange for
the surrender of their stock.
Mergers may be
(i) Horizontal Merger: It is a merger of two or more companies that compete in the same industry. It is
a merger with a direct competitor and hence expands as the firm's operations in the same industry.
Horizontal mergers are designed to achieve economies of scale and result in reducing the number
of competitors in the industry.
(ii) Vertical Merger: It is a merger which takes place upon the combination of two companies which
are operating in the same industry but at different stages of production or distribution system. If a
company takes over its supplier/producers of raw material, then it may result in backward
integration of its activities. On the other hand, forward integration may result if a company decides
to take over the retailer or Customer Company. Vertical merger provides a way for total integration
to those firms which are striving for owning of all phases of the production schedule together with
the marketing network
(iii) Co generic Merger: It is the type of merger, where two companies are in the same or related
industries but do not offer the same products, but related products and may share similar
distribution channels, providing synergies for the merger. The potential benefit from these mergers
is high because these transactions offer opportunities to diversify around a common case of
strategic resources.
(iv) Conglomerate Merger: These mergers involve firms engaged in unrelated type of activities i.e. the
business of two companies are not related to each other horizontally or vertically. In a pure
conglomerate, there are no important common factors between the companies in production,
marketing, research and development and technology. Conglomerate mergers are merger of
different kinds of businesses under one flagship company. The purpose of merger remains
utilization of financial resources enlarged debt capacity and also synergy of managerial functions. It
does not have direct impact on acquisition of monopoly power and is thus favoured throughout the
world as a means of diversification.
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2. Demerger
It is a form of corporate restructuring in which the entity's business operations are segregated into one or
more components. A demerger is often done to help each of the segments operate more smoothly, as they
can focus on a more specific task after demerger.
3. Reverse Merger
Reverse merger is the opportunity for the unlisted companies to become public listed company, without
opting for Initial Public offer (IPO). In this process, the private company acquires majority shares of public
company with its own name.
4. Disinvestment
Disinvestment means the action of an organization or government selling or liquidating an asset or

subsidiary. It is also known as "divestiture".
5. Takeover/Acquisition
Takeover occurs when an acquirer takes over the control of the target company. It is also known as
acquisition. Normally this type of acquisition is undertaken to achieve market supremacy. It may be friendly
or hostile takeover.
Friendly takeover: In this type, one company takes over the management of the target company with
the permission of the board.
Hostile takeover: In this type, one company takes over the management of the target company without
its knowledge and against the wish of their management.
6. Joint Venture (JV)
A joint venture is an entity formed by two or more companies to undertake financial activity together. The
parties agree to contribute equity to form a new entity and share the revenues, expenses, and control of the
company. It may be Project based joint venture or Functional based joint venture.
Project based Joint venture: The joint venture entered into by the companies in order to achieve a
specific task is known as project based JV.
Functional based Joint venture: The joint venture entered into by the companies in order to achieve
mutual benefit is known as functional based JV.
7. Strategic Alliance
Any agreement between two or more parties to collaborate with each other, in order to achieve certain
objectives while continuing to remain independent organizations is called strategic alliance.
8. Franchising
Franchising may be defined as an arrangement where one party (franchiser) grants another party
(franchisee) the right to use trade name as well as certain business systems and process, to produce and
market goods or services according to certain specifications.
The franchisee usually pays a one-time franchisee fee plus a percentage of sales revenue as royalty and
gains.
9. Slump sale
Slump sale means the transfer of one or more undertaking as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and liabilities in such sales. If a
company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined
lump sum consideration, then it results in a slump sale.
CORPORATE RESTRUCTURING - HISTORICAL BACKGROUND
In earlier years, India was a highly regulated economy. Though Government participation was overwhelming,
the economy was controlled in a centralized way by Government participation and intervention. In other
words, economy was closed as economic forces such as demand and supply were not allowed to have a full-
fledged liberty to rule the market. There was no scope of realignments and everything
was controlled. In such a scenario, the scope and mode of Corporate Restructuring were very limited due to
restrictive government policies and rigid regulatory framework.
These restrictions remained in vogue, practically, for over two decades. These, however, proved
incompatible with the economic system in keeping pace with the global economic developments if the
objective of faster economic growth were to be achieved. The Government had to review its entire policy
framework and under the economic liberalization measures removed the above restrictions by omitting the
relevant sections and provisions.
The real opening up of the economy started with the Industrial Policy, 1991 whereby 'continuity with change'
was emphasized and main thrust was on relaxations in industrial licensing, foreign investments, transfer of
foreign technology etc. With the economic liberalization, globalization and opening up of economies, the
Indian corporate sector started restructuring to meet the opportunities and challenges of competition.
The economic and liberalization reforms, have transformed the business scenario all over the world. The
most significant development has been the integration of national economy with 'market-oriented globalized
economy'. The multilateral trade agenda and the World Trade Organization (WTO) have been facilitating
easy and free flow of technology, capital and expertise across the globe. A restructuring wave is sweeping
the corporate sector all over the world, taking within its fold both big and small entities, comprising old
economy businesses, conglomerates and new economy companies and even the infrastructure and service
sector. From banking to oil exploration and telecommunication to power generation, petrochemicals to
aviation, companies are coming together as never before. Not only this new industries like e-commerce and
biotechnology have been exploding and old industries are being transformed.
With the increasing competition and the economy, heading towards globalisation, the corporate restructuring
activities are expected to occur at a much larger scale than at any time in the past. Corporate Restructuring
play a major role in enabling enterprises to achieve economies of scale, global competitiveness, right size,
and a host of other benefits including reduction of cost of operations and administration.
Expanding role of professionals in corporate restructuring process
The restructuring process does not only involve strategic decision making based on the market study,
competitor analysis, forecasting of synergies on various respects, mutual benefits, expected social impact
etc, but also the technical and legal aspects such as valuation of organizations involved in restructuring
process, swap ratio of shares if any, legal and procedural aspects with regulators such as Registrar of
Companies, High Court etc., optimum tax benefits after merger, human and cultural integration, stamp duty
cost involved etc.
It involves a team of professionals including business experts, Company Secretaries, Chartered
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Accountants, HR professionals, etc., who have a role to play in various stages of restructuring process. The
Company Secretaries being the vital link between the management and stakeholders are involved in the
restructuring process through out as co-coordinator, in addition to their responsibility for legal and regulatory
compliances.
The restructuring deals are increasing day by day to be in line with business dynamics and international
demands. It necessitates the expanded role of professionals in terms of maximum quality in optimum time.
COMPANIES ACT, 2013

Under the Companies Act, 2013 has brought many enabling provisions with regard to mergers, compromise
or arrangements, especially with respect to cross border mergers, time bound and single window clearances,
enhanced disclosures, disclosures to various regulators, simplified procedure for smaller companies etc.
Some of Sections under the Companies Act, 2013 are as under:-
Section 66 Reduction of Share Capital
Section 67 Restriction on purchase by company of its own shares
Chapter XV- Compromises, Arrangements and Amalgamations
Section 230 - Power to Compromise or Make Arrangements with Creditors and Members
Section 231- Power of Tribunal to Enforce Compromise or Arrangement
Section 232 - Merger and Amalgamation of Companies
Section 233 - Merger or Amalgamation of Certain Companies
Section 234 - Merger or Amalgamation of Company with Foreign Company*
Section 235 - Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by
Majority
Section 236 - Purchase of Minority Shareholding
Section 237- Power of Central Government to Provide for Amalgamation of Companies in Public Interest
Section 238 - Registration of Offer of Schemes Involving Transfer of Shares
Section 239 - Preservation of Books and Papers of Amalgamated Companies
Section 240 - Liability of Officers in Respect of Offences Committed Prior to Merger, Amalgamation, etc.
*It may be noted that Section 234 of the Companies Act, 2013 and the rules made thereunder are yet to be
notified.
Salient Features of Companies Act, 2013 relating to Corporate Restructuring (Section 230-
240)
Corporate Restructuring through Compromises, Arrangements and Amalgamations
National Company Law Tribunal to assumed jurisdiction of High Court.
Section 230(1) provides that the Compromise or arrangement may be proposed between the
company and its Creditors or the Company and its members.
Section 230(2) Application for compromise or arrangement shall be submitted before the NCLT
accompanied by an affidavit, disclosing
1. All material facts relating to the company.

2. Reduction of capital if any included in the compromise or arrangement;
3. Any scheme of corporate debt restructuring consented to by not less than 75% of the secured
creditors in value along with creditors responsibility statement, safeguard for the protection of
other secured and unsecured creditors, report of the auditor as to the funds requirement after
CDR and the conformity to liquidity test etc.
Section 230(3) Notice relating to compromise or arrangement and other documents shall be sent
to all the members, creditors, debenture holders and also to be placed on the website of the
company. the notice shall contain a statement disclosing the effect to corporate action on all the
stakeholder separately.
Proviso to Section 230(4) Persons holding not less than 10% of the shareholdings or persons
having outstanding debt amounting to not less than 5% of the total outstanding debt as per the
latest audited financial statement, entitled to object the scheme of compromise or arrangement.
Section 230(5) Notice of meeting for approval of the scheme of compromise or arrangement be
sent to various regulators including:
1. The Central Government;
2. Income-tax Authorities;
3. Reserve Bank of India (`RBI);
4. Securities and Exchange Board of India (`SEBI);
5. The Registrar;
6. Respective Stock Exchange;
8. The Competition Commission of India; if necessary; and
9. Other Sectoral regulators which could likely be affected by the scheme. Representation, if any,
by the above authorities will have to be made within a period of 30 days from receipt of notice.
Section 230(6) Approval of scheme by majority of persons representing three fourths in value
of members or creditors. Such approved scheme, when sanctioned by tribunal shall be binding
on company, all creditors, members or on liquidators (in case of a company being wound up).
Section 232(1) deals with the scheme of compromise and arrangement wherein it has been
proposed for the purpose of reconstruction of the company or the merger or amalgamation of
two or more companies. (Not yet notified)
Section 233 Fast track mergers introduced to enable fast track merger without the approval of
NCLT, between:
1. Two or more small companies. Small company is defined under the Act.
2. Holding and its wholly owned subsidiary company.
3. Other class of companies as may be prescribed.
Section 233 (10) provides that the transferee company cannot hold any shares in its own name or in the
name of any trust, or on behalf of any of its subsidiary or associate company. It is necessary that all such
shares need to be cancelled and extinguished upon merger.
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Winding Up
Section 2(94A) defines the term Winding up to means winding up under the Companies Act, 2013 or
liquidation under the Insolvency and Bankruptcy Code, 2016.
MODES OF WINDING UP
The company may be wound up in any of the following modes:
1. By National Company Law Tribunal (Tribunal) under part 1 of the Chapter XX of the Companies Act,
2013
2. By Voluntary Liquidation under Chapter -V of the part II of the Insolvency and Bankruptcy Code,
2016.
Winding up by Tribunal:
Instances wherein the company can be wound up by Tribunal:
A company may, on a petition under section 272 of the Companies Act, 2013 be wound up by the Tribunal,-
(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity of India, the security
of the State, friendly relations with foreign States, public order, decency or morality;
(c) if on an application made by the Registrar or any other person authorised by the Central
Government by notification under this Act, the Tribunal is of the opinion that the affairs of the
company have been conducted in a fraudulent manner or the company was formed for fraudulent
and unlawful purpose or the persons concerned in the formation or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the
company be wound up;
(d) if the company has made a default in filing with the Registrar its financial statements or annual
returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
Who may file Petition for the Winding up?
An application for the winding up of a company has to be made by way of petition to the Tribunal by any of
the following persons
(a) the company;
(b) any contributory or contributories;
(c) all or any of the persons specified in clauses (a) and (b);
(d) the Registrar;
(e) any person authorised by the Central Government in that behalf; or
(f) in a case falling under clause (b) of section 271, by the Central Government or a State Government.
Voluntary Winding up:

The provisions relating to Voluntary Winding Up of Companies under the Companies Act, 2013 are omitted
vide MCA Notification No. F.O. 3453(E) dated 15th November, 2016 and notified Section 255 of the
Insolvency and Bankruptcy Code, 2016 which refers to the eleventh Schedule of the Insolvency and
Bankruptcy Code, 2016.
Voluntary Liquidations:
Part II of Chapter XX of the Companies Act, 2013 dealing with voluntary winding up has since been deleted
by the Insolvency and Bankruptcy Code, 2016 and a separate provision of section 59 has been made in the
Code for dealing with voluntary winding up of corporate persons including companies. This section provides
for the initiation of voluntary liquidation proceedings by the corporate debtor which has not defaulted on any
debt due to any person A corporate debtor, being a company may choose to be wound up voluntarily under
several circumstances including winding up as a result of expiry of period of operation fixed in its
constitutional documents or occurrence of an event provided in its constitutional documents for its
dissolution.
LESSON ROUND UP
Growth of organization may be organic/inorganic growth. Growth in the factors of production is organic
growth, whereas corporate restructuring initiatives leads to inorganic growth which is relatively faster.
Restructuring may be financial restructuring, technological, market and organizational restructuring.
The most commonly applied tools of corporate restructuring are amalgamation, merger, demerger,
acquisition, joint venture, disinvestments etc.
The important aspects to be considered during Corporate Restructuring process are financial,
valuation, stamp duty, taxation and accounting aspects.
The regulatory framework for corporate restructuring includes, The Companies Act, 2013, Insolvency
and Bankruptcy Code, 2016 , SEBI(SAST) Regulations; 2011, SEBI (LODR ) Regulations, 2015 ,
Indian Stamp Act, 1899, Companies(Court) Rules; etc.
The restructuring process over the years has expanded the role of professionals in the restructuring
process at various stages.
The Companies Act; 2013 has provided several provisions for revamping the corporate restructuring
process in India.
SELF TEST QUESTIONS

1. What are different types of growth strategies?
2. Briefly discuss the scope and mode of Corporate Restructuring.
3. Discuss about different restructuring strategies.
4. Write a brief note on the role of professionals in restructuring strategies.
5. Restructuring is just not a strategic plan. Discuss.
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Lesson 2
Mergers and Amalgamations Legal and
Procedural Aspects
Regulatory Framework While implementing the strategic decision of
Provisions of the Companies Act, 2013 relating merger/amalgamation, the transferor/transferee
to mergers/amalgamation company has to comply with a number of regulations
viz., the Companies Act, 2013, National Company
Companies (Compromise, Arrangements and
Law Tribunal Rules, 2016 (hereinafter called the
Amalgamations) Rules, 2016
NCLT Rules), Income Tax Act, 1961, The Indian
National Company Law Tribunal Rules, 2016. Stamp Act 1899, The Competition Act, 2002 etc. It
National Company Law Appellate Tribunal involves conducting of various meeting including
Rules, 2016 board/general meetings, obtaining of various
approvals from regulators like Stock Exchanges,
Approvals in the scheme of amalgamation National Company Law Tribunal (NCLT) , Ministry of
Process/steps involved in mergers/ Amalgamation Corporate Affairs (ROC/RD), drafting of documents
such as preparation of scheme, notices/explanatory
Filing of various forms in the process of
statements, filing of various documents including e-
mergers/amalgamation
forms with ROC, filing of scheme of amalgamation
with NCLT etc., After reading this lesson you will be
able to understand the regulatory framework,
interpretations of provisions in the Companies Act
relating to merger/amalgamation, different approvals,
steps involved, judicial pronouncements etc. The
aspects as to stamp duty, valuation, competition law
aspects are being dealt in separate chapters.
Note: Major Portions of Section 230-240 of

Companies Act, 2013 (except Section 234) have been
recently notified by Ministry of Corporate Affairs
(MCA) which are in effect from December 15, 2016
and are accordingly dealt with in this lesson.
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REGULATORY FRAMEWORK FOR MERGER/AMALGAMATION

The Regulatory Framework of Mergers and Amalgamations covers
1. The Companies Act, 2013
2. National Company Law Tribunal Rules, 2016.
3. Companies (Compromise, Arrangements and Amalgamations) Rules, 2016
4. Income Tax Act, 1961
5. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
6. Competition Act, 2002
1. Companies Act, 2013
Chapter XV of Companies Act, 2013 comprising Sections 230 to 240 contains provisions on
Compromises, Arrangements and Amalgamations. The scheme of Chapter XV goes as follows.
1. Section 230-231 deals with compromise or arrangements with creditors and members and
power of the Tribunal to enforce such a comprise or arrangement.
2. Section 232 deals with mergers and amalgamation including demergers.
3. Section 233 is relating to the merger or amalgamation of small companies or between the
holding company and its wholly owned subsidiary (also called fast track mergers)
4. Section 234 deals with amalgamation with foreign company (also called cross border mergers).
5. Section 235 deals with acquisition of shares of dissenting shareholders.
6. Section 236 deals with purchase of minority shareholding
7. Section 237 contains provisions as to the power of the central government to provide for
amalgamation of companies in public interest.
8. Section 238 deals with registration of offer of schemes involving transfer of shares.
9. Section 239 deals with preservation of books and papers of amalgamated companies.
10. Section 240 deals with liability of officers in respect of offences committed prior to merger,
amalgamation etc.
2. Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (read with

National Company Law Tribunal Rules, 2016)
Rules 3 to Rule 29 contain provisions dealing with the procedure for carrying out a scheme of
compromise or arrangement including amalgamation or reconstruction.
3. Under the Income Tax Act, 1961
The Income Tax Act, 1961 covers aspects such as tax reliefs to amalgamating/amalgamated
companies, carry forward of losses, exemptions from capital gains tax etc. For example, when a
scheme of merger or demerger involves the merger of a loss making company or a hiving off of a loss
making division, it is necessary to check the relevant provisions of the Income Tax Act and the Rules for
the purpose of ensuring, inter alia, the availability of the benefit of carrying forward the accumulated
losses and setting of such losses against the profits of the Transferor Company.
Lesson 2 Mergers and Amalgamations Legal and Procedural Aspects 15
SEBI has notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing
Regulations) on September 2, 2015. A time period of ninety days has been given for implementing the
Regulations. However, two provisions of the regulations, which are facilitating in nature, are applicable
with immediate effect. These pertain to:
(i) passing of ordinary resolution instead of special resolution in case of all material related party
transactions subject to related parties abstaining from voting on such resolutions, in line with
the provisions of the Companies Act, 2013, and
(ii) re-classification of promoters as public shareholders under various circumstances.
The relevant Regulations relating to Corporate Restructuring are as follows.
Scheme of Arrangement.
Regulation 11. The listed entity shall ensure that any scheme of arrangement /amalgamation/merger
/reconstruction/reduction of capital etc. to be presented to any Tribunal does not in any way violate,
override or limit the provisions of securities laws or requirements of the stock exchange(s):
Provided that this regulation shall not be applicable for the units issued by Mutual Fund which are listed
on a recognised stock exchange(s).
Draft Scheme of Arrangement & Scheme of Arrangement.
Regulation 37. (1) Without prejudice to provisions of regulation 11, the listed entity desirous of
undertaking a scheme of arrangement or involved in a scheme of arrangement, shall file the draft
scheme of arrangement, proposed to be filed before any Tribunal under Sections 230-234 and Section
66 of Companies Act, 2013, whichever applicable, with the stock exchange(s) for obtaining Observation
Letter or No-objection letter, before filing such scheme with any Tribunal, in terms of requirements
specified by the Board or stock exchange(s) from time to time.
(2) The listed entity shall not file any scheme of arrangement under sections 230-234 and Section 66 of
Companies Act, 2013 , with Tribunal unless it has obtained observation letter or No-objection letter from
the stock exchange(s).
(3) The listed entity shall place the Observation letter or No-objection letter of the stock exchange(s)
before the Tribunal at the time of seeking approval of the scheme of arrangement:
Provided that the validity of the Observation Letter or No-objection letter of stock exchanges shall be
six months from the date of issuance, within which the draft scheme of arrangement shall be submitted
to the Tribunal
(4) The listed entity shall ensure compliance with the other requirements as may be prescribed by the
Board from time to time.
(5) Upon sanction of the Scheme by the Tribunal, the listed entity shall submit the documents, to the
stock exchange(s), as prescribed by the Board and/or stock exchange(s) from time to time.
Minimum Public Shareholding.
Regulation 38. The listed entity shall comply with the minimum public shareholding requirements
specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 in the
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manner as specified by the Board from time to time:
Provided that provisions of this regulation shall not apply to entities listed on institutional trading
platform without making a public issue.
6. Under the Indian Stamp Act
It is necessary to refer to the Stamp Act to check the stamp duty payable on transfer of undertaking
through a merger or demerger.
7. Competition Act, 2002
The provisions of Competition Act and the Competition Commission of India (Procedure in regard to the
Transaction of Business relating to Combinations) Regulations, 2011 are to be complied with.
PROVISIONS OF THE COMPANIES ACT 2013

Section 230 Power to compromise or make arrangements with creditors and members.
Section 230 lays down in detail the power to make compromise or arrangements with its creditors and
members. Under this Section, a company can enter into a compromise or arrangement with its creditors
or its members, or any class thereof.
Scope of Section 230
Section 230 deals with the rights of a company to enter into a compromise or arrangement (i) between
itself and its creditors or any class of them; and (ii) between itself and its members or any class of them.
The arrangement contemplated by the section includes a reorganisation of the share capital of a
company by consolidation of its shares of different classes or by sub-division of its shares into shares of
different classes or by both these methods.
The section also applies to compromise or a management entered into by companies under winding up.
Therefore, an arrangement under this section can take a company out of winding up.
Sub-section (1) Application to the Tribunal for convening meetings of members/creditors.
Where a company or a creditor or a member of the company proposes a compromise or arrangement
between it and its creditors or between it and its members or with any class of the creditors or any class
of members, the company or the creditor or member, or where the company is being wound up, the
liquidator may make an application to the Tribunal. On such application, the Tribunal may order a
meeting of the creditors or members or any class of them as the case may be and such meeting shall
be called, held and conducted in such manner as the Tribunal may direct.
The key words and expressions under sub-section are creditors, Tribunal, class of creditors or
members, a company which is being wound up, liquidator. When a company is ordered to be wound
up, the liquidator is appointed and once winding up commences liquidator takes charge of the company
in all respects and therefore it is he who could file any application of any compromise or arrangement in
the case of a company which is being wound up. A company which is being wound up would mean a
company in respect of which the court has passed the winding up order.
Who can make application under Section 230 to the Tribunal for the purpose of calling meeting of
creditors/members as the case may be?
1. The Company
2. Creditor/Member
3. Liquidator in case of the company being wound up.
Sub-section (2) Disclosures to the Tribunal by applicant under sub-section 1:
Sub-section (2) provides that the company or any other person, who makes an application as provided
under sub-section (1) shall disclose by affidavit to the Tribunal:
(a) all material facts relating to the company, such as the latest financial position of the company, the
latest auditors report on the accounts of the company and the pendency of any investigation or
proceedings against the company;
(b) reduction of share capital of the company, if any, included in the compromise or arrangement;
(c) any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of
the secured creditors in value, including
(i) a creditors responsibility statement in the prescribed form;
(ii) safeguards for the protection of other secured and unsecured creditors;
(iii) report by the auditor that the fund requirements of the company after the corporate debt
restructuring as approved shall conform to the liquidity test based upon the estimates provided
to them by the Board;
(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by
the Reserve Bank of India, a statement to that effect; and
(v) a valuation report in respect of the shares and the property Corporate Restructuring &
Insolvency 3 and all assets, tangible and intangible, movable and immovable, of the company
by a registered valuer.
What is the disclosure requirement under Section 230(2)?

Material facts including latest financial position of company, latest auditors report and pending
proceedings, if any
Reduction of share capital, if any
Any scheme of corporate debt restructuring, consent to by 3/4th majority of secured creditors
Sub-section (3) Notice of the meeting.
Notice of the meeting called in pursuant to the order of the tribunal shall be sent to all the creditors or
class of creditors and to all the members or class of members and the debenture-holders of the
company, individually at the address registered with the company which shall be accompanied by
1. a statement disclosing the details of the compromise or arrangement,
2. a copy of the valuation report, if any, and
3. explaining their effect on creditors, key managerial personnel, promoters and non-promoter
members, and the debenture holders and
4. the effect of the compromise or arrangement on any material interests of the directors of the
company or the debenture trustees, and
5. such other matters as may be prescribed:
Such notice and other documents shall also be placed on the website of the company, if any, and in
18 PP-CRVI
case of a listed company, these documents shall be sent to the Securities and Exchange Board and
stock exchange where the securities of the companies are listed, for placing on their website and shall
also be published in newspapers in such manner as may be prescribed: When the notice for the
meeting is also issued by way of an advertisement, it shall indicate the time within which copies of the
compromise or arrangement shall be made available to the concerned persons free of charge from the
registered office of the company.
Sub-section (4) Notice to provide for voting by themselves or through proxy or through postal
ballot
Subsection (4) states that a notice under sub-section (3) shall provide that the persons to whom the
notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the
adoption of the compromise or arrangement within one month from the date of receipt of such notice:
Sub-section (5) Notice to be sent to the regulators seeking their representations
Section 230(5) states that a notice under sub-section (3) along with all the documents in such form as
may be prescribed shall also be sent to the Central Government, the income-tax authorities, the
Reserve Bank of India, the Securities and Exchange Board, the Registrar, the respective stock
exchanges, the Official Liquidator, the Competition Commission of India established under sub-section
(1) of section 7 of the Competition Act, 2002, if necessary, and such other sectoral regulators or
authorities which are likely to be affected by the compromise or arrangement and shall require that
representations, if any, to be made by them shall be made within a period of thirty days from the date of
receipt of such notice, failing which, it shall be presumed that they have no representations to make on
the proposals
Sub-section (6): Approval and sanction of the scheme
Section 230(6) states that when at a meeting held in pursuance of sub-section (1), majority of persons
representing three-fourths in value of the creditors, or class of creditors or members or class of
members, as the case may be, voting in person or by proxy or by postal ballot, agree to any
compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by
an order, the same shall be binding on the company, all the creditors, or class of creditors or members
or class of members, as the case may be, or, in case of a company being wound up, on the liquidator
and the contributories of the company
Sub-section (7): Order of the tribunal sanctioning the scheme to provide for the Certain matters
An order made by the Tribunal shall provide for all or any of the following matters, namely:
(a) where the compromise or arrangement provides for conversion of preference shares into equity
shares, such preference shareholders shall be given an option to either obtain arrears of
dividend in cash or accept equity shares equal to the value of the dividend payable;
(b) the protection of any class of creditors;
(c) if the compromise or arrangement results in the variation of the shareholders rights, it shall be
given effect to under the provisions of section 48;
(d) if the compromise or arrangement is agreed to by the creditors under sub-section (6), any
proceedings pending before the Board for Industrial and Financial Reconstruction established
under section 4 of the Sick Industrial Companies (Special Provisions) Act, 1985 shall abate;
(e) such other matters including exit offer to dissenting shareholders, if any, as are in the opinion
of the Tribunal necessary to effectively implement the terms of the compromise or
arrangement:
No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the
company's auditor has been filed with the Tribunal to the effect that the accounting treatment, if
any, proposed in the scheme of compromise or arrangement is in conformity with the
accounting standards prescribed under section 133.
Sub-Section (8): Section 230(8) states that the order of the Tribunal shall be filed with the Registrar by
the company within a period of thirty days of the receipt of the order.
Sub-section (9): The Tribunal may dispense with calling of meeting of creditors
Section 230(9) states that the Tribunal may dispense with calling of a meeting of creditor or class of
creditors where such creditors or class of creditors, having at least ninety per cent value, agree and
confirm, by way of affidavit, to the scheme of compromise or arrangement.
Sub-section (10):
Compromise in respect of buy back is to be in compliance with section 68 As per Section 230(10), no
compromise or arrangement in respect of any buy-back of securities under this section shall be
sanctioned by the Tribunal unless such buy-back is in accordance with the provisions of section 68.
Sub-section (11):
Section 230(11) states that any compromise or arrangement may include takeover offer made in such
manner as may be prescribed. In case of listed companies, takeover offer shall be as per the
regulations framed by the Securities and Exchange Board
Section 231 Power of the tribunal to enforce compromise or arrangement
As per section 231(1) when the Tribunal makes an order under section 230 sanctioning a compromise
or an arrangement in respect of a company, it
(a) shall have power to supervise the implementation of the compromise or arrangement; and
(b) may, at the time of making such order or at any time thereafter, give such directions in regard to
any matter or make such modifications in the compromise or arrangement as it may consider
necessary for the proper implementation of the compromise or arrangement.
Sub-section (2) states that if the Tribunal is satisfied that the compromise or arrangement sanctioned
under section 230 cannot be implemented satisfactorily with or without modifications, and the company
is unable to pay its debts as per the scheme, it may make an order for winding up the company and
such an order shall be deemed to be an order made under section 273.
Section 232 Merger and amalgamation of companies
Sub-section (1): Tribunals power to call meeting of creditors or members, with respect to merger or
amalgamation of companies
Section 232(1) states that when an application is made to the Tribunal under section 230 for the
sanctioning of a compromise or an arrangement proposed between a company and any such persons
as are mentioned in that section, and it is shown to the Tribunal (a) that the compromise or
arrangement has been proposed for the purposes of, or in connection with, a scheme for the
20 PP-CRVI
reconstruction of the company or companies involving merger or the amalgamation of any two or more
companies; and (b) that under the scheme, the whole or any part of the undertaking, property or
liabilities of any company (hereinafter referred to as the transferor company) is required to be
transferred to another company (hereinafter referred to as the transferee company), or is proposed to
be divided among and transferred to two or more companies, the Tribunal may on such application,
order a meeting of the creditors or class of creditors or the members or class of members, as the case
may be, to be called, held and conducted in such manner as the Tribunal may direct and the provisions
of sub-sections (3) to (6) of section 230 shall apply mutatis mutandis
Sub-section (2) Circulation of documents for members/creditors meeting
Section 232(2) states that when an order has been made by the Tribunal under sub-section (1),
merging companies or the companies in respect of which a division is proposed, shall also be required
to circulate the following for the meeting so ordered by the Tribunal, namely:
(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors of the
merging company;
(b) confirmation that a copy of the draft scheme has been filed with the Registrar;
(c) a report adopted by the directors of the merging companies explaining effect of compromise on
each class of shareholders, key managerial personnel, promotors and non-promoter
shareholders laying out in particular the share exchange ratio, specifying any special valuation
difficulties;
(d) the report of the expert with regard to valuation, if any;
(e) a supplementary accounting statement if the last annual accounts of any of the merging
company relate to a financial year ending more than six months before the first meeting of the
company summoned for the purposes of approving the scheme.
Sub-section (3): Sanctioning of scheme by tribunal
Section 232(3) states that the Tribunal, after satisfying itself that the procedure specified in sub-sections
(1) and (2) has been complied with, may, by order, sanction the compromise or arrangement or by a
subsequent order, make provision for the following matters, namely:
(a) the transfer to the transferee company of the whole or any part of the undertaking, property or
liabilities of the transferor company from a date to be determined by the parties unless the
Tribunal, for reasons to be recorded by it in writing, decides otherwise;
(b) the allotment or appropriation by the transferee company of any shares, debentures, policies or
other like instruments in the company which, under the compromise or arrangement, are to be
allotted or appropriated by that company to or for any person:
No transferee company can hold shares in its own name or under any trust
A transferee company shall not, as a result of the compromise or arrangement, hold any
shares in its own name or in the name of any trust whether on its behalf or on behalf of any of
its subsidiary or associate companies and any such shares shall be cancelled or extinguished;
(c) the continuation by or against the transferee company of any legal proceedings pending by
or against any transferor company on the date of transfer;
(d) dissolution, without winding-up, of any transferor company;
(e) the provision to be made for any persons who, within such time and in such manner as the
Tribunal directs, dissent from the compromise or arrangement;
(f) where share capital is held by any non-resident shareholder under the foreign direct investment
norms or guidelines specified by the Central Government or in accordance with any law for the
time being in force, the allotment of shares of the transferee company to such shareholder shall
be in the manner specified in the order;
(g) the transfer of the employees of the transferor company to the transferee company;
(h) when the transferor company is a listed company and the transferee company is an unlisted
company,
(A) the transferee company shall remain an unlisted company until it becomes a listed
company;
(B) if shareholders of the transferor company decide to opt out of the transferee company,
provision shall be made for payment of the value of shares held by them and other benefits
in accordance with a pre-determined price formula or after a valuation is made, and the
arrangements under this provision may be made by the Tribunal: The amount of payment
or valuation under this clause for any share shall not be less than what has been specified
by the Securities and Exchange Board under any regulations framed by it;
(i) where the transferor company is dissolved, the fee, if any, paid by the transferor company on
its authorised capital shall be set-off against any fees payable by the transferee company on its
authorised capital subsequent to the amalgamation; and
(j) such incidental, consequential and supplemental matters as are deemed necessary to secure
that the merger or amalgamation is fully and effectively carried out:
No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the
companys auditor has been filed with the Tribunal to the effect that the accounting treatment, if
accounting standards prescribed under section 133.
Sub-section (4) Transfer of property or liabilities
Sub-section (4) stares that an order under this section provides for the transfer of any property or
liabilities, then, by virtue of the order, that property shall be transferred to the transferee company and
the liabilities shall be transferred to and become the liabilities of the transferee company and any
property may, if the order so directs, be freed from any charge which shall by virtue of the compromise
or arrangement, cease to have effect
Sub-section (5): Certified copy of the order to be filed with the registrar
Section 232(5) states that every company in relation to which the order is made shall cause a certified
copy of the order to be filed with the Registrar for registration within thirty days of the receipt of certified
copy of the order
Sub Section (6): Effective date of the scheme.
Section 232(6) states that the scheme under this section shall clearly indicate an appointed date from
which it shall be effective and the scheme shall be deemed to be effective from such date and not at a
date subsequent to the appointed date.
Sub-section (7): Annual statement certified by CA/CS/CWA to be filed with registrar every year until the
completion of the scheme.
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Section 232 (7) states that every company in relation to which the order is made shall, until the
completion of the scheme, file a statement in such form and within such time as may be prescribed with
the Registrar every year duly certified by a chartered accountant or a cost accountant or a company
secretary in practice indicating whether the scheme is being complied with in accordance with the
orders of the Tribunal or not.
Sub-section (8): Punishment
Section 232(8) states that if a transferor company or a transferee company contravenes the provisions
of this section, the transferor company or the transferee company, as the case may be, shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five
lakh rupees and every officer of such transferor or transferee company who is in default, shall be
punishable with imprisonment for a term which may extend to one year or with fine which shall not be
less than one lakh rupees but which may extend to three lakh rupees, or with both.
Section 233 Merger or amalgamation of certain companies
Section 233 prescribes simplified procedure for Merger or amalgamation of

two or more small companies or
between a holding company and its wholly-owned subsidiary company or
such other class or classes of companies as may be prescribed;
Sub-section (1)
Accordingly sub-section (1) of Section 233 states that notwithstanding the provisions of section 230 and
section 232, a scheme of merger or amalgamation may be entered into between two or more small
companies or between a holding company and its wholly-owned subsidiary company or such other
class or classes of companies as may be prescribed, subject to the following, namely:
(a) a notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar
and Official Liquidators where registered office of the respective companies are situated or
persons affected by the scheme within thirty days is issued by the transferor company or
companies and the transferee company;
(b) the objections and suggestions received are considered by the companies in their respective
general meetings and the scheme is approved by the respective members or class of members
at a general meeting holding at least ninety per cent. of the total number of shares;
(c) each of the companies involved in the merger files a declaration of solvency, in the prescribed
form, with the Registrar of the place where the registered office of the company is situated; and
(d) the scheme is approved by majority representing nine-tenths in value of the creditors or class
of creditors of respective companies indicated in a meeting convened by the company by
giving a notice of twenty-one days along with the scheme to its creditors for the purpose or
otherwise approved in writing.
Sub-section (2)
The sub-section states that the transferee company shall file a copy of the scheme so approved in the
manner as may be prescribed, with the Central Government, Registrar and the Official Liquidator where
the registered office of the company is situated.
Sub-section (3): Central Government to issue confirmation order, where there are no objections or
suggestions from registrar or official liquidator.
Section 233(3) states that on the receipt of the scheme, if the Registrar or the Official Liquidator has no
objections or suggestions to the scheme, the Central Government shall register the same and issue a
confirmation thereof to the companies.
Sub-section (4): Objections if any by the registrar or official liquidator to be communicated to the central
government.
Section 233(4) If the Registrar or Official Liquidator has any objections or suggestions, he may
communicate the same in writing to the Central Government within a period of thirty days. If no such
communication is made, it shall be presumed that he has no objection to the scheme.
Sub-section (5): Application by Central Government to the Tribunal.
Section 233(5) states that if the Central Government after receiving the objections or suggestions or for
any reason is of the opinion that such a scheme is not in public interest or in the interest of the
creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the
scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the
scheme under section 232.
Sub-section (6): Tribunals Action to Central Governments application
Section 233(6) states that on receipt of an application from the Central Government or from any person,
if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be
considered as per the procedure laid down in section 232, the Tribunal may direct accordingly or it may
confirm the scheme by passing such order as it deems fit: If the Central Government does not have any
objection to the scheme or it does not file any application under this section before the Tribunal, it shall
be deemed that it has no objection to the scheme.
Sub-section (7): Registrar having jurisdiction over transferee company has to be communicated
Section 233(7) states that a copy of the order under sub-section (6) confirming the scheme shall be
communicated to the Registrar having jurisdiction over the transferee company and the persons
concerned and the Registrar shall register the scheme and issue a confirmation thereof to the
companies and such confirmation shall be communicated to the Registrars where transferor company
or companies were situated.
Sub-section (8): Effect of Registration of the scheme
Sub-Section (8) states that the registration of the scheme under subsection (3) or sub-section (7) shall
be deemed to have the effect of dissolution of the transferor company without process of winding up.
Sub-section (9):
This sub-section states that the registration of the scheme shall have the following effects, namely:
(a) transfer of property or liabilities of the transferor company to the transferee company so that
the property becomes the property of the transferee company and the liabilities become the
liabilities of the transferee company;
(b) the charges, if any, on the property of the transferor company shall be applicable and
enforceable as if the charges were on the property of the transferee company;
(c) legal proceedings by or against the transferor company pending before any court of law shall
be continued by or against the transferee company; and
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(d) where the scheme provides for purchase of shares held by the dissenting shareholders or
settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall
become the liability of the transferee company.
Sub-section (10): Transferee Company not to hold any share in its own name or trust and all such
shares are to be cancelled or extinguished
Section 233 (10) states that a transferee company shall not on merger or amalgamation, hold any
shares in its own name or in the name of any trust either on its behalf or on behalf of any of its
subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger
or amalgamation.
Sub-section (11): Transferee Company to file an application with Registrar along with the scheme
registered
Section 233(11) The transferee company shall file an application with the Registrar along with the
scheme registered, indicating the revised authorised capital and pay the prescribed fees due on revised
capital. The fee, if any, paid by the transferor company on its authorised capital prior to its merger or
amalgamation with the transferee company shall be set-off against the fees payable by the transferee
company on its authorised capital enhanced by the merger or amalgamation.
Section 234: Merger or amalgamation of a Company with a foreign company (Not yet Notified)
Section 234(1) states that the provisions of this Chapter unless otherwise provided under any other law
for the time being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations
between companies registered under this Act and companies incorporated in the jurisdictions of such
countries as may be notified from time to time by the Central Government. The Central Government
may make rules, in consultation with the Reserve Bank of India, in connection with mergers and
amalgamations provided under this section.
Section 234(2) Subject to the provisions of any other law for the time being in force, a foreign company,
may with the prior approval of the Reserve Bank of India, merge into a company registered under this
Act or vice versa and the terms and conditions of the scheme of merger may provide, among other
things, for the payment of consideration to the shareholders of the merging company in cash, or in
Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the
scheme to be drawn up for the purpose. For the purposes of sub-section (2), the expression foreign
company means any company or body corporate incorporated outside India whether having a place of
business in India or not.
Section 235: Power to acquire shares of shareholders dissenting from scheme or contract
approved by majority
Section 235 of the Companies Act 2013 prescribes the manner of acquisition of shares of shareholders
dissenting from the scheme or contract approved by the majority shareholders holding not less than
nine tenth in value of the shares, whose transfer is involved. It includes notice to dissenting
shareholders, application to dissenting shareholders to tribunal, deposit of consideration received by the
transferor company in a separate bank account etc.,
Section 236: Purchase of minority shareholding
Section 236 prescribes the manner of notification by the acquirer(majority) to the company, offer to
minority for burying their shares, deposit an amount equal to the value of shares to be acquired,
valuation of shares by registered valuer etc.,
Section 237: Power of Central Government to provide for amalgamation of companies in public
interest
Sub-section (1): Power of Central Government to provide for amalgamation of Companies
Section 237(1) states that when the Central Government is satisfied that it is essential in the public
interest that two or more companies should amalgamate, the Central Government may, by order
notified in the Official Gazette, provide for the amalgamation of those companies into a single company
with such constitution, with such property, powers, rights, interests, authorities and privileges, and with
such liabilities, duties and obligations, as may be specified in the order.
Continuation of legal proceedings.
Section 237 (2) states that the order under sub-section (1) may also provide for the continuation by or
against the transferee company of any legal proceedings pending by or against any transferor company
and such consequential, incidental and supplemental provisions as may, in the opinion of the Central
Government, be necessary to give effect to the amalgamation.
Interest or rights of members, creditors, debenture holders not to be affected.
As per Section 237(3), every member or creditor, including a debenture holder, of each of the transferor
companies before the amalgamation shall have, as nearly as may be, the same interest in or rights
against the transferee company as he had in the company of which he was originally a member or
creditor, and in case the interest or rights of such member or creditor in or against the transferee
company are less than his interest in or rights against the original company, he shall be entitled to
compensation to that extent, which shall be assessed by such authority as may be prescribed and
every such assessment shall be published in the Official Gazette, and the compensation so assessed
shall be paid to the member or creditor concerned by the transferee company.
Sub-section 4: Appeal to tribunal
As per Section 237 (4) Any person aggrieved by any assessment of compensation made by the
prescribed authority under sub-section (3) may, within a period of thirty days from the date of
publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon
the assessment of the compensation shall be made by the Tribunal.
Sub-section 5: Conditions for order
As per Section 237 (5) No order shall be made under this section unless
(a) a copy of the proposed order has been sent in draft to each of the companies concerned;
(b) the time for preferring an appeal under sub-section (4) has expired, or where any such appeal
has been preferred, the appeal has been finally disposed off; and
(c) the Central Government has considered, and made such modifications, if any, in the draft order
as it may deem fit in the light of suggestions and objections which may be received by it from
any such company within such period as the Central Government may fix in that behalf, not
being less than two months from the date on which the copy aforesaid is received by that
26 PP-CRVI
company, or from any class of shareholders therein, or from any creditors or any class of
creditors thereof.
Sub-section 6:
As per Section 237 (6) the copies of every order made under this section shall, as soon as may be after
it has been made, be laid before each House of Parliament.
Section 238: Registration of offer of schemes involving transfer of shares
Section 238(1) 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, (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) states that
an appeal shall lie to the Tribunal against an order of the Registrar refusing to register any circular
under subsection (1). Section 238(3) states that the director who issues a circular which has not been
presented for registration and registered under clause (c) of sub-section (1), shall be punishable with
fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.
Section 239: Preservation of books and papers of amalgamated company
As per section 239, the books and papers of a company which has been amalgamated with, or whose
shares have been acquired by, another company under this Chapter shall not be disposed of without
the prior permission of the Central Government and before granting such permission, that Government
may 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 or
formation, or the management of the affairs, of the transferor company or its amalgamation or the
acquisition of its shares.
Section 240: Liability of officers in respect of offences committed prior to merger,

amalgamation, etc.
As per Section 240, notwithstanding anything in any other law for the time being in force, the liability in
respect of offences committed under this Act by the officers in default, of the transferor company prior to
its merger, amalgamation or acquisition shall continue after such merger, amalgamation or acquisition.
APPROVALS IN SCHEME OF AMALGAMATION
The companies are required to obtain following approvals in respect of the scheme of amalgamation:
(i) Approval of Board of Directors

The first step in carrying out amalgamation is approval of scheme of amalgamation by the
Board of both the companies.
Board resolution should, besides approving the scheme, authorise a Director/Company

Secretary/other officer to make application to Tribunal, to sign the application and other
documents and to do everything necessary or expedient in connection therewith, including
changes in the scheme.
(ii) Approval of Shareholders/Creditors
Members and creditors approval to the scheme of amalgamation is sine qua non for Tribunals
sanction. Without that the Tribunal cannot proceed. This approval is to be obtained at specially
convened meetings held as per Tribunals directions [Section 230(1)]. However, the Tribunal may
dispense with meetings of members/creditors [Section 230(9)].
The scheme of compromise or arrangement has to be approved as directed by the Tribunal, by

the members of the company; or
the members of each class, if the company has different classes of shares; and
the creditors; or
each class of creditors, if the company has different classes of creditors.
The approval of the members and creditors (or each class of them) has to be obtained at specially
convened meetings as per the Tribunal directions. An application seeking directions to call, hold and
conduct meetings is made to the Tribunal, which has jurisdiction having regard to the location of the
registered office of the company.
Following are some of the precedents under the relevant provisions of Companies Act, 1956.
Since the 1956 Act has been replaced by the 2013 Act, the National Company Law Tribunal
(NCLT of Tribunal) is the relevant Authority under the 2013 Act, in place of the respective
High Courts.
A learned Judge of Bombay High Court in Kaveri Entertainment Ltd. in re., (2003) 117 Comp Cas 245
(Bom) expounded the procedure required to be followed by a company which seeks the courts sanction
to a scheme of compromise or arrangement as:
A company which desires to enter into any arrangement with its members and/or creditors first makes
an application to the court under Sub-section (1) of Section 391 of the Act for directions for convening of
the meeting or meetings of the members and/or creditors, as the case may be, for considering the
proposed scheme of arrangement.
The court, on receiving such an application, issues directions for convening of separate meetings of the
members and/or creditors or different classes of members and/or creditors, as the case may be. In
those meetings, the scheme of arrangement is required to be approved by majority in number
representing 3/4th in value of the creditors or class of creditors or members or class of members as the
case may be. After the scheme is approved by all concerned, a petition is presented to the court for
sanctioning of the scheme of arrangement.
If the court is satisfied that the scheme is just and fair and not prejudicial to the interest of the
members/class of members or creditors/class of creditors, as the case may be, then the court may
sanction it.
A subsidiary company being a creditor cannot be included along with other unsecured creditors; their
interest in supporting a scheme proposed by the holding company would not be the same as the
interest of the other unsecured creditors [Hindustan Development Corporation Ltd. v. Shaw Wallace &
28 PP-CRVI
Co. Ltd. (supra)]. Secured creditors should not be clubbed together with the unsecured creditors. Their
interest would not be the same.
Scheme to be approved by special majority
The Scheme must be approved by a resolution passed with the special majority stipulated in Section
230(6), namely a majority in number representing three-fourths in value of the creditors, or class of
creditors, or members, or class of members, as the case may be, present and voting either in person or,
by proxy.
Thus, 51% majority in number, and 75% in value present and voting at the meeting must approve the
scheme. [Section 230(6)]. For example, if at the meeting 100 persons (members in person and proxies)
are present, at least 51 of them must vote in favour the resolution and they must be holding at least
75% of the paid-up share capital carrying voting rights. In the case of creditors, those voting in favour
must have the claim not less than 75% of the total amount of claim of all the creditors present and
voting.
Following are some of the precedents under the Companies Act, 1956. Since the 1956 Act has
been replaced by the 2013 Act, section providing for such approval is different.
The majority is dual, in number and in value. A simple majority of those voting is sufficient, whereas the
three - fourths requirement relates to value. The three-fourths value is to be computed with reference
to paid-up capital held by members (or to total amount owed by company to creditors) present and
voting at the meeting. [Re Maknam Investments Ltd. (1995) 6 SCL 93 Cal; Re Mafatlal Industries Ltd.
(1995) 84 Comp Cas 230 (Guj)].
A full bench of the Punjab and Haryana High Court in Hind Lever Chemicals Limited and Another [2005]
58S CL 211(Punj. & Har.) held that In our view, the language of Section 391(2) of the Act is totally
unambiguous and a plain reading of this provision clearly shows that the majority in number by which a
compromise or arrangement is approved should represent three-fourth in value of the creditors/
shareholders who are 'present and voting' and not of the total value of the shareholders or creditors of
the company.
This is neither an ordinary resolution nor a special resolution within the purview of Section 189 of the
Act. This is an extraordinary resolution. A copy of this resolution need not be filed with the Registrar of
Companies.
Where a Scheme is not approved at a meeting, by the requisite majority, but is subsequently approved
by individual affidavits, the court may sanction the Scheme as Section 391(2) is not mandatory but is
merely directory and there should be substantial compliance thereof. [SM Holdings Finance Pvt Ltd. v.
Mysore Machinery Mfrs Ltd. (1993) 78 Comp Cas 432 (Kar)].
In Kaveri Entertainment Ltd., in re. (2003) 17 Comp Cas 245 (Bom.): (2003) 45 SCL 294 (Bom): (2003)
57 CLA 127 (Bom), a learned Judge of the Bombay High Court expounded the requirement of Sub-
section (2) as:
Sub-section (2) of Section 391 of the Act requires that the resolution approving the scheme of
arrangement should be passed by majority in number representing 3/4th in value of the creditors or
class of creditors and/or members or class of members as the case may be. If the resolution granting
approval to the scheme of arrangement is passed by more than 3/4th in value of the creditors but, is not
carried by the majority in number of the creditors, the scheme would not be approved by the court. The
majority in number of the creditors is provided in the section for safeguarding the interests of the large
number of small creditors whose voice is often lost amongst small number of big creditors. The
conditions of approval by majority in number and 3/4th in value of credit are cumulative.
In determining whether a resolution has been passed by the requisite majority or not, the members
remaining neutral or not participating in voting are to be ignored. This is because the section clearly
provides that the votes of only the members present and voting either in person or, by proxy, are to be
taken into account. Where in a meeting for the sanction of a scheme, holders of shares of the value of
`6,42,700 were present but holders of shares of the value of `4,42,700 alone voted in favour of the
resolution and the others remained neutral, voting neither in favour of, nor against, the resolution, it was
held that there was a unanimous passing of the resolution and the requisite majority contemplated by
Section 391(2) agreed to the scheme. [Hindustan General Electric Corporation Ltd., in re. (1959) 29 Comp
Cas 46 (Cal)].
In Re: Kirloskar Electric Company Ltd., [2003] 116 Com Cas 413 (Kar): The Karnatka High Court held
that the three-fourth majority required under Sub-section (2) of Section 391 of the Act was of the value
represented by the members who were not only present but who had also voted. In fact, it went a step
further to hold that the creditors who were present and had even voted but whose votes had been found
to be invalid, could not be said to have voted because casting an invalid vote is no voting in the eyes of
law. Thus, it was held that "the proper construction to be placed in calculating whether any resolution is
approved or passed by a three-fourth majority present and voting necessarily mean the value of the
valid votes and out of the same whether the resolution has been passed with three-fourth the majority"
(iii) Approval of the Stock Exchanges:- Regulation 37 of the SEBI (LODR) Regulation, 2015
Approved under the listed entity desirous of undertaking a scheme of arrangement or involved in a
scheme of arrangement, shall file the draft scheme of arrangement, proposed to be filed before any
Court or Tribunal under Sections 230- 234 and Section 66 of Companies Act, 2013, with the stock
exchange(s) for obtaining Observation Letter or No-objection letter, before filing such scheme with the
Tribunal,
(2)The listed entity shall not file any scheme of arrangement under Sections 230-234 and Section 66 of
Companies Act, 2013, whichever applicable, with Tribunal unless it has obtained observation letter or
No-objection letter from the stock exchange(s).
(3)The listed entity shall place the Observation letter or No-objection letter of the stock exchange(s)
before the Court or Tribunal at the time of seeking approval of the scheme of arrangement:
Provided that the validity of the Observation Letter or No-objection letter of stock exchanges shall be
six months from the date of issuance, within which the draft scheme of arrangement shall be submitted
to the Tribunal.
(iv) Approval of Financial Institutions
The approval of the Financial Institutions, trustees to the debenture holders and banks, investment
corporations would be required if the Company has borrowed funds either as term loans, working
capital requirements and/or have issued debentures to the public and have appointed any one of them
as trustees to the debenture holders.
(v) Approval from the Land Holders
If the land on which the factory is situated is the lease-hold land and the terms of the lease deed so
specifies, the approval from the lessor will be needed.
30 PP-CRVI
(vi) Approval of the Tribunal

Both companies (amalgamating as well as amalgamated) involved in a scheme of compromise
or arrangement or reconstruction or amalgamation are required to seek approval of the
respective Tribunal for sanctioning the scheme.
Every amalgamation, except those, which involve sick industrial companies, requires sanction
of Tribunal which has jurisdiction over the State/area where the registered office of a company
is situated.
If transferor and transferee companies are under the jurisdiction of different High Courts,
separate approvals are necessary.
If both are under jurisdiction of one High Court, joint application may be made. [Mohan Exports
Ltd. v. Tarun Overseas P. Ltd. (1994) 14 CLA 279 (Del) dissenting from Re Electro Carbonium
P. Ltd. (1979) 49 Comp Cas 825 (Kar) wherein it was held that a joint application cannot be
made]. Alternatively, where both the companies are situated in the same State and only one
company moves the court under Section 391, the other company may be made a party to the
petition (DCA Circular No.14 of 1973 dated 5th June, 1973).
The notice of every application filed with the Tribunal has to be given to the Central
Government (Regional Director, having jurisdiction of the State concerned).
After the hearing is over, the Tribunal will pass an order sanctioning the Scheme of
amalgamation, with such directions in regard to any matter and with such modifications in the
Scheme as the Judge may think fit to make for the proper working of the Scheme. [Section
230; Rule 5, Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.].
The court under Section 230-234 of the Act is also empowered to order the transfer of undertaking,
property or liabilities either wholly or in part, allotment of shares or debentures and on other
supplemental and incidental matters.
(vii) Approval of Reserve Bank of India

Where the scheme of amalgamation envisages issue of shares/cash option to Non-Resident Indians,
the amalgamated company is required to obtain the permission of Reserve Bank of India subject to
conditions prescribed under the Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000.
(viii) Approvals from Competition Commission of India (CCI)
The provisions relating to regulation of combination as provided under Sections 5 and 6 of the
Competition Act, 2002 would also be required to be complied with by companies, if applicable. These
provisions would be effective from June 01, 2011.
STEPS INVOLVED IN MERGER - A FLOW CHART
Process of Merger and Amalgamation
Check Memorandum whether If no Amend the Object Clause

it authorises Merger Object Clause
Convene a preliminary Board Meeting

Prepare Valuation Report

and Swap Ratio
Preparation of scheme of
Amalgamation
Convene Board meeting to approve Inform Stock

the scheme, valuation report, swap ratio Exchanges before
meeting and
outcome of the
meeting
Application to the Tribunal seeking direction

to call general meeting/creditors meeting
Inform the
Convene general meeting Stock Exchanges
as and when
required
Reporting results of the meeting

to the concerned Tribunal
Obtaining Tribunal order sanctioning scheme
Filing copy of Tribunal order with ROC
Transfer of assets and liabilities
Allotment of shares to shareholders

of transferor company
Listing of shares at Stock Exchange
Post merger integration
The procedure commencing with an application for seeking directions of the Court for convening,
holding and conducting meetings of creditors or class of creditors, members or class of members, as
32 PP-CRVI
the case may be, to the stage of the Tribunals order sanctioning the scheme of compromise or
arrangement is contained in Sections 230 to 240 of the Companies Act, 2013 and rules 3-29 of the
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. The Rules also prescribe
Forms for various purposes relating to compromise or arrangement:
The following are the process involved:

(i) Memorandum to authorise amalgamation
The memorandum of association of most of the companies contain provisions in their objects clause,
authorising amalgamation, merger, absorption, take-over and other similar strategies of corporate
restructuring. If the memorandum of a company does not have such a provision in its objects clause,
the company should alter the objects clause, for which the company is required to hold a general
meeting of its shareholders, pass a special resolution and file along with a certified copy of the special
resolution along with copy of explanatory statement and Memorandum of Association & Articles of
Association and a copy of agreement with the concerned Registrar of Companies and the prescribed
filing fee. The e-form should be digitally signed by Managing Director or Director or Manager or
Secretary of the company duly authorized by the Board of Directors. The e-form should also be certified
by chartered accountant or cost accountant or company secretary (in whole time practice) by digitally
signing the e-form.
Alteration should be registered by the Registrar of companies and only on such registration the
alteration will become effective.
Following are some of the precedents under the Companies Act, 1956. Since the 1956 Act has
been replaced by the 2013 Act, sections referred to in these precedents shall differ.
No confirmation by the Company Law Board or by any outside agency is now required. The
compromise or arrangement should be within the powers of the company and not ultra vires. If it is
beyond the companys objects or power, the court will have no jurisdiction to sanction it. [Oceanic
Steam Navigation Co., Re, (1939) Com Cases 229: (1938) 3 All ER 740 (Ch.D)]
There are two different opinions expressed by various courts on a simple query that whether the court
can sanction an amalgamation when the Memorandum of Association of the company does not contain
powers to amalgamate. It has been held by certain courts that there is no necessity to have special
power in the objects clause of the memorandum of association of a company for its amalgamation with
another company as to amalgamate with another company, is a power of the company and not an
object of the company. The Karnataka High Court in Hindhivac (P) Ltd. In re (CP No.15 and 16 of
2005), (206) 62 CC 58, the High Court had sanctioned the scheme of amalgamation taking note of the
fact that the shareholders of both the companies had unanimously approved the scheme. The Court
held that Section 17 is an aid to company seeking amalgamation, reconstruction etc. Therefore, there
would be no impediment on the scheme of amalgamation even if there is no provision in the objects
clause of Memorandum of Association as to amalgamate with another company. In Marybong & Kyel
Tea Estates Ltd., Re (1977) 47 Com Cases 802, a previous decision in Hari Krishan Lohia v.
Hoolungoree Tea Company, (1970) 40 Com Cases 458: AIR 1969 Cal 312 (DB) was followed and it
was asserted that where there is a statutory provision dealing with the amalgamation of companies, no
special power in the objects clause of memorandum of association of a company is necessary for its
amalgamating with another company. It is submitted that to amalgamate with another company is a
power of the company and not an object of the company. Amalgamation may be effected by order of
the court under Sections 391 and 394.
Observing Memorandum of Association of Transferee Company

It has to be ensured that the objects of the Memorandum of Association of the transferee company
cover the objects of the transferor company or companies. If not then it will be necessary to follow the
procedure for amendment of objects by passing a special resolution at an Extraordinary General
Meeting convened for this purpose. It has been held by various decisions of the courts that there is no
necessity to have special power in the object clause of the Memorandum of Association of a company
for its amalgamation with another company. It has been laid down that to amalgamate with another
company is power of the company and not an object of the company.
Since the amalgamation will involve issue of shares by the transferee company to the shareholders of
the transferor companies, a general meeting convened for the purpose of the amendment of the Object
Clause of Memorandum of Association of the transferee company to incorporate the object of the
transferor company, should also cover resolutions relating to the increase of authorised capital,
consequential changes in the Articles of Association and resolution authorising the Directors to issue
shares of the shareholders of the transferor companies without offering them to the existing
shareholders of the company. It is also a normal practice that alongwith the special resolution for
amendment of the Object Clause, special resolution is also passed under Section 149(2A) of the
Companies Act, 1956 authorising the transferee company to commence the business of the transferor
company or companies as soon as the amalgamation becomes effective. [Section 11 of Companies
Act, 2013 dealing with commencement of business is deleted vide Companies (Amendment) Act, 2015.]
Convening a Board Meeting
A Board Meeting is to be convened and held to consider and approve in principle, amalgamation and
appoint an expert for valuation of shares to determine the share exchange ratio.
Consequent upon finalisation of scheme of amalgamation, another Board Meeting is to be held to
approve the scheme.
Preparation of Valuation Report
Simultaneously, Chartered Accountants are requested to prepare a Valuation Report and the swap ratio
for consideration by the Boards of both the transferor and transferee companies and if necessary it may
be prudent to obtain confirmation from merchant bankers on the valuation to be made by the Chartered
Accountants.
Preparation of scheme of amalgamation or merger
All the companies, which are desirous of effecting amalgamation of or merger must interact through
their companies auditors, legal advisors and practicing company secretary who should report the result
of their interaction to their respective Board of directors. The Boards of the involved companies should
discuss and determine details of the proposed scheme of amalgamation or merger and prepare a draft
of the scheme of amalgamation or merger. If need be, they can obtain opinion of experts in the matter.
The drafts of the scheme finally prepared by the Boards of both the companies should be exchanged
and discussed in their respective Board meetings. After such meetings a final draft scheme will emerge.
The scheme must define the effective date from which it shall take effect subject to the approval of the
High Courts.
Contents of Amalgamation Scheme
Any model scheme of amalgamation should include the following:
Appointed Date or Transfer Date: This is usually the first day of the financial year preceding the
34 PP-CRVI
financial year for which audited accounts are available with the companies. In other words, this is a
cut-off date from which all the movable and immovable properties including all rights, powers,
privileges of every kind, nature and description of the transferor-company shall be transferred or
deemed to be transferred without any further act, deed or thing to the transferee company.
Effective Date: This is the date on which the transfer and vesting of the undertaking of the transferor-
company shall take effect i.e., all the requisite approvals would have been obtained, i.e., date of filing
of High Court order with ROC.
Arrangement with secured and unsecured creditors including debenture-holders.
Arrangement with shareholders (equity and preference): This refers to the exchange ratio, which will
have to be worked out based on the valuation of shares of the respective companies as per the
audited accounts and accepted methods and valuation guidelines.
Cancellation of share capital/reduction of share capital: This will be necessitated when the shares of
the transferor-company(ies) are held by the transferee-company and/or its subsidiary(ies) or vice
versa.
Pending receipt of the requisite approvals to the amalgamation, the transferor-company(ies)
possesses the property to be transferred and to carry on the business for and on behalf and in trust
for the transferee-company.
The Scheme should suitably provide for:

1. Brief details of transferor and transferee companies.
2. Appointed date.
3. Main terms of transfer of assets and liabilities from transferor to transferee, with power to
execute on behalf or for transferee, the deed/documents being given to transferee.
4. Effective date of the scheme.
5. Details of happenings and consequences of the scheme coming into effect on effective date.
6. The terms of carrying on the business activities by transferor between appointed date and
effective date.
7. Details of share capital of transferor and transferee company.
8. Proposed share exchange ratio, conditions attached thereto, fractional certificates to be issued
to transferee company, approvals and consent required etc.
9. Conditions about payment of dividend, ranking of equity shares, prorata dividend declaration
and distribution.
10. Status of employees of transferor companies and various schemes or funds created for their
benefit, from the effective date.
11. Agreement between transferor and transferee companies towards making
applications/petitions under Sections 391 and 394 and other provisions to the respective High
Courts.
12. Impact of various provisions covering income tax dues, contingencies and other accounting
entries deserving attention.
13. Statement to bear costs, expenses etc. in connection with the scheme by transferee company.
14. Qualifications attached to the Scheme, requiring various approvals and sanctions etc.
15. Enhancement of borrowing limits of the transferee company upon the scheme coming into
effect.
16. Surrender of shares by shareholder of transferor company for exchange into new share
certificates.
Approval of Scheme
It would be necessary to convene a Board Meeting of both the transferor and transferee
companies for approving the Scheme of Amalgamation, Explanatory Statement under Section
230 and the Valuation Report including the swap ratio.
Notice has to be given to the regional Stock Exchanges and other Stock Exchanges where
shares of the Company are listed under the listing requirements at least two days before the
Board Meeting is proposed to be held for purpose of approving the Amalgamation.
Within 15 minutes after the Board Meeting, the Regional Stock Exchange and all other Stock
Exchanges are required to be given intimation of the decision of the Board as well the swap
ratio before such information is given to the shareholders and the media.
Pursuant to Regulation 37 of LODR Regulation, all listed companies shall have to obtain NOC
from the Stock Exchange before filing of any scheme/petition proposed to be filed before
Tribunal under Sections 230, 232 and 66 of Companies Act, 2013.
Application to Tribunal seeking direction to hold meetings
Rule 3 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. lays down
that an application under Section 230 of the Companies Act, 2013 for an order seeking direction for
convening meeting(s) of creditors and/or members or any class of them shall be by way of Judges
summons supported by an affidavit. A copy of the proposed scheme should be annexed to the affidavit
as an exhibit thereto.
Jurisdiction of Tribunal
Following are the provisions under the Companies Act, 1956. Since the 1956 Act has been replaced by
the 2013 Act, sections referred to herein shall differ. The NCLT/Tribunal is now the relevant authority
(replacing the relevant High Court) constituted under Section 408 of the 2013 Act.
As explained earlier if the registered offices of both the companies are situated in the same State, a
joint application or separate applications should be moved to the High Court having jurisdiction over the
State in which registered offices of the companies are situated. However, if the registered offices of the
companies involved are situated in different States, they should make separate applications to their
respective High Courts.
Accordingly, an application should be made to the NCLT under Section 230 of the Companies Act,
2013 in accordance with the provisions of rule 3 of the Companies (Compromises, Arrangements and
Amalgamations) Rules, 2016 for an order directing convening of meeting(s) of creditors and/or
members or any class of them, by a Judges summons supported by an affidavit.
Normally, an application under Section 230 of the Act is made by the company, but a creditor or a
member may also make the application. Although a creditor or a member or a class of creditors or a
class of members may move an application under Section 230(1) of the Act, yet, such an application
36 PP-CRVI
may not be accepted by the court because the scheme of compromise or arrangement submitted to the
court along with the application may not have the approval of the Board of directors of the company or
of the company in general meeting. However, the court has the discretion to give such directions as it
may deem proper.
Where the company is not the applicant
Rule 3(3) lays down that where the company is not the applicant, a copy of the notice of admission and
of the affidavit shall be served on the company, or, where the company is being wound up on the
liquidator not less than 14 days before the date fixed for the hearing of the notice of admission.
Where an arrangement is proposed for the merger or for the amalgamation of two or more companies,
the petition must pray for appropriate orders and directions under Section 232 of the Act for facilitating
the reconstruction or amalgamation of the company or companies.
Obtaining order of the Tribunal for holding class meeting(s)
On receiving a petition, the Tribunal may order meeting(s) of the members/creditors to be called, held
and conducted in such manner as the court directs. Once the ordered meetings are duly convened,
held and conducted and the scheme is approved by the prescribed majority in value of the
members/creditors, the Tribunal is bound to sanction the scheme.
The Tribunal looks into the fairness of the scheme before ordering a meeting because it would be no
use putting before the meeting, a scheme containing illegal proposals which are not capable of being
implemented. At that stage, the Tribunal may refuse to pass order for the convening of the meeting.
According to Rule 5 of the Companies (Compromises, Arrangements and Amalgamations) Rules,

2016., upon hearing the application under sub-section (1) of section 230 of the Act, the Tribunal shall,
give directions as he may think necessary in respect of the following matters:
(i) determining the members/creditors whose meeting or meetings have to be held for considering
the proposed scheme of merger or amalgamation;
(ii) fixing time and place for such meetings;
(iii) appointing a chairman or chairmen for the meetings;
(iv) fixing quorum and procedure to be followed at the meetings including voting by proxy;
(v) determining the values of the members/creditors, whose meetings have to be held;
(vi) notice to be given of the meetings and the advertisement of such notice; and
(vii) the time within which the chairman of the meeting or chairmen of the meetings are to report to
the Court the result of the meeting or meetings as the case may be.
Draft Notice, Explanatory statement under Section 230 of the Companies Act, 2013 and form of proxy
are required to be filed and settled by the concerned Tribunal before they can be printed and
dispatched to the shareholders.
After obtaining the Tribunals order containing directions to hold meeting(s) of members/creditors, the
company should make arrangement for the issue of notice(s) of the meeting(s). The notice should be in
Form No. CAA-2 of the said Rules and must be sent by the person authorised by the Tribunal in this
behalf. The person authorised may be the person appointed by the court as chairman of the meeting, or
if the Tribunal so directs by the company or its liquidator if the company is in liquidation, or by any other
person as the court may direct. The Tribunal usually appoints an advocate to be the chairman of such a
meeting.
Notice of the meeting should be sent under certificate of posting to the creditors/members of the
company, at their last known addresses at least twenty-one clear days before the date fixed for the
meeting. The notice must be accompanied by a copy of the scheme for the proposed compromise or
arrangement and of the statement required to be furnished under Section 230 setting forth the terms of
the proposed compromise or arrangement explaining its effects and an explanatory statement in terms
of the provision of 230(3)of the Companies Act.
Notice by advertisement
Generally, the Tribunal directs that the notice of meeting of the creditors and members or any class of
them be given through newspapers advertisements also. Where the Tribunal has directed that the
notice of the meetings should also be given by newspaper advertisements, such notices are required to
be given in the prescribed Form and published once in an english newspaper and once in the regional
language of the state in which the registered office of the company is situated.
The notice must particularly disclose any material interest of the directors, managing director or
manager whether as shareholders or creditors or otherwise and the effect on their interests on the
compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of
other persons. Such information must also be included in the form of a statement in the notice
convening the meeting, where such notice is given by a newspaper advertisement, or, if this is not
practicable, such advertised notice must give notification of the place at and the manner in which
creditors or members entitled to attend the meeting may obtain copies of such a statement. If debenture
holders are affected, the statement must give like information as far as it affects the trustees for the
debenture holders. Statements which have to be supplied to creditors and members as a result of press
notification must be supplied by the company to those entitled, free of charge. The Chairman appointed
by the Tribunalhas to file an affidavit atleast 7 days before the meeting confirming that the direction
relating to issue of notices and the advertisement has been duly complied with, as required under Rule
12 of the said Rules.
Information as to merger or amalgamation
Section 230(3) of the Companies Act, 2013 lays down that where a meeting of creditors or members or
any class of them is called under Section 230(1):
(3) Where a meeting is proposed to be called in pursuance of an order of the Tribunal under subsection
(1), a notice of such meeting shall be sent to all the creditors or class of creditors and to all the
members or class of members and the debenture-holders of the company, individually at the address
registered with the company which shall be accompanied by a statement disclosing the details of the
compromise or arrangement, a copy of the valuation report, if any, and explaining their effect on
creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders
and the effect of the compromise or arrangement on any material interests of the directors of the
company or the debenture trustees, and such other matters as may be prescribed:
Provided that such notice and other documents shall also be placed on the website of the company, if
any, and in case of a listed company, these documents shall be sent to the Securities and Exchange
Board and stock exchange where the securities of the companies are listed, for placing on their website
and shall also be published in newspapers in such manner as may be prescribed:
Provided further that where the notice for the meeting is also issued by way of an advertisement, it shall
indicate the time within which copies of the compromise or arrangement shall be made available to the
concerned persons free of charge from the registered office of the company.
38 PP-CRVI
Holding meeting(s) as per Courts direction

The meetings are to be held as per directions of the Tribunal under the chairmanship of the person
appointed by the Court for the purpose. Normally, the Court appoints a Chairman and alternate
Chairman of each meeting.
Convening of General Meeting
At the General Meeting convened by the High Court, resolution will be passed approving the
scheme of amalgamation with such modification as may be proposed and agreed to at the
meeting. The Extraordinary General Meeting of the Company for the purpose of amendment of
Object Clause, consequent change in Articles and issue of shares can be convened on the
same day either before or after conclusion of the meeting convened by the High Court for the
purpose of approving the amalgamation.
Following points of difference relating to the holding and conducting of the meeting convened
by the High Court may be noted:
(a) Proxies are counted for the purpose of quorum;
(b) Proxies are allowed to speak;
(c) The vote must be put on poll [Rule 13 of the Companies (Compromises, Arrangements and
Amalgamations) Rules, 2016].
In terms of Section 230(1), the resolution relating to the approval of amalgamation has to be
approved by a majority of members representing three-fourths in value of the creditors or class
of creditors or members or class of members as the case may be present and voting either in
person or by proxy. The resolution will be passed only if both the criteria namely, majority in
number and three fourth in value vote for the resolution.
The minutes of the meeting should be finalised in consultation with the Chairman of the
meeting and should be signed by him once it is finalised and approved. Copies of such minutes
are required to be furnished to the Stock Exchange in terms of the listing requirements.
Reporting of the Results
The chairman of the meeting will submit a report of the meeting indicating the results to the concerned
Tribunal in Form No. CAA-4 of the said Rules within the time fixed by the Tribunal, or where no time has
been fixed, within three days after the conclusion of the meeting. The Report must state accurately
(a) the number of creditors or class of creditors or the number of members or class of members,
as the case may be, who were present at the meeting;
(b) the number of creditors or class of creditors or the number of members or class of members,
as the case may be, who voted at the meeting either in person or by proxy;
(c) their individual values; and
(d) the way they voted.
Petition to Tribunal for confirmation of scheme
When the proposed scheme of compromise or arrangement is agreed to, with or without modifications,
as provided in Section 230 of the Act, a petition must be made to the Tribunal for confirmation of the
scheme of compromise or arrangement. The petition must be made by the company and if the company
is in liquidation, by the liquidator, within seven days of the filing of the report by the chairman. The
petition is required to be made in Form No. CAA-5 of the said rules. On hearing the petition the
Tribunalshall fix the date of hearing and shall direct that a notice of the hearing shall be published in the
same newspapers in which the notice of the meeting was advertised or in such other papers as the
Tribunal may direct, not less than 10 days before the date fixed for hearing. (Rule 16) The Tribunal also
directs that notices of petition be sent to the objectors or to their representatives under sub-section (4)
of section 230 of the Act and to the Central Government and other authorities who have made
representation under rule 8 and have desired to be heard in their representation.
Obtaining order of the court sanctioning the scheme
An order of the Tribunal on summons for directions should be obtained which will be in Form No. CAA.
6 (Refer Rule 17).
Filing of copy of Courts order with ROC
According to the provisions of Section 230(8) of the Companies Act, a certified copy of the order passed
by the Court under both the sub-sections is required to be filed with the concerned Registrar of
Companies. This is required to be filed with INC-28 as prescribed in the Companies Act, 2013.
Conditions precedent and subsequent to Tribunals order sanctioning scheme of arrangement
The Tribunal shall not sanction a scheme of arrangement for amalgamation, merger etc. of a company
which is being wound up with any other company or companies unless it has received a report from the
Registrar of Companies to the effect that the affairs of the company have not been conducted in a manner
prejudicial to public interest. When an order has been passed by the Tribunal for dissolution of the
transferor company, the transferor company is required to deliver to the Registrar a certified copy of the
order for registration within thirty days and the order takes effect from the date on which it is so delivered.
Copies of the order of Tribunal are required to be affixed to all copies of Memorandum and Articles of
Association of the transferee company issued after certified copy has been filed as aforesaid. The
transferor company or companies will continue in existence till such time the court passes an order for
dissolution without winding up, prior to which it must receive a report from the official liquidator to the
effect that the affairs of the company have not been conducted in a manner prejudicial to the interest of
the members or to public interest. The practice in India is that in certain High Courts the Order on
amalgamation is passed only after the Report of the Official Liquidator is received, whereas in certain
cases the order of dissolution is passed after which amalgamation is approved by the concerned High
Court. [High Court has been replaced by the Tribunal under the 2013 Act.]
The above sets out briefly the procedure relating to merger and amalgamation in India. It will be obvious
from the foregoing that considerable amount of paper work and documents are required to be prepared
during the course of the process of merger. Since the law requires approval of the shareholders both in
majority in number and three-fourth in value, it has to be ensured that adequate number of
shareholders, whether in person or by proxy attend the meeting so that the resolution can be passed by
the requisite majority as mentioned above. Normally the time frame for such merger will depend on the
opposition, if any, to the proposed merger from shareholders or creditors but in normal case it may take
anything between six months to one year to complete the merger from the time the Board approves the
scheme of amalgamation till the merger becomes effective on filing of the certified copies of the Courts
Order. [High Court has been replaced by the Tribunal under the 2013 Act.]
40 PP-CRVI
JUDICIAL PRONOUNCEMENTS
Following are some of the precedents under the relevant provisions of Companies Act, 1956. Since the
1956 Act has been replaced by the 2013 Act, the procedure under the 2013 Act shall apply. However,
the reasoning and jurisprudence around mergers and amalgamations developed by the Courts over the
years, shall broadly remain the same.
Broad Principles evolved by Courts in Sanctioning the Scheme

(a) The resolutions should be passed by the statutory majority in accordance with Section 391(2)
of Companies Act, at a meeting(s) duly convened and held. The court should not usurp the
right of the members or creditors;
(b) Those who took part in the meetings are fair representative of the class and the meetings
should not coerce the minority in order to promote the adverse interest of those of the class
whom they purport to represent;
(c) the scheme as a whole, having regard to the general conditions and background and object of
the scheme, is a reasonable one ; it is not for court to interfere with the collective wisdom of the
shareholders of the company. If the scheme as a whole is fair and reasonable, it is the duty of
the court not to launch an investigation upon the commercial merits or demerits of the scheme
which is the function of those who are interested in the arrangement;
(d) There is no lack of good faith on the part of the majority;
(e) The scheme is not contrary to public interest;
(f) The scheme should not be a device to evade law.
In Miheer H Mafatlal v. Mafatlal Industries Ltd. (1996) 4 Comp. LJP. 124, The Supreme Court explained
the contours of the court jurisdictions, as follows:
(i) The sanctioning court has to see to it that all the requisite statutory procedures for supporting
such a scheme have been complied with and that the requisite meetings as contemplated by
Section 391(1)(a) of the Companies Act, 1956 have been held.
(ii) That the scheme put up for sanction of the court is backed up by the requisite majority vote as
required by Section 391(2) of the Act.
(iii) That the concerned meetings of the creditors or members or any class of them had the relevant
material to enable the voters to arrive at an informed decision for approving the scheme in
question. That the majority decision of the concerned class of voters is just and fair to the class
as a whole so as to legitimately bind even the dissenting members of that class.
(iv) That all the necessary material indicated by the Section 393(1)(a) of the Act is placed before
the voters at the concerned meetings as contemplated by Section 391(1) of the Act.
(v) That all the requisite material contemplated by the proviso of Sub-section (2) of Section 391 of
the Act is placed before the court by the concerned applicant seeking sanction for such a
scheme and the court gets satisfied about the same.
(vi) That the proposed scheme of compromise and arrangement is not found to be violative of any
provision of law and is not contrary to public policy. For ascertaining the real purpose
underlying the scheme with a view to be satisfied on this aspect, the court, if necessary, can
pierce the veil of apparent corporate purpose underlying the scheme and can judiciously x-ray
the same.
(vii) That the Company Court has also to satisfy itself that members or class of members or
creditors or class of creditors, as the case may be, were acting bona fide and in good faith and
were not coercing the minority in order to promote any interest adverse to that of the latter
comprising of the same class whom they purported to represent.
(viii) That the scheme as a whole is also found to be just, fair and reasonable from the point of view
of prudent men of business taking a commercial decision beneficial to the class represented by
them for whom the scheme is meant.
(ix) Once the aforesaid broad parameters about the requirements of a scheme for getting sanction
of court are found to have been met, the court will have no further jurisdiction to sit in appeal
over the commercial wisdom of the majority of the class of persons who with their open eyes
have given their approval to the scheme even if in the view of the court, there could be a better
scheme for the company and its members or creditors for whom the scheme is framed. The
court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to
the court exercising appellate jurisdiction over the scheme rather than its supervisory
jurisdiction.
Judicial Interpretations of Mergers and Amalgamations
Court will sanction the scheme if alteration of the memorandum is by reshuffling of the Objects
Clause by shifting Other Objects to Main Objects, if transferee company has complied with
provisions of Section 149(2A) [Re: Rangkala Investments Ltd. (1996) 1 Comp LJ 298 (Guj)].
There need not be unison or identity between objects of transferor company and transferee
company. Companies carrying entirely dis-similar businesses can amalgamate. [Re: PMP Auto
Inds Ltd. (1994) 80 Comp Cas 291 (Bom); Re: EITA India Ltd. (ibid); Re: Mcleod Russel (India)
Ltd. (1997) 13 SCL 126(Cal)].
Scheme of amalgamation should provide that on amalgamation the main objects of the
transferor company shall be deemed to be (additional) main objects of the transferee company.
No need for compliance under Section 17 of the Companies Act, 1956 [Vasant Investment
Corporation Ltd. v. Official Liquidator (1981) 51 Comp Cas 20 (Bom)].
Sanction to scheme of amalgamation cannot be refused on the ground that the transferee
company does not have sufficient authorised capital on the appointed date. If the scheme is
sanctioned, the transferee company can thereafter increase its authorised capital to give effect
to the scheme [Re: Mahavir Weaves Pvt. Ltd. (1985) 83 Comp. Cas 180].
The Supreme Court of India in Meghal Homes Private Limited v. Shreeniwas Girmikk Samiti
and others (2007) 78 SCL 482 (SC) held that the company court could sanction a scheme even
in the case of a company where an order of winding-up has been made and a liquidator has
been appointed. The essential factors to be seen by the Court are whether the scheme is
bonafide and whether there is a genuine attempt to revive the company and such attempt is in
public interest.
Where amalgamation involves reorganisation of capital by reduction thereof, the provisions of
Sections 100 to 102 of Companies Act need to be complied with vide rule 85 of Companies
(Court) Rules. However, it has been held that, if reduction of capital is a part of scheme of
amalgamation, those provisions are substantially complied with when the scheme is approved
by shareholders and court. Therefore, no separate compliance is necessary. [Re:
Maneckchowk and Ahmedabad Mfg. Co. Ltd. (1970) 40 Comp Cas 819 (Guj); Re: Asian
42 PP-CRVI
Investments Ltd. (1992) 73 Comp Cas 517 (Mad); Re: Novopan India Ltd. (1997) 88 Comp Cas
596 (AP)].
Post amalgamation events such as increase of capital or total number of members exceeding
fifty (in case of a private company) cannot affect sanction of a scheme. [Re: Winfield Agro
Services Pvt. Ltd. (1996) 3-Comp LJ 347 (AP)].
In view of its wide powers, court may approve a change in the name of the transferee company
as part of scheme of amalgamation. However, Mumbai High Court has held that change of
name cannot be effected merely on amalgamation becoming effective; transferee company
should independently comply with Section 21. [Re: Govind Rubber Ltd. (1995) 83 Comp Cas
556 (Bom)].
Change of name of transferee company, independent of amalgamation after approval of the
scheme is not invalid; hence no change in appointed date needed. [Re: Hipolin Products Ltd.
(1996) 2 Comp LJ 61 (Guj)].
The Bombay High Court has held in Sadanand S. Varde v. State of Maharashtra [(2001) 30 SCL 268
(Bom.)] that Sections 391 to 394 of the Companies Act constitutes a complete code on the subject of
amalgamation. The court has no special jurisdiction under Article 226 of the Constitution to sit in appeal
over an order made under Section 391 of the Companies Act, 1956 which has become final, binding
and conclusive. Ministry of Industry need not be impleaded or heard, on the ground that its approval for
the transfer of letter of intent to the transferee company is required. [Re: Ucal Fuel Systems Ltd.
(supra)].
Also in PMP Auto Industries Ltd., S.S. Mirando Ltd. and Morarjee Goculdas Spg & Wvg Co. Ltd., (1994)
80 Comp Cases 289 (Bom) it has been held that not only is Section 391 a complete code (as is the
view of various High Courts), it is intended to be in the nature of single window clearance system to
ensure that the parties are not put to avoidable, unnecessary and cumbersome procedure of making
repeated applications to the court for various other alterations or changes which might be needed
effectively to implement the sanctioned scheme whose overall fairness and feasibility has been judged
by the court under Section 394.
There is a statutory power of amalgamation under the Act even if the objects of the company are
construed as not specifically empowering companies to amalgamate [Aimco Pesticides Ltd. (2001) 103
Comp Cas 4163 (Bom)].
No special notice need be given to Income Tax Dept. to find out whether there is a motive of
tax evasion in the proposed amalgamation; general public notice in newspapers is sufficient.
[Re: Vinay Metal Printers Pvt. Ltd. (1996) 87 Comp Cas 266 (AP)].
The compromise or arrangement should be within the powers of the company and not ultra
vires. If it is beyond the companys objects or power, the court will have no jurisdiction to
sanction it. [Oceanic Steam Navigation Co., Re, (1939) Com Cases 229: (1938) 3 All ER 740
(Ch.D)]
It is not necessary that the parties to the amalgamation need be financially unsound or under
winding-up as per Section 390(a). For purposes of Section 391 company means any
company liable to be wound up. But it does not debar amalgamation of financially sound
companies. [Re: Rossell Inds Ltd. (1995) 6 SCL 79 Cal].
Section 390(a) is applicable to a company incorporated outside India. If court has jurisdiction to
wind up such a company on any of the grounds specified in the Act, court has jurisdiction to
sanction scheme of amalgamation if a company incorporated outside India is a transferor
company. [Bombay Gas Co. Pvt. Ltd. v. Regional Director (1996) 21 CLA 269 (Bom)].
There is no bar to a company amalgamating with a fifteen-day old company having no assets
and business. [Re: Apco Industries Ltd. (1996) 86 Comp Cas 457 (Guj)].
Amalgamation of a company licensed under Section 25 of the Companies Act with a
commercial, trading or manufacturing company could be sanctioned under Section 391/394.
[Re: Sir Mathurdas Vissanji Foundation (1992) 8 CLA 170 (Bom); Re: Walvis Flour Mills
Company P. Ltd. (1996) 23 CLA 104]. There is nothing in law to prevent a company carrying on
business in shares from amalgamating with one engaged in transport. [Re: EITA India Ltd.
(1997) 24 CLA 37 (Cal)].
In Vishnu Chemicals (P) Limited, In Re [2002] 35 SCL 459 (AP), the Andhra Pradesh High Court held
that when a class of creditors does not agree to the proposed scheme of arrangement it is the duty of
the court to examine whether the consent is unreasonably withheld or in the alternative if the sanction
would prejudicially affect that set of creditors who have withheld their consent.
A scheme is a document of an arrangement of settlement or agreement which can be interpreted on the

personal perception of each group or members of group of creditors, so it will not be legal to say at the
preliminary stage, before the scheme comes up for the courts consideration after examination by the
creditors and members, to go into the details of allegations made against the company or any of the
transactions into which it had entered with the scheme till the preliminary formalities are completed and
the scheme comes up for detailed consideration in the court. Commerz Bank AG v. Arvind Mills Ltd.
(2002) 49 CLA 392: (2002) CLC 1136: (2002) 39 SCL 9 (Guj).
Where the written consent to the proposed scheme is granted by all the members and secured and
unsecured creditors, separate meeting of members and secured and unsecured creditors can be
dispensed with. Re Feedback Reach Consultancy Services (P) Ltd. (2003) 52 CLA 260: (2003) CLC
498: (2003) 42 SCL 82: (2003) 115 Comp Cas 897 (Del).
In Milind Holdings (P) Ltd. & Darshan Holdings (P) Ltd. v. Mihir Engineers Ltd. (1996) 7 SCL 172 (Bom),
it was held that the sanction of the court is necessary even where the petitioner company had no
secured creditor and all unsecured creditors had accorded their approval to the proposed scheme along
with the shareholders of both the companies and their official liquidator also did not raise any objections
to the scheme
As per section 391(2), any compromise or arrangement approved by a majority of creditors will be
binding on all the creditors only if the said compromise or arrangement is sanctioned by the Court. Till
the time sanction is not granted by the Court to the scheme of arrangement, it cannot be said that the
scheme is binding on all creditors or that the creditors are not entitled to file the individual application.
Smt. Promila v. DCM Financial Services Ltd. (2001) 45 CLA 292 (Del.)
When the majority of the shareholders with their open eyes have given their approval to the scheme,
even if in the view of the Court there would be a better scheme, for the company and its members, the
Court cannot refuse to sanction such a scheme on that ground as it would otherwise amount to the
Court exercising appellate jurisdiction over the scheme rather than its supervisory jurisdiction.
Alembic Ltd. v. Dipak Kumar J. Shah (2003) 41 SCL 145: (2003) 52 CLA 272: (2002) 6 Comp LJ 513
(Guj).
44 PP-CRVI
In National Organic Chemical Industries Limited v. Miheer H.Mafatlal [JT 2004 (5) SC 612] / [2004]
XXXIV CS LW 83, the question before Supreme Court was whether the company court can decide
the issue of shareholding of a member when the issue was pending before a civil court. The Supreme
Court held that there was no statutory need for the company court to decide this issue and the
findings of the company court of the title of the appellant over the shares or beyond the jurisdiction of
the company and on that ground the Supreme Court set aside the said findings.
The full bench of Punjab and Haryana High Court in Hind Lever Chemicals Limited In Re [2004] 61 CLA
32 (P&H)/[2004] XXXIV CS LW 85, held that the words and phrases employed in Sub-section (2) of
Section 391 clearly shows that the requirement of three-fourth majority relates to the value of
shares/credit represented by the shareholders or creditors who are present and voting and not of the
total value of shares or credit of the company.
In TCI Industries Limited In Re [2004] 118 Comp Cas 373 (AP), the scheme was approved by the
majority of the shareholders. The ROC representing the Central Government raised on objection that
the purpose of the scheme is to buy shares and as such the company ought to have followed the
provisions of Section 77A. The court held that Section 77A is merely an enabling provision and the
courts powers under Section 391 is not in any way affected. Similarly, the conditions for a buy back
under Section 77A cannot be applied to a scheme under Sections 100 to 104 and Section 391. The two
provisions operate in independent fields.
In Larsen & Toubro Limited In re [2004] 60 CLA 335 (Bom) [2004] XXXIV CS LW 72 the Mumbai High
Court held that a composite scheme could be made involving de-merger, of one of the undertakings of
the transferor company, for the transfer of the demerged undertaking of a subsidiary company and for
the reduction in the capital of the transferor-company.
In Jaypee Cement Limited v. Jayprakash Industries Limited [2004] 2 Comp LJ 105 (All) / [2004] XXXIV
CS LW 50 the Allahabad High Court held that the combining of the authorised share capital of the
transferor company with that of the transferee company resulting in increase in the authorised share
capital of the transferee company does not require the payment of registration fee or the stamp duty
because there is no reason why the same fee should be paid again by the transferee company on the
same authorised capital.
In SEBI/Union of India v. Sterlite Industries (India) Limited [2002] 113 Comp Cas 273 (Bom), the
division bench of the Bombay High Court held that the word arrangement is of a wider import and is not
restricted to a compulsory purchase or acquisition of shares. There is no reason as to why a
cancellation of shares and the consequent reduction of capital cannot be covered by Section 391 read
with Section 100 merely because a shareholder is given an option to cancel or to retain his shares. In
view of the foregoing discussion, the objection of the appellants based on Section 77A must be
rejected.
The scheme of amalgamation of the subsidiary company with the holding transferee company provided
transfer of all assets and liabilities of the subsidiary transferor company to the holding transferee
company and such transfer did not affect the rights of its members or creditors and also did not involve
reorganization of the share capital of the transferee company. As the structure of the transferee
company would remain unaltered. As such there was no requirement for the holding transferee
company to initiate separate proceedings and make separate application under s. 391 or
s.394. Reliance Jamnagar Infrastructure Ltd., In re., [2012] 475:[2013] 176 Com Cases 217:[2013] 112
CLA 234 (Guj).
A scheme was proposed only with a view to dispose off the assets of the company and to relieve the
promoters and ex-directors of the company from their personal liabilities. The court refused
sanction. Apurva J. Parekh v. Essen Computers Ltd., 2005 CLC 774 : (2006) 3 Comp LJ 321 : (2005)
61 SCL 254 : (2005) 68 CLA 29 (Guj).
In cases where the scheme of arrangement involves the company and one class of creditors, the
wishes of the other classes of creditors, more particularly public sector/scheduled banks must be
ascertained to ensure that their interest is not adverse affected. Neither any meetings were held nor
was no objection letters or consent letters sought. The scheme is but a ruse to avoid repayment of the
dues of the creditors of both the petitioner companies and was filed to obtain an order of stay from this
court under s.391(6) and therefore against public policy. The court is not expected to put its seal of
approval on the scheme merely because the majority of the shareholders have voted in favour of the
scheme. Model Financial Corporation Ltd. v. A.P. Mahesh Co-operative Urban Bank Ltd. (2013) 176
Com Cases 264:[2013] 113 CLA 19 (AP).
A company was ordered to be wound up for having closed its business due to heavy financial losses.
The petitioner was an ex-director of the company. He filed a petition seeking sanction of a scheme of
compromise for its revival and repayment of a part of dues of creditors in a phased manner. The
scheme was objected to by major creditors. The court said that it can refuse to put its seal of approval,
where there is no bona fide purpose behind the scheme and is intended to cover up misdeeds of ex-
directors or is otherwise inequitable. The scheme had unworkable and unacceptable ideas like zero per
cent debentures and refund one per cent to some creditors and 20% to some others. Apurva J. Parekh
v. Essen Computers Ltd., (2005) 61 SCL 254 : (2006) 129 Com Cases 121 (Guj).
A scheme of arrangement that envisages re-aligning of existing reserves of shareholders, being equity
premium reserve accounts, to business reconstructions reserve account and to re-evaluate immovable
property of company deserves to be sanctioned when all shareholders have consented to it, the
revaluation is in the interest of shareholders, creditors, employees and all stakeholders and there is no
objection to the scheme from the Regional Director. DSM Anti Infectives India Ltd. In re:, (2011) 100
CLA 228 (P&H).
INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD v. B.P.L. LTD [SC] (09/01/2015)
Facts:
The appellant is the one of the secured creditors of the respondent company. The respondent company
had executed a hypothecation deed in favour of the appellant and had also registered the charge with
the registrar of companies. During the course, an arbitration award was passed in favour of the
appellant. Meanwhile, the Respondent Company proposed a scheme of arrangement where under the
existing CTV business undertaking of the respondent would be transferred to a new joint venture
company.
The scheme was approved by the shareholders and the creditors of the respondent company. The
appellant herein opposed the scheme and contented that it is not a secured creditor of the respondent
company as the passing of the arbitration award had robed the security created in its favour and
rendered it a mere unsecured creditor. However, the company court rejected the contention and passed
the scheme. On appeal the DB also concurred with the company court. Against this order of the DB, the
appellant appealed to the Supreme Court.
Decision:
The appeal was dismissed. It is clear that two facts are beyond dispute. First, the appellant stands
46 PP-CRVI
registered as a secured creditor of the respondent company on the record of the Registrar of
Companies under the Act;
Second, the arbitral tribunal has passed an award on the basis of consent and it has the status of a
decree which is executable in law.
The purpose of the classification of creditors has its significance. It is with this object that when a class
has to be restricted, the principle has to be founded on homogeneity and commonality of interest
The contention of the appellant is that it does not fall into the class of secured creditors, for it had
initiated the arbitration proceeding and an award has been passed on consent which is a simple money
decree and, therefore, the deed of hypothecation, even if assumed to be executed at one point of time,
has become irrelevant. To elaborate, the status of the appellant had changed from a secured creditor to
that of an unsecured creditor. The principles of Order II, Rule 2, C.P.C. would be applicable as the
appellant would be debarred to issue on the basis of the charge of hypothecation.
Emphasis has been laid on the factum that there having been a change of status, the appellant
company cannot be clubbed with the secured creditors as a class and even if it is kept in homogenous
category of secured creditors, it should still fall under a separate class, regard being had to the fact it
has obtained an award from the arbitral tribunal. In this context, it is to be seen that whether the
arbitration award has the effect of obliterating or nullifying the status of the appellant and making him an
unsecured creditor as a consequence of which it would not be able to sue on the basis of a charge
created in its favour.
The issue that the appellant shall remain as a secured creditor, for it was registered as such under the
Registrar of Companies: The formalities for creating the charge having duly followed, the Division
Bench has referred to the Form No. 8 and 13 and also adverted to the power of Registrar to make
entries of satisfaction and release, as provided under Sections 138 and 139 of the Companies Act,
1956. It has also expressed the view that in the absence of any proceeding, the status of the company
as a secured creditor continues. After registration of the deed of hypothecation, if a condition
subsequent is not satisfied, that would be in a different realm altogether. In any case, the finding has
been recorded that the respondent was not at fault and, in any case, that would not change the status
of the appellant as a secured creditor.
Thus, the appellant cannot be treated as an unsecured creditor and it is not permissible for him to put
forth a stand that it would not be bound by the Scheme that has been approved by the learned
Company Judge.
FILING OF VARIOUS FORMS IN THE PROCESS OF MERGER/ AMALGAMATION
The following forms, reports, returns etc. are required to be filed with the Registrar of Companies, SEBI
and Stock Exchanges at various stages of the process of merger/amalgamation:
1. (a) when the objects clause of the memorandum of association of the transferee company is
altered to provide for amalgamation/merger, for which special resolution is passed;
(b) the companys authorised share capital is increased to enable the company to issue shares
to the shareholders of the transferor company in exchange for the shares held by them in
that company for which a special resolution for alteration of its articles is passed;
(c) a special resolution is passed to authorise the companys Board of directors to issue
shares to the shareholders of the transferor company in exchange for the shares held by
them in that company; and
(d) a special resolution authorising the transferee company to commence the business of the
transferor company or companies as soon as the amalgamation/merger becomes effective;
the company should file with ROC within thirty days of passing of the aforementioned
special resolutions. The following documents should be annexed to the said e-form: (i)
certified true copies of all the special resolutions; (ii) certified true copy of the explanatory
statement annexed to the notice for the general meeting at which the resolutions are
passed, for registration of the resolution. This e-form should be digitally signed by
Managing Director/Director/Manager or Secretary of the Company duly authorized by
Board of Directors. This e-form should also be certified by Company Secretary or
Chartered Accountant or Cost Accountant (in whole time practice) by digitally signing the e-
form.
2. In compliance with the listing agreement, the transferee company is required to give notice to
the stock exchanges where the securities of the company are listed, and to the Securities and
exchange Board of India (SEBI), of the Board meeting called for the purpose of discussing and
approving amalgamation.
3. In compliance with the listing agreement, the transferee company is required to give intimation
to the stock exchanges where the securities of the company are listed, of the decision of the
Board approving amalgamation and also the swap ratio, before such information is given to the
shareholders and the media.
4. The transferee company is required to file with the Registrar of Companies, INC-28 along with
a certified copy of the Tribunals order on summons directing the convening and holding of
meetings of equity shareholders/creditors including debentures holders etc. as required under
Section 230 of the Companies Act. This e-form should be digitally signed by the Managing
Director or Director or Manager or Secretary of the Company duly authorized by the Board of
Directors. However, in case of foreign company, the e-form should be digitally signed by an
authorized representative of the company duly authorized by the Board of Directors.
The original certified copy of the Courts order is also required to be submitted at the concerned
ROC office simultaneously while filing INC-28, failing which the filing will not be considered and
legal action will be taken.
5. In compliance with the listing agreement, the transferee company is required to simultaneously
furnish to the stock exchanges where the securities of the company are listed, copy of every
notice, statement, pamphlet etc. sent to members of the company in respect of a general
meeting in which the scheme of arrangement of merger/amalgamation is to be approved.
6. In compliance with the listing agreement, the transferee company is required to furnish to the
stock exchanges where the securities of the company are listed, minutes of proceedings of the
general meeting in which the scheme of arrangement of merger/amalgamation is approved.
7. To file with ROC within thirty days of passing of the special resolution, the following documents
should be annexed to the said e-form: (i) certified true copy of the special resolution approving
the scheme of arrangement of merger/amalgamation; (ii) certified true copy of the explanatory
statement annexed to the notice for the general meeting at which the resolution is passed, for
registration of the resolution. This e-form should be digitally signed by Managing Director/
Director/Manager or Secretary of the Company duly authorized by Board of Directors. The e-
form should also be certified by Company Secretary or Chartered Accountant or Cost
Accountant (in whole time practice) by digitally signing the e-form.
8. The transferee company is required to file with the Central Government notice of every
48 PP-CRVI
application made to the Tribunal under Section 230 to 240 of the Companies Act, 2013. No
notice need be given to the Central Government once again when the Court proceeds to pass
final order to dissolve the transferor company.
9. To file with the Registrar of Companies within thirty days of allotment of shares to the
shareholders of the transferor company in lieu of the shares held by them in that company in
accordance with the shares exchange ratio incorporated in the scheme of arrangement for
merger/amalgamation, the return of allotment along with the prescribed filing fee as per
requirements of the Act. This e-form should be digitally signed by Managing Director or Director
or Manager or Secretary of the Company duly authorised by the Board of Directors. The e-form
should also be certified by Company Secretary or Chartered Accountant or Company Secretary
(in whole time practice) by digitally signing the e-form.
Changes to the regime of mergers and amalgamations under the Companies Act, 2013 and
Rules thereunder:
Process of Making application: An application under section 230 (1) of the Act, 2016 for compromise,
arrangements or amalgamation may be made before the Tribunal in Form NCLT-1 as provided in the
NCLT Rules, 2016.
The same shall be accompanied by the following:
a. A notice of admission in Form No. NCLT-2;
b. An affidavit in Form No. NCLT-6;
c. A copy of scheme of compromise or arrangement; and
d. Such fees as prescribed in the Schedule of fees.
Mode of sending notice: The notice shall be sent by the Chairperson appointed for the meeting, or, if
the Tribunal so directs, by the company (or its liquidator), or any other person as the Tribunal may
direct, by registered post or speed post or by courier or by email or by hand delivery or any other mode
as directed by the Tribunal to their last known address at least one month before the date fixed for the
meeting.
Dispensation from the meeting: If 90% by value of creditors/members agree by way of affidavit then
meeting of creditors/members can be dispensed with by the NCLT
Manner of voting: Voting in person or by proxy or by postal ballot or by voting through electronic
means are permitted.
Notice to statutory authorities: Notice of the meeting shall also be served to the CG, IT authority,
RBI, Stock exchanges, CCI, SEBI as may be applicable and to such other regulators as may be
directed by the Tribunal. Further, such statutory authorities can also make their representation by
sending notice to the Tribunal and to the company within 30 days of receiving the notice.
Time limit within which order sanctioning petition to be filed: Order of NCLT to be filed with RoC
within 30 days of receipt of the order. However, that the order shall have no effect until filed, is not
provided.
Brief Pointers on changes in provisions relating to merger and amalgamation under

Companies Act,2013:
1. Dispensation from holding shareholders meeting.
2. Notification to be sent to multiple Authorities.

3. Approval of the Scheme through postal ballot.
4. Valuation Report must be annexed to the notice for meetings under section 232(2) Companies
Act, 2013.
5. Accounting Standards Prior certification from an auditor mandatory for both listed and unlisted
companies stating that accounting treatment is in accordance with Accounting Standards.
6. Merger of a listed company into an unlisted one under Section 232(3)(h) of the Companies Act,
2013.
7. Cross-border mergers (though the relevant provision i.e., Section 234 is not yet notified).
8. Penalties have been made more severe under 232 (8) of the Companies Act, 2013.
9. Fast Track Merger and Merger of small companies and holding with wholly-owned
subsidiaries under Section 233 of the Companies Act, 2013.
10. Restriction on the maintenance of the treasury stock under Section 233(10) of the Companies
Act, 2013.
11. For compromise or arrangement in respect of buy back of securities to be valid, buy-back of
securities must be in accordance with section 68 of the Companies Act, 2013.
12. Compromise or arrangement can include takeover offer provided takeover offer is as per SEBI
Regulations made in this behalf.
13. Objections can be made by shareholders holding a minimum of ten per cent. of the
shareholding or creditors having outstanding debt amounting to five per cent or more of the
total outstanding debt, as per the latest audited financial statement as per the proviso to
section 230(4) of the Companies Act, 2013.
14. Compliance with order of Tribunal till the completion of the scheme under Section 232(7).
LESSON ROUND UP
Amalgamation is a legal process by which two or more companies are joined together to form a new
entity.
Merger and amalgamation have various advantages e.g. synergy, economies of scale, reduction in
production and other expenses, tax advantages, competitive advantage etc.
While implementing the strategic decision of merger/amalgamation, the transferor/transferee company

has to comply with a number of regulations viz., the Companies Act, 2013, Companies (Compromises,
Arrangements and Amalgamations) Rules, 2016. , Income Tax Act, 1961, The Indian Stamp Act, 1899,
The Competition Act, 2002 etc.,
Section 230 is relating to the power of the company to compromise or to make arrangement with its
creditors and members.
Section 230(2) deals with regard to information as to compromises and arrangements with creditors
and members.
Section 232 deals with facilitation of merger and amalgamation of companies.
Section 230(5) deals with a notice to be given to the Central Government in respect of applications
50 PP-CRVI
under Section 391 and 394.
Sections 235-236 deal with provisions regarding the power and duty to acquire shares of shareholders
dissenting from scheme or contract approved by majority shareholders.
Section 237 contains provisions as to the power of the central government to provide for amalgamation
of companies in national interest.
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 contains provisions

dealing with the procedure for carrying out a scheme of compromise or arrangement including
amalgamation or reconstruction.
Mergers involves approvals from Board of Directors, Shareholders, Court, Stock Exchanges etc.,
Mergers involves filing of various forms with different regulators.
SELF TEST QUESTIONS

(These are meant for recapitulation only. Answers to these questions are not required to be
submitted for evaluation).
1. Briefly describe the legal framework for mergers?
2. What are the approvals required in merger?
3. What are the procedural steps involved in a merger?
4. Discuss the role of Tribunal in approving a scheme of reconstruction or restructuring under
Sections 230-240 of the Companies Act, based on decided cases from the standpoint of
shareholders and employees.
5. ABC & Co (P) Ltd. and XYZ Ltd. have finalized a scheme of arrangement. The registered offices
of both the companies are located in Delhi. A joint-petition is proposed to be filed before the High
Court for sanction of the scheme.
Give your brief opinion in the light of the provisions of the Companies Act, 2013and the
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 whether such a
joint-petition can be filed.
6. Discuss the law as laid down by the Supreme Court in Miheer H. Mafatlal v. Mafatlal Industries
Ltd. with regard to the role of the court in sanctioning scheme of arrangement under Section
391 of the Companies Act, 1956.
Lesson 3
Economic and Competition Law
Aspects of Mergers and
Amalgamations
Reason for mergers and amalgamations As the countries are getting integrated into one
Underlying economic objectives in mergers global platform, the businesses across the
jurisdictions are also competing on the flat platform,
Competition aspects of combinations
providing multiple choices to consumers and calling
Combination thresholds for highest quality of output supported by innovation
Regulation of combinations and technology. The paradigm requires the
corporates to possess multiple expertise, through
Compulsory wait period business restructuring. Mergers, acquisitions and
Exemptions takeovers are widely accepted business strategies in
the global platform. The economic reasons behind
Inquiry into combination by the Commission
such strategies may be increased market share, cost
reduction, managing competition, financial/tax
benefits, increased economies of scale etc.,
Further the competition law being an economic

legislation regulates merger(called combinations)
deals with threshold limits (domestic/cross border),
notice to Competition Commission of India etc.
After reading this lesson, you will be able to

understand, the economic aspects of merger and the
important regulatory aspects of combinations as
specified in the Competition Act, 2002.
52 PP-CRVI
ECONOMIC ASPECTS
Reasons for Merger and Amalgamation

Mergers must form part of the business and corporate strategies aimed at creating sustainable
competitive advantage for the company. Mergers and amalgamations are important strategic decisions
leading to the maximisation of a companys growth.
Mergers and amalgamations are usually intended to achieve any or all of the following purposes:
(1) Synergistic operational advantages Coming together to produce a new or enhanced effect
compared to separate effects.
(2) Economies of scale (scale effect) Reduction in the average cost of production and hence in
the unit costs when output is increased, to enable to offer products at more competitive prices
and thus to capture a larger market share.
(3) Reduction in production, administrative, selling, legal and professional expenses.
(4) Benefits of integration Combining two or more companies under the same control for their
mutual benefit by reducing competition, saving costs by reducing overheads, capturing a larger
market share, pooling technical or financial resources, cooperating on research and
development, etc. Integration may be horizontal (or lateral) or vertical and the later may be
backward integration or forward integration.
(5) Optimum use of capacities and factors of production.
(6) Tax advantages Carry forward and set off of losses of a loss-making amalgamating company
against profits of a profit-making amalgamated company, e.g. Section 72A of the Income-Tax
Act, 1961.
(7) Financial constraints for expansion A company which has the capacity to expand but cannot
do so due to financial constraints may opt for merging into another company which can provide
funds for expansion.
(8) Strengthening financial position.
(9) Diversification.
(10) Advantage of brand-equity.
(11) Loss of objectives with which several companies were set up as independent entities.
(12) Survival.
(13) Competitive advantage: The factors that give a company an advantage over its rivals.
(14) Eliminating or weakening competition.
(15) Revival of a weak or sick company.
(16) Sustaining growth.
(17) Accelerating companys market power and reducing the severity of competition.
Lesson 3 Economic and Competition Law Aspects of 53
Mergers and Amalgamations
Underlying Objectives In Mergers
Major objectives and their benefits are given below:
Market Leadership
The amalgamation can enhance value for shareholders of both companies through the amalgamated
entitys access to greater number of market resources. With the addition to market share, a company
can afford to control the price in a better manner with a consequent increase in profitability. The
bargaining power of the firm vis-a-vis labour, suppliers and buyers is also enhanced. In the case of the
amalgamation of Reliance Petroleum Limited with Reliance Industries Limited, the main consideration
had been that the amalgamation will contribute towards strengthening Reliances existing market
leadership in all its major products. It was foreseen that the amalgamated entity will be a major player in
the energy and petrochemical sector, bringing together Reliances leading positions in different product
categories.
Improving Economies of Scale
One of the most frequent reasons for merger is to improve the economies of scale. Economies of scale
may be obtained when increase in volume of production leads to a reduction in cost of production per
unit. They are generally associated with the manufacturing operations, so that the ratio of output to
input improves with the volume of operations. Mergers and amalgamations help to expand the volume
of production without a corresponding increase in fixed costs. Thus, the fixed costs are distributed over
a large volume causing the unit cost of production to decline. Economies of scale may also be obtained
from the optimum utilisation of resources and planning, budgeting, reporting and control. A combined
business with a large size can make the optimum use of the management resources and systems
resulting in economies of scale. This gives the company a competitive advantage by gaining an ability
to reduce the prices to increase market share, or earn higher profits while maintaining a price.
Operating Economics
Apart from economies of scale, a combination of two or more companies may result in reduction of
costs due to operating economies. A combined company may avoid overlapping of functions and
facilities. Various functions may be consolidated and duplicate channels may be eliminated by
implementing an integrated planning and control system.
Financial Benefits
A merger or amalgamation is capable of offering various financial synergies and benefits such as
eliminating financial constraints, deployment of surplus cash, enhancing debt capacity and lowering the
costs of financing. Mergers and amalgamations enable external growth by exchange of shares, releasing
thereby the financial constraint. Also, sometimes cash rich companies may not have enough internal
opportunities to invest surplus cash. Their wealth may increase through an increase in the market value of
their shares if surplus cash is used to acquire another company. A merger can bring stability of cash flows
of the combined company, enhance the capacity of the new entity to service a larger amount of debt,
allowing a higher interest tax shield thereby adding to the shareholders wealth. Also, in a merger since the
probability of insolvency is reduced due to financial stability, the merged company may borrow at a lower
rate of interest. Apart from this, a merged company is able to realize economies of scale in floatation and
transaction costs related to an issue of capital i.e. issue costs are saved when the merged company
makes a larger security issue.
54 PP-CRVI
Acquiring a New Product or Brand Name
Acquiring a new product is different from acquiring a brand name. A company may be able to build a
brand name for a particular line of business. In a related field, the company might think of introducing
another product so that reputation and goodwill associated with a brand name of the company could
be advantageously exploited. In this situation, the company would be either installing a manufacturing
facility for the new product or looking for a good party in the market with a reasonable market share. If
the company acquires its manufacturing facility, the company can save a lot of time and energy in
creating a new industry. The combination of the ability of the company to takeover the manufacturing
facility and build the said product with the companys brand name develops a great market for the
company.
On the one hand, the company has bought a competitor because the party from whom the company
had bought the unit would have given up the said line of business. Another advantage is that the
company with its definite name and reputation and with plenty of money would be able to establish a
strong presence for its new product and create a higher market share. At the same time, there could
be a case, where the company has a production facility but its market share for the said product is
abysmally low. In spite of its best efforts the product may not receive encouraging response from
customers or consumers. In such a situation the company, for strategic reasons, may wish to acquire
a brand name by buying out the entire market share of another party who may be having strong
presence for the said product.
This acquisition can happen in certain circumstances only. An aggressive player in the market will be
always on the look out for such possibilities and cash on when opportunity strikes. Thus through
amalgamation, it is possible to acquire either the entire production facility including human resources
or a new brand for an existing product or range of products. However, in acquisition of a facility, the
difficulties of getting the required know-how from reliable sources, installing and commissioning a
plant and then launching the new product which may take a lot of time and result in heavy cost, could
be avoided. Amalgamation in such cases would make available ready-made facilities, which would
provide a quicker entry for encashing the comparative advantage of the new product before new
entrants make the market much more competitive and much less profitable.
Diversifying the Portfolio

Another reason for merger is to diversify the companys dependence on a number of segments of the
economy. Diversification implies growth through the combination in unrelated businesses. All
businesses go through cycles and if the fortunes of a company were linked to only one or a few
products then in the decline stage of their product life cycles, the company would find it difficult to
sustain itself. The company therefore looks for either related or unrelated diversifications, and may
decide to do so not internally by setting up new projects, but externally by merging with companies of
the desired product profile. Such diversification helps to widen the growth opportunities for the company
and smoothen the ups and downs of their life cycles.
Strategic integration
Considering the complementary nature of the businesses of the concerned companies, in terms of their
commercial strengths, geographic profiles and site integration, the amalgamated entity may be able to
conduct operations in the most cost effective and efficient manner. The amalgamation can also enable
optimal utilization of various infrastructural and manufacturing assets, including utilities and other site
facilities.
Synergies
Synergy refers to a situation where the combined entity is more valuable than the sum of individual
combining firms (2+2=5). The combination of operations can create a unique level of integration for the
amalgamated entity spanning the entire value chain in the line of business. This enables the
amalgamated entity to achieve substantial savings on costs and significantly enhancing its earnings
potential.
Synergies can be expected to flow from more focused operational efforts, rationalization,
standardization and simplification of business processes, productivity improvements, improved
procurement, and the elimination of duplication. The main criteria for synergy lies in the ability of an
organization to leverage on resources to deliver more than its optimum levels. By combining the
strengths of two complementary organizations, not only one could achieve synergy but also eliminate
the disadvantages each had. One of the most important reasons for mergers and amalgamations is to
realize synergy; either through cost effective production bases or by cost savings and pooling of
resources in R&D marketing and distribution.
Taxation or Investment Incentives
A company, which has incurred losses in the past, can carry forward such losses and offset them
against future taxable profits and reduce tax liabilities. Such a company when merged with a company
with large taxable profits would help to absorb the tax liability of the later.
A similar advantage exists when a company is modernizing or investing heavily in plant and machinery,
which entitles it to substantial investment incentives, but has not much taxable profits to offset them
with. Acquiring or merging such a company with a highly profitable company would help make full use
of the investment incentives for the later.
Survey findings
In the early seventies, the Organization for Economic Cooperation and Development (OECD) published
a Report of their Committee of Experts on Restrictive Business Practices, on Mergers and Competition
Policy. The report listed twelve motives most often cited for mergers, which may be grouped together
under the following categories:
Category Motives
A. Economies of Scale 1 Obtain Real Economies of Scale

2 Acquire Capacity at Reduced Prices
B. Market share 3 Increase market power
4 Expand production without price reduction
5 Build an empire
6 Rationalize production
C. Financial Synergy 7 Obtain Tax advantages
8 Obtain monetary economies of scale
9 Use complementary resources
10 Gain promotional profits
D. Diversification of Risk 11 Spread risks by diversification
12 Avoid firms failure
56 PP-CRVI
Limiting Competition
It would be wrong to conclude that mergers limit or restrict competition from the consumers point of
view. In mergers business enterprises achieve what could be termed as a buy out of the competitions
market shares or stake. The purpose of such acquisition could be to consolidate or to eliminate the
competition posed by the acquired enterprise. It does not mean new competitive forces cannot emerge
or survive. It is only natural for business enterprises and the people who drive such enterprises to look
at opportunities for acquiring more and more market stake. Mergers therefore are tools in the hands of
the entrepreneurial community to keep a watch on the competition and take appropriate action.
Acquisition and Mergers were identified as one of the key factor to overcome economic
recession
2008 was a traumatic year for the global economy. A decade of global economic growth had come to a
sudden, grinding halt. However, there has been improvement in the global economy since the last
review in July 2009.
New Zealand Trade & Enterprise has conducted a research on corporates during world economic
recession as to how they adopt strategies to survive during the recession and to succeed subsequently.
This research focused primarily on 13 companies that were established members of the Global Fortune
500 index. They were the examples of organisations that have adapted, survived, and prospered during
recessionary periods. All of the companies studied achieved dramatic increases in growth and
profitability during the period of economic downturn or in the following recovery period. These
companies were chosen because they exhibit characteristics and strategies that enabled them to
achieve success from difficult economic periods. The study has identified seven key factors to have
greatest impact on firms ability to emerge strongly from recessionary periods. Among other key factors,
they have identified acquisitions and strategic alliances as a key factor to overcome economic
recession to strengthen, re-focus, and position the company for increased growth and profitability. The
study identified that companies also made acquisitions to access new markets, products, technologies,
customers and talent at an accelerated pace.
COMPETITION ASPECTS OF COMBINATIONS
Antitrust law seeks to make enterprises compete fairly. It has had a serious effect on business practices
and the organization of U.S. industry. Premised on the belief that free trade benefits the economy,
businesses, and consumers alike, the law forbids several types of restraints of trade and
monopolization. These cover areas such as agreements between or among competitors, contractual
arrangements between sellers and buyers, the pursuit or maintenance of monopoly power, and
mergers.
The Sherman Anti-Trust Act of 1980 is the origin of Anti-trust/Competition Law in many countries. This
legislation was the result of intense public opposition to the concentration of economic power in large
corporations and in combinations of business concerns that had been taking place in the U.S. in the
decades following the Civil War.
The Sherman Antitrust Act was the first measure enacted by the U.S. Congress. The Sherman Antitrust
Act, was based on the constitutional power of Congress to regulate interstate commerce. In 1914, US
Congress passed two measures that provided additional support for the Sherman Antitrust Act. One
was the Clayton Antitrust Act, which elaborated on the general provisions of the Sherman Act and
specified a number of illegal practices that either contributed to or resulted from monopolization. It
explicitly outlawed commercial practices such as price discrimination (i.e., charging different prices to
different customers), the buying out of competitors and interlocking boards of directors. The other was
the establishment of the Federal Trade Commission, an agency with the power to investigate possible
violations of antitrust laws and to issue orders forbidding unfair competitive practices. Gradually,
competition law came to be recognized as one of the key pillars of a market economy. This recognition
led to enactment of competition law in many countries including developing countries.
COMPETITION ACT, 2002
Based on the recommendations of the Raghavan Committee, the Competition Bill, 2000 was introduced
in Parliament which was later enacted as the Competition Act, 2002.
Preamble
An Act to provide for, keeping in view of the economic development of the country, the establishment of
a Commission to prevent practices having adverse effect on competition, to promote and sustain
competition in markets, to protect the interest of consumers and to ensure freedom of trade carried on
by other participants in market, in India, and for matters connected therewith or incidental thereto.
Combination under Competition Act, 2002
Combination means acquisition of control, shares, voting rights or assets, acquisition of control by a
person over an enterprise where such person has control over another enterprise engaged in competing
business, and mergers and amalgamations between or amongst enterprises when the combining parties
exceed the thresholds set in the Act. The thresholds are unambiguously specified in the Act in terms of
assets or turnover in India and abroad. Entering into a combination which causes or is likely to cause an
appreciable adverse effect on competition within the relevant market in India is prohibited and such
combination would be void.
Combinations Thresholds
On March 4, 2016, the Central Government issued notifications pertaining to the statutory thresholds for
the purposes of combinations under Section 5 of the Competition Act, 2002 (Act).
1. Increase in thresholds: Pursuant to Notification No.S.O.675(E) dated March 4, 2016, the

value of assets and the value of turnover has been enhanced by 100% for the purposes of
Section 5 of the Act. Accordingly, the revised thresholds for notification to the Competition
Commission of India (Commission) are:
THRESHOLDS FOR FILING NOTICE
Assets Turnover
Enterprise India > INR 2000 crore > INR 6000 crore
Level
Worldwide with >USD 1 bn >USD 3 bn
India leg OR
With at least With at least
INR 1000 crore in India INR 3000 crore in India
58 PP-CRVI
OR
Group Level India > INR 8000 crore > INR 24000 crore
Worldwide with >USD 4 bn OR >USD 12 bn

India leg With at least With at least
INR 1000 crore in India INR 3000 crore in India
2. Increase in thresholds of De Minimis Exemption: Pursuant to Notification No.S.O.674(E)

dated March 4, 2016, acquisitions where enterprises whose control, shares, voting rights or
assets are being acquired have assets of not more than Rs.350 crore in India or turnover of not
more than Rs.1000 crore in India, are exempt from Section 5 of the Act for a period of 5 years.
Accordingly, the revised thresholds for availing of the De Minimis exemption for acquisitions
are:
THRESHOLDS FOR AVAILING OF DE MINIMIS EXEMPTION FOR ACQUISITIONS

Assets Turnover
Target In India < INR 350 crore OR < INR 1000 crore
Enterprise
3. Definition of Group: As per Notification No.S.O.673(E) dated March 4, 2016, the exemption to
the group exercising less than fifty per cent of voting rights in other enterprise from the
provisions of Section 5 of the Act under Notification No.S.O.481(E) dated March 4, 2011, has
been continued for a further period of 5 years.
The value of assets and turnover provided in the De Minimis exemption apply to the enterprise whose
control, shares, voting rights or assets are being acquired; and not to the value of the target
assets/division/business being acquired
Regulation of combinations
Section 6 of the Competition Act prohibits any person or enterprise from entering into a combination
which causes or is likely to cause an appreciable adverse effect on competition within the relevant
market in India and if such a combination is formed, it shall be void.
Notice to the Commission disclosing details of the proposed combination
Section 6(2) envisages that any person or enterprise, who or which proposes to enter into any
combination, shall give a notice to the Commission disclosing details of the proposed combination, in
the form prescribed and submit the form together with the fee prescribed by regulations. Such intimation
should be submitted within 30 days of:
(a) approval of the proposal relating to merger or amalgamation, referred to in section 5(c), by the
board of directors of the enterprise concerned with such merger or amalgamation, as the case
may be;
(b) execution of any agreement or other document for acquisition referred to in section 5(a) or
acquiring of control referred to in section 5(b).
The Competition Commission of India (CCI) has been empowered to deal with such notice in
accordance with provisions of sections 29, 30 and 31 of the Act. Section 29 prescribes procedure for
investigation of combinations. Section 30 empowers the Commission to determine whether the
disclosure made to it under section 6(2) is correct and whether the combination has, or is likely to have,
an appreciable adverse effect on the competition. Section 31 provides that the Commission may allow
the combination if it will not have any appreciable adverse effect on competition or pass an order that
the combination shall not take effect, if in its opinion, such a combination has or is likely to have an
appreciable adverse effect on competition.
Exemptions
The provisions of section 6 do not apply to share subscription or financing facility or any acquisition, by
a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any
covenant of a loan agreement or investment agreement. This exemption appears to have been
provided in the Act to facilitate raising of funds by an enterprise in the course of its normal business.
Under section 6(5), the public financial institution, foreign institutional investor, bank or venture capital
fund, are required to file in prescribed form, details of the control, the circumstances for exercise of such
control and the consequences of default arising out of loan agreement or investment agreement, within
seven days from the date of such acquisition or entering into such agreement, as the case may be.
As per the explanation to section 6(5):

(a) foreign institutional investor has the same meaning as assigned to it in clause (a) of the
Explanation to section 115AD of the Income-tax Act, 1961;
(b) venture capital fund has the same meaning as assigned to it in clause (b) of the Explanation
to clause (23FB) of section 10 of the Income-tax Act, 1961.
It may be noted that under the law, the combinations are only regulated whereas anti-competitive
agreements and abuse of dominance are prohibited.
Inquiry into combination by the Commission

The Commission under section 20 of the Competition Act may inquire into the appreciable adverse
effect caused or likely to be caused on competition in India as a result of combination either upon its
own knowledge or information (suo moto) or upon receipt of notice under section 6(2) relating to
acquisition referred to in section 5(a) or acquiring of control referred to in section 5(b) or merger or
amalgamation referred to in section 5(c) of the Act. It has also been provided that an enquiry shall be
initiated by the Commission within one year from the date on which such combination has taken effect.
Thus, the law has provided a time limit within which suo moto inquiry into combinations can be initiated.
This provision dispels the fear of enquiry into combination between merging entities after the expiry of
stipulated period.
On receipt of the notice under section 6(2) from the person or an enterprise which proposes to enter
into a combination, it is mandatory for the Commission to inquire whether the combination referred to in
that notice, has caused or is likely to cause an appreciable adverse effect on competition in India.
The Commission shall have due regard to all or any of the factors for the purposes of determining
whether the combination would have the effect of or is likely to have an appreciable adverse effect on
competition in the relevant market, namely:
(a) actual and potential level of competition through imports in the market;
(b) extent of barriers to entry into the market;
60 PP-CRVI
(c) level of combination in the market;

(d) degree of countervailing power in the market;
(e) likelihood that the combination would result in the parties to the combination being able to
significantly and sustainably increase prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) extent to which substitutes are available or likely to be available in the market;
(h) market share, in the relevant market, of the persons or enterprise in a combination, individually
and as a combination;
(i) likelihood that the combination would result in the removal of a vigorous and effective
competition or competitors in the market;
(j) nature and extent of vertical integration in the market;
(k) possibility of a failing business;
(l) nature and extent of innovation;
(m) relative advantage, by way of the contribution to the economic development, by any
combination having or likely to have appreciable adverse effect on competition;
(n) whether the benefits of the combination outweigh the adverse impact of the combination, if any.
The above yardsticks are to be taken into account irrespective of the fact whether an inquiry is
instituted, on receipt of notice under section 6(2) or upon its own knowledge. The scope of assessment
of adverse effect on competition will be confined to the relevant market. Most of the facts enumerated
in section 20(4) are external to an enterprise. It is noteworthy that sub clause (n) of Section 20(4)
requires to invoke principles of a balancing. It requires the Commission to evaluate whether the
benefits of the combination outweigh the adverse impact of the combination, if any. In other words if the
benefits of the combination outweigh the adverse effect of the combination, the Commission will
approve the combination. Conversely, the Commission may declare such a combination as void.
Procedure for investigation of combination

The procedure for investigation by the Commission has been stipulated under section 29 of the Act. It
involves the following stages:
(i) The Commission first has to form a prima facie opinion that a combination is likely to cause, or
has caused an appreciable adverse effect on competition within the relevant market in India.
Further, when the Commission has come to such a conclusion then it shall proceed to issue a
notice to the parties to the combination, calling upon them to show cause why an investigation
in respect of such combination should not be conducted.
(ii) After receipt of the response of the parties to the combination, the Commission may call for the
report of the Director General.
(iii) When pursuant to response of parties or on receipt of report of the Director General whichever
is later, the Commission is, prima facie, of the opinion that the Combination is likely to cause an
appreciable adverse effect on competition in relevant market, it shall, within seven working
days from the date of receipt of the response of the parties to the combinations or the receipt of
the report from Director General under section 29 (1A) whichever is later, direct the parties to
the combination to publish within ten working days, the details of the combination, in such
manner as it thinks appropriate so as to bring to the information of public and persons likely to
be affected by such combination.
(iv) The Commission may invite any person affected or likely to be affected by the said
combination, to file his written objections within fifteen working days of the publishing of the
public notice, with the Commission for its consideration.
(v) The Commission may, within fifteen working days of the filing of written objections, call for such
additional or other information as it deem fit from the parties to the said combination and the
information shall be furnished by the parties above referred within fifteen days from the expiry
of the period notified by the Commission.
(vi) After receipt of all the information and within 45 days from expiry of period for filing further
information, the Commission shall proceed to deal with the case, in accordance with provisions
contained in section 31 of the Act.
Thus, the provisions of section 29 provides for a specified timetable within which the parties to the
combination or parties likely to be affected by the combination are required to submit the information or
further information to the Commission to ensure prompt and timely conduct of the investigation. It
further imposes on Commission a time limit of 45 working days from the receipt of additional or other
information called for by it under sub-section (4) of section 29 for dealing with the case of investigation
into a combination, which may have an adverse effect of the competition.
Inquiry into disclosures under section 6(2)

Section 6(2) casts an obligation on any person or enterprise, who or which proposes to enter into
combination, to give notice to the Commission, in the form as may be specified, and the fee which may
be determined, by regulations, disclosing the details of the proposed combination within thirty working
days of:
(i) Approval of the proposal relating to merger or amalgamation by the board of directors of the
enterprises concerned with such merger or amalgamation;
(ii) Execution of any agreement or other document for acquisition referred to in section 5(a) or
acquiring of control referred to in section 5(b).
The section 6(2A) envisages that no combination shall come into effect until 210 days have passed
from the day on which notice has been given to Commission or the Commission has passed orders,
whichever is earlier.
Upon receipt of such notice, the Commission shall examine such notice and form its prima facie opinion
as to whether the combination has, or is likely to have, an appreciable adverse effect on the competition
in the relevant market in India.
Orders of Commission on certain combinations

The Commission, after consideration of the relevant facts and circumstances of the case under
investigation by it under section 28 or 30 and assessing the effect of any combination on the relevant
market in India, may pass any of the written orders indicated herein below. Where the Commission
comes to a conclusion that any combination does not, or is not likely to, have an appreciable adverse
effect on the Competition in relevant market in India, it may, approve that Combination.
(i) Where the Commission is of the opinion that the combination has, or is likely to have an
62 PP-CRVI
adverse effect on competition, it shall direct that the combination shall not take effect.
(ii) Where the Commission is of the opinion that adverse effect which has been caused or is likely
to be caused on competition can be eliminated by modifying such combination then it shall
direct the parties to such combination to carry out necessary modifications to the combination.
(iii) The parties accepting the proposed modification shall carry out such modification within the
period specified by the Commission.
(iv) Where the parties have accepted the modification, but fail to carry out such modification within
the period specified by the Commission, such combination shall be deemed to have an
appreciable adverse effect on competition and shall be dealt with by the Commission in
accordance with the provisions of the Act.
(v) Where the parties to the Combination do not accept the proposed modification such parties
may within 30 days of modification proposed by the Commission, submit amendment to the
modification proposed by the Commission.
(vi) Where the Commission agrees with the amendment submitted by the parties, it shall, by an
order approve the combination.
(vii) Where the Commission does not accept the amendment, parties shall be allowed a further
period of 30 days for accepting the amendment proposed by the Commission.
(viii) Where the parties to the combination fail to accept the modification within thirty days, then it
shall be deemed that the combination has an appreciable adverse effect on competition and
will be dealt with in accordance with the provisions of the Act.
(ix) Where Commission directs under section 31(2) that the combination shall not take effect or it
has, or is likely to have an appreciable adverse effect, it may order that,
(a) the acquisition referred to in section 5(a); or
(b) the acquiring of control referred to in section 5(b); or
(c) the merger or the amalgamation referred to in section 5(c) shall not be given effect to by
the parities.
As per proviso the Commission may, if it considers appropriate, frame a scheme to implement
its order in regard to the above matters under section 31(10).
(x) A deeming provision has been introduced by section 31(11). It provides that, if the Commission
does not, on expiry of a period of 210 days from the date of filing of notice under section 6(2)
pass an order or issue any direction in accordance with the provisions of section 29(1) or
section 29(2) or section 29(7), the combination shall be deemed to have been approved by the
Commission. In reckoning the period of 210 days, the period of thirty days specified in section
29(6) and further period of thirty working days specified in section 29(8) granted by
Commission shall be excluded.
(xi) Further more where extension of time is granted on the request of parties the period of two
hundred ten days shall be reckoned after deducting the extended time granted at the request of
the parties.
(xii) Where the Commission has ordered that a combination is void, as it has an appreciable
adverse effect on competition, the acquisition or acquiring of control or merger or
amalgamation referred to in section 5, shall be dealt with by other concerned authorities under
any other law for the time being in force as if such acquisition or acquiring of control or merger
or amalgamation had not taken place and the parties to the combination shall be dealt with
accordingly.
(xiii) Section 29(14) makes it clear that nothing contained in Chapter IV of the Act shall affect any
proceeding initiated or may be initiated under any other law for the time being in force. It
implies that provisions of this Act are in addition to and not in derogation of provisions of other
Acts.
Thus, approval under one law does not make out a case for approval under another law.
Extra Territorial Jurisdiction of Commission
Section 32 extends the jurisdiction of Competition Commission of India to inquire and pass orders in
accordance with the provisions of the Act into an agreement or dominant position or combination, which
is likely to have, an appreciable adverse effect on competition in relevant market in India,
notwithstanding that,
(a) an agreement referred to in section 3 has been entered into outside India; or
(b) any party to such agreement is outside India; or
(c) any enterprise abusing the dominant position is outside India; or
(d) a combination has taken place outside India; or
(e) any party to combination is outside India; or
(f) any other matter or practice or action arising out of such agreement or dominant position or
combination is outside India.
The above clearly demonstrate that acts taking place outside India but having an effect on competition
in India will be subject to the jurisdiction of Commission. The Competition Commission of India will have
jurisdiction even if both the parties to an agreement are outside India but only if the agreement,
dominant position or combination entered into by them has an appreciable adverse effect on
competition in the relevant market of India.
Power to impose penalty for non-furnishing of information on combination
Section 43A provides that if any person or enterprise who fails to give notice to the Commission under
sub-section (2) of section 6, the Commission shall impose on such person or enterprise a penalty which
may extend to one per cent of the total turnover or the assets, whichever is higher, of such a
combination.
Thus, failure to file notice of combination falling under section 5 attracts deterrent penalty.
The Competition Commission of India (Procedure in regard to the transaction of business
relating to combinations) Amendment Regulation, 2015
The Competition Commission of India (CCI) vide a Notification (published in the Gazette of India) on
July 01, 2015, (the amendment) published the The Competition Commission of India (Procedure in
regard to the transaction of business relating to combinations) Amendment Regulation, 2015 ,
amending the existing Competition Commission of India (Procedure in regard to the transaction of
business relating to combinations)Regulations, 2011(Combination Regulations).
To bring in more firmness, scope of the term other document has now been limited to a
communication conveying the intention to make an acquisition to a Statutory Authority.
Any person duly authorised by the board of directors can sign the notice. The number of copies to
be filed with the commission has also been reduced.
64 PP-CRVI
CCI has also revised Form I required to be filed for notifying combination to the effect that notes of
the forms will be provided for guidance to the notifying parties regarding the information to be filed
in the notice.
Furthermore, to provide more transparency regarding review process, amendment provides that
summary of the combination under review will be published on the CCI website. With this the
stakeholders will get an opportunity to submit their comments to CCI regarding the proposed
combination.
CCI has also modified the timelines for prima facie opinion on appreciable adverse effects from 30
Calendar Days to 30 Working days.
LESSON ROUND UP
The economic aspects of merger include market leadership, acquiring new product/brand name, imposing
economies of scale, rationalization in production etc.
The preamble of the Competition Act, 2002 states that this is an Act to establish a Commission to prevent
anti-competitive practices, promote and sustain competition, protect the interests of the consumers and
ensure freedom of trade in markets in India.
Combination means acquisition of control, shares, voting rights or assets, acquisition of control by a person
over an enterprise where such person has direct or indirect control over another enterprise engaged in
competing businesses, mergers and amalgamations between or amongst enterprises.
Any person or enterprise, who or which proposes to enter into any combination, shall give a notice to the
Commission disclosing details of the proposed combination, in the form, prescribed and submit the form
together with the fee prescribed by regulations. Such intimation should be submitted within 30 days of
approval of the proposal relating to merger or amalgamation by the board of directors of the enterprise
concerned with such merger or amalgamation, as the case may be, or execution of any agreement or other.
Section 32 of the Competition Act, 2002 extends the extra territorial jurisdiction of the Competition
Commission of India to enquiry and pass orders in accordance with the provisions of the Act in to an
agreement, dominant position and regulates combinations i.e. mergers and acquisitions with a view to
ensure that there is no adverse effect on competition in India.
SELF TEST QUESTIONS
1. What are the reasons for mergers?

2. Enumerate the preamble of the Competition Act, 2002.
3. Discuss about the thresholds limits of Combination.
4. Explain abut Competition Commission of India extra territorial jurisdiction.
Lesson 4
Accounting Aspects of Amalgamations

Applicability
Accounting Standard 14(AS 14) deals with
Types of amalgamation under AS 14 Accounting for amalgamations. According to AS 14
i. Amalgamation in the nature of amalgamation may be either in the nature of merger
merger or in the nature of purchase. It prescribes certain
conditions to be fulfilled for consideration of
ii. Amalgamation in the nature of
amalgamation in the nature of merger. It includes
purchase
aspects relating to transfer of assets and liabilities,
Methods of accounting for amalgamations shareholders of transferor companies becoming
i. Pooling of interest method and shareholders of transferee company, consideration
for amalgamation continuity of business of transferor
ii. Purchase method.
Company(ies) etc.,
Consideration for amalgamation
AS 14 further prescribes that amalgamation in the
Treatment of Reserves on Amalgamation nature of merger should be accounted for under
Goodwill on amalgamation pooling of interest method and amalgamation in the
nature of purchase should be accounted for under
Balance of profit & Loss account
the purchase method. It also covers aspects such as
Disclosure Requirements treatment of reserves/goodwill in a scheme of
Amalgamation after the Balance Sheet date amalgamation, amalgamation after the balance-sheet
etc., After reading this lesson you will be able to
understand the applicability of AS 14 to various
strategic decisions, accounting methods, disclosure
requirements etc. and the applicability and phases of
implementation of the Companies (Indian Accounting
Standards) Rules, 2015 notified by MCA, with special
reference to INDAS 103 dealing with Business
combinations.
66 PP-CRVI
APPLICABILITY
Accounting Standard-14 Accounting for Amalgamations lays down the accounting and disclosure
requirements in respect of amalgamations of companies and the treatment of any resultant goodwill or
reserves.
Exception
This standard does not deal with cases of acquisitions which arise when there is a purchase by one
company (acquiring company) of the whole or part of the shares, or the whole or part of the assets, of
another company (acquired company) in consideration by payment in cash or by issue of shares or other
securities in the acquiring company or partly in one form and partly in the other. The distinguishing feature of
an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.
Is AS-14 Applicable to Demerger?
Case 1 Scheme of arrangement between Sony India Private Limited (Sony India) and Sony Software
Centre Private Limited (Sony Software) with reference to transfer of software undertaking of Sony
India to Sony Software
The Delhi High Court (the High Court), while approving scheme of arrangement between Sony India and
Sony Software in 2012 has clarified that. AS-14 (i.e., accounting standards issued by the Institute of
Chartered Accountants) is applicable only to amalgamations and not to demerger. As per the scheme of
arrangement, Software Undertaking of Sony India is proposed to be transferred to Sony Software under
Sections 391 to 394 of the Companies Act, 1956. One of the conditions of the scheme was that any excess
in the value of net assets of software undertaking transferred to the resulting company shall be applicable for
distribution to the shareholders of the resulting company
Regional Director of Northern Region, Ministry of Corporate has raised objection in his affidavit filed with the
High Court stating that excess if any, in the value of the net assets of the software undertaking should be
adjusted to the capital reserve as prescribed in AS-14 and not to the general reserve as proposed in the
scheme of arrangements.
The petitioners contended that AS-14 is applicable only to amalgamations and not to demerger. It was
clarified that AS-14 is applicable only to amalgamations and not to demerger. On a plain reading of the
accounting standard under reference, it is clear that the same is applicable only in case of an amalgamation
and not in case of demergers. This has also been held by the Gujarat High Court in the case of 2010 1 CLJ
351 tiled Gallops Realty (P) Ltd. Copy of the order has been placed on record.
Case 2 - Gujarat, Gallops Realty (P.) Ltd
In Case of High Court of Gujarat,Gallops Realty (P.) Ltd., In re v. K.A. PUJ, J.(2010), under Section 391,
read with sections 394 and 100, of the Companies Act, 1956 Petitioner-companies, i.e., demerged
company and resulting company, sought for sanction of composite scheme of arrangement in nature of
purchase of shares and demerger of hotel business of demerged company to resulting company and
consequent reconstruction of share capital of demerged company under section 391, read with sections
394, 78 and 100 consisting of reduction of paid-up share capital as well as utilization of share premium
Lesson 4 Mergers and Amalgamations Accounting Aspects of Amalgamations 67
account. Regional Director stated that as per scheme, capital profit on demerger would be transferred to
general reserve in books of resulting company which was not in consonance with generally accepted
accounting principles as also Accounting Standard - 14 which provide that any profit arising out of a capital
transaction ought to be treated as capital profit and, hence, would be transferred to capital reserve and not
to general reserve. It was held that the observation of Regional Director was not in consonance with
accounting principles in general and Accounting Standard-14 in particular, as Accounting Standard-14 is
applicable only in case of amalgamation and not in case of demerger, as envisaged in instant
scheme.
TYPES OF AMALGAMATION
Accounting Standard (AS)-14 recognizes two types of amalgamation:

(a) Amalgamation in the nature of merger.
(b) Amalgamation in the nature of purchase.
An amalgamation should be considered to be an amalgamation in the nature of merger when all the following
conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after amalgamation, the assets and
liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (other than the equity shares already held therein, immediately before the amalgamation,
by the transferee company or its subsidiaries or their nominees) become equity shareholders of the
transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the transferor
company who agree to become equity shareholders of the transferee company is discharged by the
transferee company wholly by the issue of equity shares in the transferee company, except that
cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation, by the
transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
An amalgamation should be considered to be an amalgamation in the nature of purchase, when any one or
more of the conditions specified above is not satisfied. These amalgamations are in effect a mode by which
one company acquires another company and hence, the equity shareholders of the combining entities do not
continue to have a proportionate share in the equity of the combined entity or the business of the acquired
company is not intended to be continued after amalgamation.
METHODS OF ACCOUNTING FOR AMALGAMATION
There are two main methods of accounting for amalgamations:

(a) the pooling of interests method; and
(b) the purchase method.
The pooling of interests method is used in case of amalgamation in the nature of merger. The purchase
68 PP-CRVI
method is used in accounting for amalgamations in the nature of purchase.
The Pooling of Interest Method

Since merger is a combination of two or more separate business, there is no reason to restate carrying
amounts of assets and liabilities. Accordingly, only minimal changes are made in aggregating the individual
financial statements of the amalgamating companies.
In preparing the transferee companys financial statements, the assets, liabilities and reserves (whether
capital or revenue or arising on revaluation) of the transferor company should be recorded at their existing
carrying amounts and in the same form as at the date of the amalgamation. The balance of the Profit and
Loss Account of the transferor company should be aggregated with the corresponding balance of the
transferee company or transferred to the General Reserve, if any.
If, at the time of the amalgamation, the transferor and the transferee company have conflicting accounting
policies, a uniform set of accounting policies should be adopted following the amalgamation. The effects on
the financial statements of any changes in accounting policies should be reported in accordance with
Accounting Standard (AS-5), Net Profit or Loss for the Period Prior Period Items and Changes in Accounting
Policies.
The difference between the amount recorded as share capital issued (plus any additional consideration in
the form of cash or other assets) and the amount of share capital of the transferor company should be
adjusted in reserves. It has been clarified that the difference between the issued share capital of the
transferee company and share capital of the transferor company should be treated as capital reserve. The
reason given is that this difference is akin to share premium. Furthermore, reserve created on amalgamation
is not available for the purpose of distribution to shareholders as dividend and/or bonus shares. It means that
if consideration exceeds the share capital of the transferor company (or companies), the unadjusted amount
is a capital loss and adjustment must be made, first of all in the capital reserves and in case capital reserves
are insufficient, in the revenue reserves. However, if capital reserves and revenue reserves, are insufficient
the unadjusted difference may be adjusted against revenue reserves by making addition thereto by
appropriation from profit and loss account. There should not be direct debit to the profit and loss account. If
there is insufficient balance in the profit and loss account also, the difference should be reflected on the
assets side of the balance sheet in a separate heading.
The Purchase Method

In preparing the transferee companys financial statements, the assets and liabilities of the transferor
company should be incorporated at their existing carrying amounts or, alternatively, the consideration should
be allocated to individual identifiable assets and liabilities on the basis of their fair values at the date of
amalgamation. The reserves (whether capital or revenue or arising on revaluation) of the transferor
company, other than the statutory reserves, should not be included in the financial statements of the
transferee company except as in case of statutory reserve.
Any excess of the amount of the consideration over the value of the net assets of the transferor company
acquired by the transferee company should be recognised in the transferee companys financial statements
as goodwill arising on amalgamation. If the amount of the consideration is lower than the value of the net
assets acquired, the difference should be treated as Capital Reserve.
The goodwill arising on amalgamation should be amortised to income on a systematic basis over its useful
life. The amortisation period should not exceed five years unless a somewhat longer period can be justified.
The reserves of the transferor company, other than statutory reserve should not be included in the financial
statements of the transferee company. The statutory reserves refer to those reserves which are required to
be maintained for legal compliance. The statute under which a statutory reserve is created may require the
identity of such reserve to be maintained for a specific period.
Where the requirements of the relevant statute for recording the statutory reserves in the books of the
transferee company are complied with, such statutory reserves of the transferor company should be
recorded in the financial statements of the transferee company by crediting the relevant statutory reserve
account. The corresponding debit should be given to a suitable account head (e.g., Amalgamation
Adjustment Account) which should be disclosed as a part of miscellaneous expenditure or other similar
category in the balance sheet. When the identify the statutory reserves is no longer required to be
maintained, both the reserves and the aforesaid account should be reversed.
Let us recapitulate
There are two types of amalgamation and two methods of accounting for amalgamations under AS 14. The
types of amalgamation are amalgamation, in the nature of merger and amalgamation in the nature of
purchase. There are two main methods of accounting for amalgamations viz. the pooling of interests method;
and the purchase method. The pooling of interests method is used in case of amalgamation in the nature of
merger. The purchase method is used in accounting for amalgamations in the nature of purchase.
CONSIDERATION FOR AMALGAMATION

The consideration for amalgamation means the aggregate of the shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to the shareholders of the
transferor company. In determining the value of the consideration, assessment is made of the fair value of its
various elements.
The consideration for the amalgamation should include any non-cash element at fair value. The fair value
may be determined by a number of methods. For example, in case of issue of securities, the value fixed by
the statutory authorities may be taken to be the fair value. In case of other assets, the fair value may be
determined by reference to the market value of the assets given up, and where the market value of the
assets given up cannot be reliably assessed, such assets may be valued at their respective net book values.
While the scheme of amalgamation provides for an adjustment to the consideration contingent on one or
more future events, the amount of the additional payment should be included in the consideration if payment
is probable and a reasonable estimate of the amount can be made. In all other cases, the adjustment should
be recognised as soon as the amount is determinable.
Treatment of Reserves on Amalgamation

If the amalgamation is an amalgamation in the nature of merger
If the amalgamation is an amalgamation in the nature of merger, the identity of the reserves is preserved
and they appear in the financial statements of the transferee company in the same form in which they
appeared in the financial statements of the transferor company. Thus, for example, the General Reserve of
the transferor company becomes the General Reserve of the transferee company, the Capital Reserve of the
transferor company becomes the Capital Reserve of the transferee company and the Revaluation Reserve of
the transferor company becomes the Revaluation Reserve of the transferee company. As a result of
preserving the identity, reserves which are available for distribution as dividend before the amalgamation
would also be available for distribution as dividend after the amalgamation. The difference between the
amount recorded as share capital issued (plus any additional consideration in the form of cash or other
assets) and the amount of share capital of the transferor company is adjusted in reserves in the financial
70 PP-CRVI
statements of the transferee company.
If the amalgamation is an amalgamation in the nature of purchase
If the amalgamation is an amalgamation in the nature of purchase, the identity of the reserves, other than
the statutory reserves is not preserved, dealt within the certain circumstances mentioned below.
Certain reserves may have been created by the transferor company pursuant to the requirements of, or to
avail of the benefits under, the Income-tax Act, 1961; for example, Development Allowance Reserve, or
Investment Allowance Reserve. The Act requires that the identity of the reserves should be preserved for a
specified period. Likewise, certain other reserves may have been created in the financial statements of the
transferor company in terms of the requirements of other statutes. Though, normally, in an amalgamation in
the nature of purchase, the identity of reserves is not preserved, an exception is made in respect of reserves
of the aforesaid nature (referred to hereinafter as statutory reserves) and such reserves retain their identity
in the financial statements of the transferee company in the same form in which they appeared in the
financial statements of the transferor company, so long as their identity is required to be maintained to
comply with the relevant statute. This exception is made only in those amalgamations where the
requirements of the relevant statute for recording the statutory reserves in the books of the transferee
company are complied with. In such cases the statutory reserves are recorded in the financial statements of
the transferee company by a corresponding debit to a suitable account head (e.g., Amalgamation
Adjustment Account) which is disclosed as a part of miscellaneous expenditure or other similar category in
the balance sheet. When the identity of the statutory reserves is no longer required to be maintained, both
the reserves and the aforesaid account are reversed.
The amount of the consideration is deducted from the value of the net assets of the transferor company
acquired by the transferee company. If the result of the computation is negative, the difference is debited to
goodwill arising on amalgamation and dealt with in the manner stated below under treatment of goodwill on
amalgamation, . If the result of the computation is positive, the difference is credited to Capital Reserve.
Goodwill on Amalgamation
Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is
appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to
nature of goodwill, it is difficult to estimate its useful life, but estimation is done on a prudent basis.
Accordingly, it should be appropriate to amortise goodwill over a period not exceeding five years unless a
somewhat longer period can be justified.
The following factors are to be taken into account in estimating the useful life of goodwill:
(i) the forceable life of the business or industry;
(ii) the effects of product obsolescence, changes in demand and other economic factors;
(iii) the service life expectancies of key individuals or groups of employees;
(iv) expected actions by competitors or potential competitors; and
(v) legal, regulatory or contractual provisions affecting the useful life.
Balance of Profit and Loss Account

In the case of an amalgamation in the nature of merger, the balance of the Profit and Loss Account
appearing in the financial statements of the transferor company is aggregated with the corresponding
balance appearing in the financial statements of the transferee company. Alternatively, it is transferred to the
General Reserve, if any.
In the case of an amalgamation in the nature of purchase, the balance of the Profit and Loss Account
appearing in the financial statements of the transferor company, whether debit or credit, loses its identity.
Disclosure Requirements
(a) For amalgamations of every type of the following disclosures should be made in the first
financial statements following the amalgamations:
(i) names and general nature of business of the amalgamating companies;
(ii) effective date of amalgamation for accounting purposes;
(iii) the method accounting used to reflect the amalgamation; and
(iv) particulars of the scheme sanctioned under a statute.
(b) In case of amalgamations accounted for under the pooling of interests method, the following
additional disclosures are required to be made in the first financial statements following the
amalgamation :
(i) description and number of shares issued, together with the percentage of each companys
equity shares exchanged to effect the amalgamation;
(ii) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof.
(c) In case of amalgamations accounted for under the purchase method the following additional
disclosures are required to be made in the first financial statements following the amalgamations:
(i) consideration for the amalgamation and a description of the consideration paid or contingently
payable, and
(ii) the amount of any difference between the consideration and the value of net identifiable assets
required, and the treatment thereof including the period of amortization of any goodwill arising
on amalgamation.
Amalgamation after the Balance Sheet Date
While an amalgamation is effected after the balance sheet date but before the issuance of the financial
statements of either party to the amalgamation, disclosure should be made as per the provisions of AS-4,
Contingencies and Events Occurring after the Balance Sheet Date, but the amalgamation should not be
incorporated in that financial statements. In certain circumstances, the amalgamation may also provide
additional information affecting the financial statements themselves, for instance, by allowing the going
concern assumption to be maintained.
Companies (Indian Accounting Standards) Rules, 2015

The Ministry of Corporate Affairs (MCA) has notified on February 16, 2015 the Companies (Indian
Accounting Standards) Rules, 2015. The applicability and the phases of implementation of the standards has
been given below:
On voluntary For accounting periods Any company
Applicability Timelines Class of companies
basis beginning on or after
st
1 April, 2015
72 PP-CRVI
On For the accounting a) companies having net worth of `500 crore or

mandatory periods beginning on more whether their equity and/or debt
st
basis or after 1 April, 2016 securities are listed or otherwise
b) holding, subsidiary, joint venture or associate
companies of the class of companies covered
in (a) above.
On For the accounting a) companies whose equity and/or debt

mandatory periods beginning on securities are listed or are in the process of
st
basis or after 1 April, being listed on any stock exchange in India or
2017 outside India and having net worth of less
than `500 crore
b) unlisted companies having net worth of `250
crore or more but less than `500 crore
c) holding, subsidiary, joint venture or associate
companies of the above class of companies.
Indian Accounting Standard 103 for Business Combinations- A birds eye view
Ind AS 103 defines business combination which has a wider scope whereas the existing AS 14 deals only
with amalgamation. Under the existing AS 14 there are two methods of accounting for amalgamation. The
pooling of interest method and the purchase method. Ind AS 103 prescribes only the acquisition method for
each business combination
IND-AS 103 provides definition of a business. It defines business as An integrated set of activities and
assets that is capable of being conducted and managed for the purpose of providing a return in the form of
dividends, lower costs or other economic benefits directly to investors or other owners, members or
participants Further a Business Combinations is a transaction or other event in which anacquirerobtains
control of one or morebusinesses. Transactions sometimes referred to as true mergers or mergers of
equals are alsobusiness combinationsas that term is used in this Indian Accounting Standard.
Under Ind AS 103, Business Combinations, all business combinations are accounted for using the purchase
method that considers the acquisition date fair values of all assets, liabilities and contingent liabilities of the
acquiree. The limited exception to this principle relates to acquisitions between entities under common control.
Ind AS-103, Business Combinations and AS-14, Accounting for Amalgamations
(i) Ind AS 103 defines business combination which has a wider scope whereas the existing AS 14
deals only with amalgamation.
(ii) Under the existing AS 14 there are two methods of accounting for amalgamation. The pooling of
interest method and the purchase method. Ind AS 103 prescribes only the acquisition method for
each business combination.
(iii) Under the existing AS 14, the acquired assets and liabilities are recognised at their existing book
values or at fair values under the purchase method. Ind AS 103 requires the acquired identifiable
assets liabilities and non-controlling interest to be recognised at fair value under acquisition method.
(iv) Ind AS 103 requires that for each business combination, the acquirer shall measure any non-
controlling interest in the acquire either at fair value or at the non-controlling interests proportionate
share of the acquirees identifiable net assets. On other hand, the existing AS 14 states that the
minority interest is the amount of equity attributable to minorities at the date on which investment in
a subsidiary is made and it is shown outside shareholders equity.
(v) Under Ind AS 103, the goodwill is not amortised but tested for impairment on annual basis in
accordance with Ind AS 36.The existing AS 14 requires that the goodwill arising on amalgamation in
the nature of purchase is amortised over a period not exceeding five years.
(vi) Ind AS 103 deals with reverse acquisitions whereas the existing AS 14 does not deal with the same.
(vii) Under Ind AS 103, the consideration the acquirer transfers in exchange for the acquiree includes
any asset or liability resulting from a contingent consideration arrangement. The existing AS 14
does not provide specific guidance on this aspect.
(viii) Ind AS 103 requires bargain purchase gain arising on business combination to be recognised in
other comprehensive income and accumulated in equity as capital reserve, unless there is no clear
evidence for the underlying reason for classification of the business combination as a bargain
purchase, in which case, it shall be recognised directly in equity as capital reserve. Under existing
AS 14 the excess amount is treated as capital reserve
(ix) Appendix C of Ind AS 103, deals with accounting for common control transactions, which prescribes
a method of accounting different from Ind AS 103. Existing AS 14 does not prescribe accounting for
such transactions different from other amalgamations.
LESSON ROUND UP
Accounting Standard-14 Accounting for Amalgamations lays down the accounting and disclosure
requirements in respect of amalgamations of companies and the treatment of any resultant goodwill or
reserves.
AS 14 is not applicable to demergers.
AS 14 provides for two types of amalgamations viz amalgamation, in the nature of merger and
amalgamation in the nature of purchase.
There are two main methods of accounting for amalgamations viz the pooling of interests method; andthe
purchase method.
The pooling of interests method is used in case of amalgamation in the nature of merger. The purchase
method is used in accounting for amalgamations in the nature of purchase.
The consideration for amalgamation means the aggregate of the shares and other securities issued and the
payment made in the form of cash or other assets by the transferee company to the shareholders of the
transferor company.
If the amalgamation is an amalgamation in the nature of merger, the identity of the reserves is preserved
and they appear in the financial statements of the transferee company in the same form in which they
appeared in the financial statements of the transferor company.
If the amalgamation is an amalgamation in the nature of purchase, the identity of the reserves, other than
the statutory reserves is not preserved, dealt within the certain circumstances specified.
Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is
appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life.
AS 14 also prescribes certain disclosure requirements.
While an amalgamation is effected after the balance sheet date but before the issuance of the financial
statements of either party to the amalgamation, disclosure should be made as per the provisions of AS-4,
74 PP-CRVI
Contingencies and Events Occurring after the Balance Sheet Date, but the amalgamation should not be
incorporated in that financial statements.
While filing for approval any draft Scheme of amalgamation/merger/ reconstruction, etc. with the stock
exchange under the listing agreement, the company is also required to file an auditors certificate to the effect
that the accounting treatment contained in the scheme is in compliance with all the Accounting Standards.
SELF TEST QUESTIONS

(These are meant for recapitulation only. Answers to these questions are not to be submitted for evaluation)
1. Does AS 14 apply to Demerger? Explain.
2. What are the types of amalgamation provided under AS 14?
3. What are the methods of accounting provided under AS 14?
4. How the balance in Profit and Loss Account of transferor is treated in case of amalgamation in the
nature of merger?
Lesson 5
Financial, Stamp Duty and Taxation
Aspects of Amalgamation
Financial aspects of mergers and As the financial aspects of merger denotes financial
amalgamations benefits. Stamp duty and taxation aspects are closely
linked to the financial aspects. Similarly, the
Constitutional background on levy of stamp
incidence of stamp duty is an important consideration
duty
in the planning of any merger. In fact, in some cases,
Stamp duty payable on high court order the whole form in which the merger is sought to take
sanctioning amalgamation place is selected taking into account the savings in
Amalgamation of holding and subsidiary stamp duty. Taxation aspects of merger includes
companies exemption from payment of aspects such as carry forward of losses after merger.
stamp duty
After reading this lesson you will be able to
Taxation aspects of mergers and understand the regulatory aspects and court
amalgamation decisions as to the stamp duty aspects of mergers,
tax advantage on mergers etc.,
Taxation aspects of slump sale
76 PP-CRVI
FINANCIAL ASPECTS OF MERGERS AND AMALGAMATIONS
INTRODUCTION
In any merger or amalgamation, financial aspects of the transaction are of prime importance. It denotes the
benefits in terms of financial benefits, i.e., increase in productivity, improved profitability and enhanced
dividend paying capacity of the merged or the amalgamated company, which the management of each
company involved in this exercise would be able to derive.
Each amalgamation or merger is aimed at the following financial aspects:

(a) To pool the resources of all the companies involved in the exercise of amalgamation or merger so
as to achieve economies of production, administrative, financial and marketing management.
(b) To secure the required credit on terms from financial institutions, banks, suppliers, job workers etc.
(c) To cut down cost of production, management, marketing etc. by effecting savings in all spheres with
the combined strength of qualified and competent technical and other personnel.
(d) To reinforce the united research and development activities for product development to ensure a
permanent, dominant and profit making position in the industry.
(e) To improve productivity and profitability in order to maintain a regular and steady dividend to the
shareholders.
(f) To concentrate on the core competence of the merged or the amalgamated company.
(g) To consolidate the resource base and improve generation, mobilisation and utilisation of physical,
financial, human, knowledge, information and other important tangible and intangible resources.
An important aspect in the scheme of mergers and amalgamations relating to the valuation of shares is to
decide the exchange ratio. Objections have been raised about the method of valuation even in cases where
the schemes had been approved by a large majority of shareholders and the lending Financial Institutions.
The courts have declared their unwillingness to engage themselves on a study of the fitness of the mode of
valuation.
According to a High Court statement: The valuation of shares is a technical matter which requires
considerable skill and expertise. There are bound to be differences of opinion as to the correct value of the
shares of the company. Simply because it is possible to value the shares in a manner different from the one
adopted in a given case, it cannot be said that the valuation agreed upon has been unfair.
In the Hindustan Lever Ltd. case, the Supreme Court held that it would not interfere with the valuation of
shares, when more than 99 per cent of the shareholders have approved the scheme, and with the valuation
having been perused by the Financial Institutions.
Valuation and acquisition motives are an important aspect in the merger/amalgamation /takeover activity.
The valuation of business, however, depends to a great extent on the acquisition motives. The acquisition
activity is usually guided by strategic behavioural motives. The strategic reasons could be either purely
financial (taxation, asset-stripping, financial restructuring involving an attempt to augment the resources base
and portfolio-investment) or business related (expansion or diversification). The behavioural reasons have
more to do with the personal ambitions or objectives (desire to grow big) of the top management. The
expansion and diversification objectives are achievable either by building capacities on ones own or by
Lesson 5 Financial, Stamp Duty and Taxation Aspects of Amalgamation 77
buying the existing capacities. This would effectively mean a make (build) or buy decision of capital nature.
The decision criteria in such a situation would be the present value of the differential cash flows. These
differential cashflows would, therefore, be the limit on the premium which the acquirer would be willing to
pay. On the other hand, if the acquisition is motivated by financial considerations (specifically taxation and
asset-stripping), the expected financial gains would form the limit on the premium, over and above the price
of physical assets in the company. The cashflow from operations may not be the main consideration in such
situations. Similarly, a merger with financial restructuring as its objective will have to be valued mainly in
terms of financial gains. It would, however, not be easy to determine the level of financial gains because the
financial gains would be a function of the use to which these resources are put. Finally, the pricing of
behaviourally motivated acquisitions is not really guided by the financial considerations. Since the
acquisitions are not really the market driven transactions, a set of non-financial considerations will also affect
the price. The price could be affected by the number and the motives of other bidders. The value of a target
is effected not only by the motive of the acquiring company, but also by the target companys own objectives.
The motives of the target company could also be viewed as to be strategic, financial or behavioural. In
addition, if the target company is an unwilling dis-investor, the price of an acquisition may not have much to
do with the potential financial benefits.
STAMP DUTY ASPECTS OF MERGERS AND AMALGAMATIONS

The incidence of stamp duty is an important consideration in the planning of any merger. In fact, in some
cases, the whole form in which the merger is sought to take place is selected taking into account the savings
in stamp duty. The incidence of stamp duty, more particularly on transfer of immovable property is fairly high
to merit serious consideration. The fact that, in India, stamp duty is substantially levied by the States has
given considerable scope for savings in stamp duty.
Constitutional background on levy of stamp duty on Amalgamation and Mergers

Article 265
Article 265 of the Constitution prohibits levy or collection of tax except by authority of law.
Article 246, read with the Seventh Schedule of the Constitution provides legislative powers to be exercised
by the Parliament and the State Legislatures.
The Seventh Schedule consists of three viz., List I - Union List, List II - State List and List III - Concurrent
List. List I is the exclusive domain of the Parliament to make laws in relation to that matter and it becomes a
prohibited field for the State Legislature. List II is within the exclusive competence of the State Legislature
and then the Parliament is prohibited to make any law with regard to the same except in certain
circumstances. In List III, both Parliament and State Legislature can make laws subject to certain conditions.
Matters not mentioned in any of the three lists fall within the exclusive domain of the Parliament.
Article 372
All the laws in force immediately before the commencement of the Constitution continue to be in force until
altered or repealed or amended by a competent Legislature or other competent authority.
Accordingly, the Indian Stamp Act,1899 is continuing to this extent.
The relevant entries in the Seventh Schedule regarding stamp duty are as follows:
List I entry 91
91. Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading,
letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts.
78 PP-CRVI
List II entry 63
63. Rates of stamp duty in respect of documents other than those specified in the provisions of List I
with regard to stamp duty.
List III entry 44
44. Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates
of stamp duties.
In exercise of power conferred by Entry 63, List II the State Legislature can make amendment in the Indian
Stamp Act under article 372, in regard to the rates of stamp duty in respect of documents other than those
specified in provisions of List I.
Stamp duty is levied in India on almost all, except a few documents, by the States and hence the rate and
incidence of stamp in different states varies. The State Legislature has jurisdiction to levy stamp duty under
entry 44, List III of the Seventh Schedule of the Constitution of India and prescribe rates of stamp duty under
entry 63, List 11.
Under the provisions of the Companies Act, 1956 it has been decided that by sanctioning of amalgamation
scheme, the property including the liabilities are transferred as provided in sub-section (2) of section 394 of
the Companies Act and on that transfer instrument, stamp duty is levied.
Therefore, it cannot be said that the State legislature has no jurisdiction to levy such duty on an order of the
High Court sanctioning a scheme of compromise or arrangement under section 394 of the Companies Act,
1956. [Li taka Pharmaceuticals Ltd. and another v. State of Maharashtra and others ibid].
Stamp Duty Payable on a Tribunal Order Sanctioning Amalgamation
As section 232 of the Companies Act, 2013 is the corresponding section to the Section 394 of the
Companies Act, 1956 and for understanding the payment of Stamp duty on Tribunal Order Sanctioning
Amalgamation, it is necessary to take reference of the judicial pronouncement under the Companies Act,
1956, which is as under:
1. In amalgamation the undertaking comprising property, assets and liabilities, of one (or more)
company (amalgamating or transferor company) are absorbed by and transferred company merges
into or integrates with transferee company. The former loses its entity and is dissolved (without
winding up).
2. The transfer and vesting of transferor companys property, assets, etc. into transferee company
takes place by virtue of the High Courts order. [Section 394(2)]. Thus, the vesting of the property
occurs on the strength of the order of the High Court sanctioning the scheme of amalgamation,
without any further document or deed. Property includes every kind of property, rights and powers
of every description. [Section 394(4)(d)].
3. For the purpose of conveying to the transferee company the title to the immovable property of the
transferor company, necessary registration in the lands records in the concerned office of the State
in which the property is situated, will be done on the basis of the High Court order sanctioning the
amalgamation. If any stamp duty is payable under the Stamp Act of the State in which the property
is situated, it will be paid on the copy of the High Court order.
4. An order of the High Court under section 394 is founded and based on the compromise or
arrangement between the two companies for transferring assets and liabilities of the transferor
company to the transferee company and that order is an instrument as defined in Section 2(1) of the
Bombay Stamp Act which included every document by which any right or liability is transferred [Li
taka Pharmaceuticals Ltd. v. State of Maharashtra (1996) 22 CLA 154: AIR 1997 Bom 7].
5. Thus, an order of the High Court sanctioning a scheme of amalgamation under Section 394 of the
Companies Act is liable to stamp duty only in those states where the states stamp law provides.
In Hindustan Lever Ltd. v. State of Maharashtra (2003)117 Comp Cas SC 758 the Supreme Court
considered this issue. Tata Oil Mills Company Ltd (TOMCO) was merged with the Hindustan Lever
Ltd (HLL). The State imposed stamp duty on the order sanctioning the scheme of merger. The
demand was challenged by the company on two grounds that State Legislature is not competent to
impose stamp duty on the order of amalgamation passed by a court and such order of the court is
neither instrument nor document (transferring properties from transferor company to transferee
company) liable to stamp duty.
The Supreme Court dismissed the appeal of the company on following reasons:
Transfer of property has been defined to mean an act by which a living person conveys property, in
present or in future, to one or more living persons. Companies or associations or bodies of
individuals, whether incorporated or not, have been included amongst living persons. It clearly
brings out that a company can affect transfer of property. The word inter vivos in the context of
section 394 of the Companies Act would include, within its meaning, also a transfer between two
juristic persons or a transfer to which a juristic person is one of the parties. The company would be
a juristic person created artificially in the eyes of law capable of owning and transferring the
property. The method of transfer is provided in law. One of the methods prescribed is dissolution of
the transferee company along with all its assets and liabilities. Where any property passes by
conveyance, the transaction is said to be inter vivos as distinguished from a case of succession or
devise. The Supreme Court dismissed the appeal on following reasons.
The State Legislature would have the jurisdiction to levy stamp duty under entry 44 List III of the
Seventh Schedule of the constitution and prescribes rate of stamp duty under entry 63, List II. It
does not in any way impinge upon any entry in List I. Entry 44 of List III empowers the State
Legislature to prescribe rates of stamp duty in respect of documents other than those specified in
List I. By sanctioning a scheme of amalgamation, the property including the liabilities are transferred
as provided in Section 394 of the Companies Act and on that transfer instrument, stamp duty is
levied. Therefore, it cannot be said that the State Legislature has no jurisdiction to levy such duty.
Under the scheme of amalgamation, the whole or any part of the undertaking, properties or liability
of any company concerned in the scheme are to be transferred to the other company. The intended
transfer is a voluntary act of the contracting parties. The transfer is a voluntary act of the contracting
parties. The transfer has all trappings of a sale. While exercising its power in sanctioning a scheme
of arrangement, the court has to examine as to whether the provisions of the statute have been
complied with. Once the court finds that the parameters set out in section 394 of the Companies Act
have been met then the court would have no further jurisdiction to sit in appeal over the commercial
wisdom of the class of persons who with their eyes open give their approval, even if, in the view of
the court a better scheme could have been framed. Two broad principles underlying a scheme of
amalgamation are that the order passed by the court amalgamating the company is based on a
compromise or arrangement arrived at between the parties; and that the jurisdiction of the company
court while sanctioning the scheme is supervisory only. Both these principles indicate that there is
no adjudication by the court on merits as such.
The order of the court under sub-section (2) of section 391 has to be presented before the Registrar
80 PP-CRVI
of Companies within 30 days for registration and shall not have effect till a certified copy of the order
has been filed with the Registrar and the Registrar of Companies certifies that the transferor
company stands amalgamated with the transferee company along with all its assets and liabilities.
Thus, the amalgamation scheme sanctioned by the court would be an instrument within the
meaning of section 2(i) of the Bombay Stamp Act, 1958. By the said instrument the properties are
transferred from the transferor company to the transferee company, the basis of which is the
compromise or arrangement arrived at between the two companies. A document creating or
transferring a right is an instrument. An order effectuating the transfer is also a document.
6. The company will provide to the Collector of Stamps

application for adjudication of the High Court order for determination of stamp duty payable;
proof of the market value of equity shares of the transferor company (Stock Exchange quotation
or a certificate from Stock Exchange) as of the appointed day;
certificate from an approved valuer or valuation of the immovable property being transferred to
the transferee company.
7. The Collector thereafter will adjudicate the order and determine stamp duty.
8. The stamp duty will be paid in the manner prescribed under the Stamp Rules. The duty-paid Order
will be registered with the Sub-Registrar of Assurances where the lands and buildings are located.
Incidence of Levy of Stamp Duty
Stamp duty is levied on Instruments. Section 3 of the Bombay Stamp Act, 1958 specifies the following
essentials for the levy of stamp duty :
(1) There must be an instrument
(2) Such instrument is one of the instruments specified in Schedule I
(3) Such instrument must be executed.
(4) Such instrument must have either
(a) not having been previously executed by any person is executed in the state or
(b) having been executed outside the state, relates to any property situated in the State or any
matter or thing done or be done in the state and is received in the state.
Instrument
The term instrument is defined in Section 2(i) of the Bombay Stamp Act, 1958 as follows:
Instrument includes every document by which any right or liability is or purports to be created, transferred
limited extended, extinguished or recorded but does not include a bill of exchange, cheque, promissory note,
bill of lading, letter of credit, policy of insurance, transfer of shares, debentures, proxy and receipt.
An award is an instrument within the meaning of the Stamp Act and the same is required to be stamped as
was decided in the case Hindustan Steel Ltd. v. Dilip Construction Co., AIR 1969 SC 1238.
The scheme of amalgamation sanctioned by the court would be an instrument within the meaning of Section
2(1) where by the properties are transferred from the transferor company to the transferee company based
on compromise arrived at between the two companies. The state legislature would have the jurisdiction to
levy stamp duty under Entry 44, List II of the Seventh Schedule of the Constitution on the order of the court
sanctioning scheme of amalgamation vide the case Hindustan Lever v. State of Maharashtra, AIR 2004 at
pp. 335, 339.
This definition is an inclusive definition and includes any document which purports to transfer assets or
liabilities considered as an instrument.
Order of Court under Section 394 of Companies Act, 1956 - A Transfer
It was earlier held that when transfer takes place by virtue of a court order to a scheme of amalgamation,
stamp duty is leviable. By virtue of Section 2(g), the order of the Court ordering the transfer of assets and
liabilities of the transferor Company to the transferee Company is deemed to be a conveyance. This
definition of conveyance is given below:
As per Section 2(g) of the Bombay Stamp Act, 1958 Conveyance includes,
(i) a conveyance on sale,
(ii) every instrument,
(iii) every decree or final order of any Civil Court,
(iv) every order made by the High Court under Section 394 of the Companies Act, 1956 (I of 1956)
in respect of amalgamation of companies;
by which property, whether moveable or immovable, or any estate or interest in any property is transferred
to, or vested in, any other person, inter vivos, and which is not otherwise specifically provided for by
Schedule I;....
The amended definition of term conveyance under section 2(g) of the Bombay Stamp Act, 1958 (amended
in 1985) inter-alia includes every order made by the High Court under section 394 of the Companies Act,
1956 in respect of amalgamation of Companies by which property, whether moveable or immovable, or any
estate or interest in any property of transferor is transferred to, or vested in the transferee company.
Transfer of the property of a partnership firm to a limited company on its conversion was held to be treated
as a conveyance and, hence, chargeable to stamp duty, irrespective of the fact that the partners of the firm
were the shareholders of the Company [In re The Kandoli Tea Company 13 Cal 43; Foster v.
Commissioners, (1894) 1 QB 516].
The landmark decision of Bombay High Court in Li Taka Pharmaceuticals v. State of Maharashtra (1996) 8
SC 102 (Bom.) has serious implications for mergers covered not just by the Bombay Stamp Act, 1958 but
also mergers covered by Acts of other States. The following are the major conclusions of the Honourable
Court:
(1) An amalgamation under an order of Court under Section 394 of the Companies Act, 1956 is an
instrument under the Bombay Stamp Act.
(2) States are well within their jurisdiction when they levy stamp duty on instrument of amalgamation.
(3) Stamp duty would be levied not on the gross assets transferred but on the undertaking, when the
transfer is on a going concern basis, i.e. on the assets less liabilities. The value for this purpose
would thus be the value of shares allotted. This decision has been accepted in the Act and now
stamp duty is leviable on the value of shares allotted plus other consideration paid.
82 PP-CRVI
The Calcutta High Court in the case of Emami Biotech Ltd (2012) held that a Court order sanctioning a
scheme of amalgamation or demerger under section 391 to 394 of the Companies Act, 1956 is an instrument
and conveyance within the meaning of the Stamp Act applicable to the State of West Bengal and is
accordingly, subject to stamp duty.
This case is related to a scheme sanctioned by the Calcutta High Court in West Bengal.
Stamp Duty on Other Documents
Usually, in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending
on the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the
nature of the instrument and its contents.
No stamp duty is payable on an order issued by the Board for Industrial and Financial Reconstruction (BIFR),
sanctioning an amalgamation, apparently on the ground that such an order aims at rehabilitating business
and undertaking of a sick industrial company.
Amalgamation between Holding and Subsidiary Companies Exemption from payment of Stamp
Duty
The Central Government has exempted the payment of stamp duty on instrument evidencing transfer of
property between companies limited by shares as defined in the Indian Companies Act, 1913, in a case:
(i) where at least 90 per cent of the issued share capital of the transferee company is in the beneficial
ownership of the transferor company, or
(ii) where the transfer takes place between a parent company and a subsidiary company one of which
is the beneficial owner of not less than 90 per cent of the issued share capital of the other, or
(iii) where the transfer takes place between two subsidiary companies each of which not less than 90
per cent of the share capital is in the beneficial ownership of a common parent company :
Provided that in each case a certificate is obtained by the parties from the officer appointed in this
behalf by the local Government concerned that the conditions above prescribed are fulfilled.
Therefore, if property is transferred by way of order of the High Court in respect of the Scheme of
Arrangement/Amalgamation between companies which fulfill any of the above mentioned three conditions,
then no stamp duty would be levied provided a certificate certifying the relation between companies is
obtained from the officer appointed in this behalf by the local Government (generally this officer is the
Registrar of Companies).
However, stamp being a state subject, the above would only be applicable in those states where the State
Government follows the above stated notification of the Central Government otherwise stamp duty would be
applicable irrespective of the relations mentioned in the said notification.
W.e.f 15.12.2016, Section 232 of Companies Act, 2013 has been notified and the now the power to sanction
amalgamation shall vest with the Tribunal.
TAXATION ASPECTS OF MERGERS AND AMALGAMATIONS

The word amalgamation or merger is not defined anywhere in the Companies Act, 1956. However,
Section 2(1B) of the Income Tax Act, 1961 defines the term amalgamation as follows:
Amalgamation in relation to companies, means the merger of one or more companies with another
company or the merger of two or more companies to form one company (the company or companies which
so merge being referred to as the amalgamating company or companies and the company with which they
merge or which is formed as a result of the merger, as the amalgamated company), in such a manner that
(i) all the property of the amalgamating company or companies immediately before the amalgamation
becomes the property of the amalgamated company by virtue of the amalgamation;
(ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation
become the liabilities of the amalgamated company by virtue of the amalgamation;
(iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become
shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a
result of the acquisition of the property of one company by another company pursuant to the
purchase of such property by the other company or as a result of the distribution of such property to
the other company after the winding up of the first mentioned company.
Thus, for a merger to be qualified as an amalgamation for the purpose of the Income Tax Act, the above
three conditions have to be satisfied.
Carry forward and set off of accumulated loss and unabsorbed depreciation allowance
Under Section 72A of Income Tax Act, 1961, a special provision is made which relaxes the provision relating
to carrying forward and set off of accumulated business loss and unabsorbed depreciation allowance in
certain cases of amalgamation. Where there has been an amalgamation of a company owning an industrial
undertaking or a ship or a hotel with another company, or an amalgamation of a banking company referred to
in clause (c) of Section 5 of the Banking Regulations Act, 1949 with a specified bank, or one or more public
sector company or companies engaged in the business of operation of aircraft with one or more public sector
company or companies engaged in similar business, then, notwithstanding anything contained in any other
provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company
shall be deemed to be the loss or; as the case may be, allowance for depreciation of the amalgamated
company for the previous year in which the amalgamation was effected, and other provisions of this Act
relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly.
It is to be noted that as Unabsorbed losses of the amalgamating company are deemed to be the losses for
the previous year in which the amalgamation was effected, the amalgamated company will have the right to
carry forward the loss for a period of eight assessment years immediately succeeding the assessment year
relevant to the previous year in which the amalgamation was effected.
However, the above relaxations shall not be allowed in the assessment of the amalgamated company unless
(a) the amalgamated company

(i) has been engaged in the business in which the accumulated loss occurred or depreciation
remains unabsorbed, for three or more years;
(ii) has held continuously as on date of the amalgamation at least three fourth of the book value of
fixed assets held by it two years prior to the date of amalgamation;
(b) the amalgamated company

(i) holds continuously for a minimum of five years from the date of amalgamation at least three
84 PP-CRVI
fourth of the book value of fixed assets of the amalgamating company acquired in a scheme of
amalgamation;
(ii) continues the business of the amalgamating company for a minimum period of five years from
the date of amalgamation;
(iii) fulfills such other conditions as may be prescribed to ensure the revival of the business of the
amalgamating company or to ensure that the amalgamation is for genuine business purpose.
It further provides that in case where any of the above conditions are not complied with, the set off of loss or
allowance of depreciation made in any previous year in the hands of the amalgamated company shall be
deemed to be the income of amalgamated company chargeable to tax for the year in which such conditions
are not complied with.
For the purpose of this section, accumulated loss means so much of the loss of the predecessor firm or the
proprietary concern or the amalgamating company or demerged company, as the case may be, under the
head Profit and gains of business or profession (not being a loss sustained in a speculation business)
which such predecessor firm or the proprietary concern or the amalgamated company or demerged
company, would have been entitled to carry forward and set off under the provisions of Section 72 if the
reorganization of business or amalgamation or demerger had not taken place. Similarly unabsorbed
depreciation means so much of the allowance for depreciation of the predecessor firm or the proprietary
concern or the amalgamating company or demerged company, as the case may be, which remains to be
allowed and which would have been allowed to the predecessor firm or the proprietary concern or
amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the
reorganization of business or amalgamation or demerger had not taken place.
The following sub-section (6A) was inserted after sub-section (6) of section 72A by the Finance Act, 2010,
w.e.f. 1-4-2011:
(6A) Where there has been reorganisation of business whereby a private company or unlisted public
company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to
clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the
accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the
loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous
year in which business reorganisation was effected and other provisions of this Act relating to set off and
carry forward of loss and allowance for depreciation shall apply accordingly:
Provided that if any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied
with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor
limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to
tax in the year in which such conditions are not complied with.
Capital Gains Tax
Capital gains tax is leviable if there arises capital gain due to transfer of capital assets. The word transfer
under section 2(47) of the Act includes the sale, exchange or relinquishment of the asset or the
extinguishment of any rights therein or the compulsory acquisition thereof under any law or in a case where
the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried
on by him, such conversion or treatment or any transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance of a contract of the nature referred to in
Section 53A of the Transfer of Property Act, 1882 (4 of 1882) or any transaction (whether by way of
becoming a member of, or acquiring shares in, a co-operative society, company or other association of
persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the
effect of transferring or enabling the enjoyment of any immovable property.
Under section 47(vi) and (vii), transfer does not include any transfer in a scheme of amalgamation of a
capital asset by the amalgamating company to the amalgamated company if the latter is an Indian company.
From the assessment year 1993-94 any transfer of shares in an Indian company held by a foreign company
to another foreign company in pursuance of a scheme of amalgamation between the two foreign companies
will not be regarded as transfer for the purpose of levying tax on capital gains. This provision will apply only
if at least twenty five percent of the shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company and such transfer does not attract tax on capital gains in
the country in which the amalgamating company is incorporated.
Further, the term transfer also does not include any transfer by a shareholder in a scheme of amalgamation
of a capital asset being a share or the shares held by him in the amalgamating company if the transfer is
made in consideration of the allotment to him of any share or the shares in the amalgamated company and
the amalgamated company is an Indian company. Even in the absence of Section 47(vii) of the Act, a
shareholder is not liable to pay any capital gains tax since an amalgamation does not include exchange or
relinquishment of the assets. Amalgamation does not involve an exchange or relinquishment of shares by
amalgamating company as held in CIT v. Rasik Lal Manek Lal (1975) 95 ITR 656). However, no benefit will
be available under Section 47(vii) if the shareholders of amalgamating company are allotted something more
than share in the amalgamated company viz. bonds or debentures [CIT v. Gautam Sarabhai Trust (1988)
173 ITR 216 (Guj.)].
Amortisation of Preliminary Expenses
The benefit of amortisation of preliminary expenses under section 35D are ordinarily available only to the
assessee who incurred the expenditure. However, the benefit will not be lost in case the undertaking of an
Indian company which is entitled to the amortisation is transferred to another Indian company in a scheme of
amalgamation within the 10 years/5 years period of amortisation. In that event the deduction in respect of
previous year in which the amalgamation takes place and the following previous year within the 10 years/5
years period will be allowed to the amalgamated company and not to the amalgamating company.
Capital Expenditure on Scientific Research
In the case of an amalgamation if the amalgamating company transfers to the amalgamated company, which
is an Indian company, any asset representing capital expenditure on scientific research, provision of section
35 would apply to the amalgamated company as they would have applied to amalgamating company if the
latter had not transferred the asset.
Expenditure on Acquisition of Patent Right or Copyright
Where the assessee has purchased patent right or copyrights, he is entitled to a deduction under Section
35A for a period of 14 years in equal installments. The amalgamated company gets the right to claim the
unexpired installments as a deduction from its total income.
The deduction under this section is however available for expenditure incurred before 1st April, 1998 only.
Expenditure on Amalgamation
Section 35DD provides that where an assessee being an Indian company incurs any expenditure, on or after
86 PP-CRVI
the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an
undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure
for each of the five successive previous years beginning with the previous year in which the amalgamation or
demerger takes place.
Expenditure on know-how
Section 35AB(3) of the Income-tax Act provides that where there is a transfer of an undertaking under a
scheme of amalgamation or demerger and the amalgamating or the demerged company is entitled to a
deduction under this section, then the amalgamated or the resulting company, as the case may be, shall be
entitled to claim deduction under this section in respect of such undertaking to the same extent and in
respect of the residual period as it would have been allowable to the amalgamating company or the
demerged company, as the case may be, had such amalgamation or demerger not taken place.
The deduction under this section is however available for any lump sum consideration paid in any previous
year relevant to the assessment year commencing on or before 1.4.1998.
Expenditure for obtaining Licence to Operate Telecommunication Services (Section 35ABB)
The provisions of the section 35ABB of the Income Tax Act relating to deduction of expenditure, incurred for
obtaining licence to operate communication services shall, as far as may be, apply to the amalgamated
company as they would have applied to the amalgamating company if the latter had not transferred the
licence.
TAX ASPECTS ON SLUMP SALE
Section 180(1) of the Companies Act, 2013 empowers the Board of Directors of a company, after obtaining
the consent of the company by a special resolution to sell, lease or otherwise dispose off the whole or
substantially the whole of the undertaking(s) of a company.
Explanation-
(i) undertaking shall mean an undertaking in which the investment of the company exceeds twenty per cent.
of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which
generates twenty per cent of the total income of the company during the previous financial year;
(ii) the expression substantially the whole of the undertaking in any financial year shall mean twenty per
cent. or more of the value of the undertaking as per the audited balance sheet of the preceding financial year
The transaction in this case, is normally of either of the following type:

(a) Sale of a running concern.
(b) Sale of a concern which is being wound up.
(a) Sale of a Running Concern
This type of sale as a going concern provides for the continuation of the running of the undertaking without
any interruption. But there is always a problem of fixing a value in the case of a running concern for all
tangible and intangible assets including fixing a value for the infrastructure and other environmental facilities
available. In view of all this, the seller normally fixes a lump sum price called slump price.
The noun slump means a gross amount, a lump. Similarly, slump sum means a lump sum [Chambers
Twentieth Century Dictionary, 1983 Edn., p 1220). A slump sale or a slump transaction would, therefore,
mean a sale or a transaction which has a lump sum price for consideration.
(b) Sale of a concern which is being wound up
On the other hand a sale in the course of winding up, is nothing but a realisation sale aimed at collecting the
maximum price for distributing to the creditors and the balance to the contributories (the shareholders). By
the very nature of the transaction, this is a piecemeal sale and not a slump sale. In this case, there will be
liability to tax as per the various provisions of the Income Tax Act and the criteria which is applicable to a
slump sale is not applicable here.
Normally, any sale of a capital asset will give rise to a capital receipt and any profit derived may give rise to
capital gains in certain cases. This is true in the case of sale of an undertaking also.
In Doughty v. Commissioner of Taxes, the Privy Council laid down the following principles: The sale of a
whole concern engaged in production process, e.g. dairy farming or sheep rearing, does not give rise to a
revenue profit. The same might be said of a manufacturing business which is sold with the lease holds and
plant, even if there are added to the sale piece goods in stock and even if these piece goods form a very
substantial part of the aggregate sold. Where, however, business consists entirely in buying and selling, it is
difficult to distinguish for income tax purposes between an ordinary and realisation sale, the object in either
case being to dispose of the goods at a profit. The fact that the stock is sold out in one sale does not render
the profit obtained any different in kind from the profit obtained by a series of gradual and smaller sales. In
the case of such a realisation sale, if there is an item which can be traced as representing the stock-in-trade
sold, the profit obtained by the sale of the stock-in-trade, though it is in conjunction with the sale of the whole
concern, may be treated as taxable income. But where there is a sale of the whole concern and a transfer of
all the assets for a single unapportioned consideration, there cannot be said to be any revenue profit realised
on the sale of the stock-in-trade which is sold with all the other assets, although the business of the concern
may consist entirely in buying and selling.
The Supreme Court, based on the above decision held in the following two cases that the price received on
the sale of industrial undertaking is a capital receipt.
CIT v. West Coast Chemicals and Industries Ltd. 46 ITR 135 Where a slump price is paid and no portion
is attributable to the stock-in-trade, it may not be possible to say that there is a profit other than what results
from the appreciation of capital. The essence of the matter, however, is not that an extra amount has been
gained by the selling out or the exchange but whether it can fairly be said that there was a trading, from
which alone profit can arise in business.
CIT v. Mugneeram Bangur and Co. 57 ITR 299 In the case of a concern carrying on the business of
buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale,
and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The
mere fact that in the schedule, the price of land was stated does not lead to the conclusion that part of the
slump price is necessarily attributable to the land sold.
The same view was also reiterated by the Gujarat High Court in the following cases:
1. Sarabhai M. Chemicals Pvt. Ltd. v. P.M. Mittal, Competent Authority 126 ITR 1.
2. Artex Manufacturing Co. v. CIT 131 ITR 559.
At the same time, the Gujarat High Court also recognised that when an undertaking as a whole is sold as a
going concern there will be liability under the head Capital Gains. In 126 ITR 1 the Gujarat High Court stated
88 PP-CRVI
as follows:
It is well settled that business is property and the undertaking of a business is a capital asset of the owner of
the undertaking. When an undertaking as a whole is transferred as a going concern together with its goodwill
and all other assets, what is sold is not the individual itemised property but what is sold is the capital asset
consisting of the business of the undertaking and any tax that can be attracted to such a transaction for a
slump price at book value would be merely capital gains tax and nothing else but capital gains tax. Plant or
machinery of any fixture or furniture is not being sold as such. What is sold is the business of undertaking for
a slump price. If the capital asset, namely, the business of the undertaking, has a greater value than its
original cost of acquisition, then, capital gains may be attracted in the ordinary case of a sale of an
undertaking.
The Bombay High Court also recognised that there will be a capital gains tax when a sale of business as a
whole occurs (Refer Killic Nixon and Co. v. CIT 49 ITR 244).
LESSON ROUND UP
Financial aspects of mergers denotes financial benefits, i.e., increase in productivity, improved profitability
and enhanced paying capacity.
The incidence of stamp duty is an important consideration in the planning of any merger. In fact, in some
cases, the whole form in which the merger is sought to take place is selected taking into account the savings
in stamp duty. The incidence of stamp duty, more particularly on transfer of immovable property is fairly high
to merit serious consideration. The fact that, in India, stamp duty is substantially levied by the States has
given considerable scope for savings in stamp duty.
Usually, in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending
on the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the
nature of the instrument and its contents.
Under Section 72A, a special provision is made which relaxes the provision relating to carrying forward and
set off of accumulated business loss and unabsorbed depreciation allowance in certain cases of
amalgamation.
Capital gains tax is leviable if there arises capital gain due to transfer of capital assets.
SELF TEST QUESTIONS

1. Describe the financial benefits that would arise out of merger.
2. Explain the constitutional background of Indian Stamp Act, 1899 with respect to merger.
3. Is the order of Tribunal an instrument? Is stamp duty compulsory on the Tribunal order?
4. What are the tax advantages of mergers?
Lesson 6
Interest of the Small Investors
in Mergers
Minority interest and substantive law Shareholders have important rights which they can
Right of minority shareholders during exercise democratically at the general meeting. They
Mergers/Amalgamation have the power to control and supervise
management of the company. The term shareholder
Fair valuation as a means of safeguarding democracy relates to the different ways in which
minority interests shareholders can influence or even determine a
Provisions of the Companies Act, 2013 companys course of life. As regards mergers, the
minority shareholders interest may be protected
Judicial pronouncements
through rational valuation, proper disclosure etc.,
SEBI circular to protect the interest of minority After reading this lesson you will be able to
in Mergers. understand the regulatory aspects, case laws, recent
SEBI initiatives for the protection of minority
shareholders in mergers.
90 PP-CRVI
INTRODUCTION
The fundamental principle defining operation of shareholders democracy is that the rule of majority shall
prevail. However, it is also necessary to ensure that this power of the majority is placed within reasonable
bounds and does not result in oppression of the minority and mis-management of the company. The minority
interests, therefore, have to be given a voice to make their opinions known at the decision making levels.
The law should provide for such a mechanism. If necessary, in cases where minority has been unfairly
treated in violation of the law, the avenue to approach an appropriate body for protecting their interests and
those of the company should be provided for. The law must balance the need for effective decision making
on corporate matters on the basis of consensus without permitting persons in control of the company, i.e.,
the majority, to stifle action for redressal arising out of their own wrong doing.
Minority and Minority Interest under Companies Act
The term minority and minority interest are not clearly defined in the Companies Act, 2013 or Rules made
thereunder. However, in various provisions of the Act, members are given various collective statutory rights
which can be exercised even if they are not in majority (i.e. holding more than 50% of the
numbers/shares/voting rights). In another way, minority can be identified as those members who are not in
the control or management of the affairs of the company.
The following are some of the provisions where minority interest is recognised in the Act:
1. At present as per Section 244 of the Companies Act, 2013, in case of a company having share capital,
th
not less than 100 members or not less than 1/10 of total number of members, whichever is less or any
th
member or members holding not less than 1/10 of issued share capital have the right to apply to NCLT in
case of oppression and mismanagement. In case of companies not having share capital, not less than 1/5th
of total number of members have the right to apply.
2. To reflect the interest of the Minority, a 10% criteria in case of companies having share capital and a
20% criteria in the case of other companies is provided for in the Act. To help the Minority shareholders,
proviso to Section 244(1) of the Companies Act, 2013 empowers NCLT to allow application by shareholders
who are not otherwise eligible (i.e. holding less than 10%-20% as aforesaid). This really opens up possibility
of minority actions in deserving cases of oppression and mismanagement.
3. In Section 235 of the Act, the dissenting shareholders have been put at the limit of 10% of the value of the
shares.
4. Remedy against oppression is available in section 241 (a) of the Act. Oppression can be defined as
conducting the companys affairs in a manner prejudicial to public interest or in a manner oppressive to any
member or members. Remedy against Mis-management is available in Section 241(b) of the Act. Mis-
management can be defined as conducting the affairs of the company in a manner prejudicial to public
interest or in a manner prejudicial to the interests of the company.
5. In section 245 of the Act, provisions of Class action are laid down. Under these provisions, minority
members or depositors may apply to NCLT on behalf of the members or depositors, if they are of the opinion
that the management or conduct of the affairs of the Company are in a manner prejudicial to the interest of
the company or its members or depositors. In this provision also the threshold of minority action is in line
with Section 244 of the Act as noted above. Section 245 of the Act has broadened the scope for minority
actions in India in line with international practices.
Lesson 6 Interest of the Small Investors in Mergers 91
Rights of minority shareholders during mergers/amalgamations/ takeovers

th
1. As per existing provisions of the Act, approval of High Court (prior to 15 December, 2016) /Tribunal
th
(w.e.f. 15 December, 2016) is required in case of corporate restructuring (which, inter-alia, includes,
mergers/amalgamations etc.) by a company. The Scheme is also required to be approved by shareholders,
before it is filed with the NCLT. The scheme is circulated to all shareholders along with statutory notice (Form
No. CAA-2) of the Tribunal convened meetings and the explanatory statement u/s 230(3) of the Act read with
Rule 6 of Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 for approving the scheme
by shareholders.
2. As per proviso to Section 230(4) of the Act, it is provided that any objection to the compromise or
arrangement shall be made by persons holding 10% or more of the shareholding or having 5% or more of
the total outstanding debt as per latest audited financial statement. Thus, shareholders holding less than
10% or more of the shareholding are not entitled to object to the scheme as matter of statutory right.
There are other built in safeguards in the matter of approval of the scheme of compromise and
arrangements. The notice convening the meetings and also the notice of hearing of the petition (in Form
CAA-2) is required to be published in the newspaper as per the Companies (Compromise, Arrangement and
Amalgamation) Rules, 2016. The notice is also required to be given to various statutory authorities, sectoral
regulators etc.
Though there may not be any express protection to any dissenting minority shareholders to file their
objections as a matter of right on this issue, the Tribunal, while approving the scheme, may follow judicious
approach more particularly in view of the publication of the public notices about the proposed scheme in the
newspapers. Any interested person (including a minority shareholder) may appear before the NCLT. There
have been, however, occasions when shareholders holding miniscule shareholdings, have made frivolous
objections against the scheme, just with the objective of stalling or deferring the implementation of the
scheme. The courts have, on a number of occasions, overruled their objections. In view of this, proviso to
Section 230(4) of the Act has put some limit for the objectors.
3. In case of Takeovers, as per SEBI (Substantial Acquisition of Shares and Takeover) Regulations, SEBI
has powers to appoint investigating officer to undertake investigation, in case complaints are received from
the investors, intermediaries or any other person on any matter having a bearing on the allegations of
substantial acquisition of shares and takeovers. SEBI may also carry out such investigation suo moto upon
its own knowledge or information about any breach of these regulations. Under section 235 of the Act, 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. For this purpose, there is no threshold applicable i.e. even a single
dissentient shareholding holding one share may also approach Tribunal. In such case, further acquisition of
shares by the transferee company will be subject to the outcome of the decision of the NCLT.
Legal provisions of Companies Act, 2013 with respect to Minority interest in Mergers/ Amalgamation
etc.
Sections 230 to 240 (except Section 234 which is not yet notified) of The Companies Act, 2013 read with the
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 guide the legal procedure for
corporate strategies, including mergers, amalgamations and reconstructions.
Sections 230 to 232 inter-alia give the Court the power to sanction, enforce and supervise a compromise or
arrangement between a company and its creditors/members subject to certain conditions. These include
92 PP-CRVI
providing for the availability of information required by creditors and members of the concerned company
when acceding to such an arrangement and facilitating the reconstruction and amalgamation of companies,
by making an appropriate application to the Court.
Section 235 gives the right to acquire the shares of dissenting shareholders from the scheme or contract,
which has been approved by the majority (i.e. members holding 90% or more of the value of shares whose
transfer is involved).
As per Section 236(1) of the Act, any person who acquires 90% or more of the issued equity shares of the
company shall notify to the company of their intention to buy the remaining equity shares. The acquirer as
described under sub section (1) shall offer minority shareholders of the company for buying equity shares
held by them at a price determined on basis of valuation by registered valuer thus providing compulsory exit
opportunity to the minority shareholders.
Section 237 deals with the powers of the Central Government to provide for an amalgamation of companies
in the national interest.
In any scheme of amalgamation, both the amalgamating company and the amalgamated company are
required to comply with the requirements specified in Sections 230 to 232 and Rules made thereunder and
submit the details of all the formalities for consideration of the Tribunal.
Protection of minority Interest
Section 232(3)(e) authorises the Tribunal to make provision for any person who dissent from the scheme.
Thus, the Tribunal has to play a very vital role. It is not only a supervisory role but also a pragmatic role
which requires the forming of an independent and informed judgement as regards the feasibility or proper
working of the scheme and making suitable modifications in the scheme and issuing appropriate directions
with that end in view [Mafatlal Industries Ltd. In re. (1995) 84 Comp. Cas. 230 (Guj.)].
The Tribunal considers Minority interest while approving the scheme of merger
As per existing provisions of the Act, approval of Tribunal is required in case of corporate restructuring
(which, inter-alia, includes, mergers/amalgamations etc.) by a company. The Scheme is also required to be
approved by shareholders, before it is filed with the Tribunal. The scheme is circulated to all shareholders
along with statutory notice of the court convened meeting and the explanatory statement u/s 230(3) read with
Rule 6 of The Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 of the Act for
approving the scheme by shareholders
The notice of hearing of petition (in form CAA-2) is also required to be published in the newspaper. As per
proviso to Section 230(4) of the Act, members holding 10% or more of the shareholding are entitle to file their
objection before NCLT as a matter of right.
Any interested person (including a minority shareholder) may appear before the Tribunal. There have been,
however, occasions when shareholders holding miniscule shareholdings, have made frivolous objections
against the scheme, just with the objective of stalling or deferring the implementation of the scheme. The
courts have, on a number of occasions, overruled their objections.
Some Judicial Pronouncements

There have been occasions when the minority shareholders have raised objections and have succeeded in
preventing the implementation of a scheme of arrangement. A lone minority shareholder of Tainwala
Lesson 6 Interest of the Small Investors in Mergers 93
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.
Frivolous objections by Minority shareholders are not entertained by Court
There have however been some instances when shareholders holding a small number of shares, have made
frivolous objections against the scheme, just with the objective of deferring the implementation of the
scheme. The courts have, on a number of occasions, overruled their objections. But Companies had to bear
the consequences in the form of time and cost over-runs.
In case of Parke-Davis India 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.
In case of Tomco with HLL Merger
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.
Majority approval cannot deprive minority from raising objections.
Approval of majority of shareholders is not an automatic rejection of objections of minority shareholders. The
court has to apply its mind to dissent or objections raised by minority shareholders. The majority view will
prevail if there is nothing cogent or valid In the objections (In case of Consolidated Coffee Limited(1999))
Fair and reasonable Scheme made in good faith
Any scheme which is fair and reasonable and made in good faith will be sanctioned if it could reasonably be
supported by sensible people to be for the benefit to each class of the members or creditors concerned. In
Sussex Brick Co. Ltd., Re, (1960) 1 All ER 772 : (1960) 30 Com Cases 536 (Ch D) it was held, inter alia, that
although it might be possible to find faults in a scheme that would not be sufficient ground to reject it. It was
further held that in order to merit rejection, a scheme must be obviously unfair, patently unfair, unfair to the
meanest intelligence. It cannot be said that no scheme can be effective to bind a dissenting shareholder
unless it complies with the basic requirements to the extent of 100 per cent. It is the consistent view of the
Courts that no scheme can be said to be fool-proof and it is possible to find faults in a particular scheme but
that by itself is not enough to warrant a dismissal of the petition for sanction of the scheme. If the court is
satisfied that the scheme is fair and reasonable and in the interests of the general body of shareholders, the
court will not make any provision in favour of the dissentients. For such a provision is not a sine qua non to
sanctioning a fair and reasonable scheme, unless any special case is made out which warrants the exercise
94 PP-CRVI
of court's discretion in favour of the dissentients. Re, Kami Cement & Industrial Co. Ltd., (1937) 7 Com
Cases 348, 364-65 (Bom).
The Courts have gone further to say that a scheme must be held to be unfair to the meanest intelligence
before it can be rejected. It must be affirmatively proved to the satisfaction of the Court that the scheme is
unfair before the scheme can be rejected by the Court. English, Scottish & Australian Chartered Bank, Re,
(1893) 3 Chancery 385.
A reading of Section 230 makes it clear at once that the Tribunal which is called upon to sanction a scheme
has not merely to go by the ipse dixit* of the majority of the shareholders or creditors or their respective
classes who might have voted in favour of the scheme by requisite majority but the Tribunal has to consider
the pros and cons of the scheme with a view to finding out whether the scheme is fair, just and reasonable
and is not contrary to any provisions of law and it does not violate any public policy. This is implicit in the very
concept of compromise or arrangement which is required to receive the imprimatur of a court of law. No court
of law would ever countenance any scheme of compromise or arrangement arrived at between the parties
and which might be supported by the requisite majority if the tribunal finds that it is an unconscionable or an
illegal scheme or is otherwise unfair or unjust to the class of shareholders or creditors for whom it is meant. It
is trite to say that once the scheme gets sanctioned by the Tribunal, it would bind even the dissenting
minority shareholders or creditors. Therefore, the fairness of the scheme qua them also has to be kept in
view by the Tribunal while putting its seal of approval on the concerned scheme. [Miheer H. Mafatlal v.
Mafatlal Industries Ltd., (1996) 87 Com Cases 792 at 812 (SC)]
LESSON ROUNDUP
At present, in case of a company having share capital, not less than 100 members or not less than 1/10th of
total number of members, whichever is less or any member or members holding not less than 1/10th of
issued share capital have the right to apply to CLB/NCLT in case of oppression and mismanagement.
Section 232 (3)(e) authorises the tribunal to make provision for those who dissent from the scheme.
As per proviso to Section 230(4) of the Act, objection to compromise or arrangement shall be made only by
person holding 10% or more of the shareholding or having 5% or more of the total outstanding debt as per
the latest audited financial statement.
There have been occasions when the minority shareholders have raised objections and have succeeded in
preventing the implementation of a scheme of arrangement.
SELF TEST QUESTIONS

1. Write a brief regulatory background about protection of minority interest?
2. Describe the success of minority shareholders in merger decision with case laws.
* ipse dixit means an unsupported statement.

Lesson 7
Amalgamation of Banking and
Government Companies
Amalgamation of Banking Companies- Mergers and Acquisitions (M&As are the commonly
resorted to mode of business consolidation used by
Introduction
corporates to maintain their market share and keep
Directions issued by Reserve Bank of India for themselves afloat in a competing environment. Mergers and
Acquisitions as well as Demergers in the normal corporate
amalgamation of Private sector banks sector amidst listed companies and unlisted companies are
quite frequent and no study of corporate restructuring
Amalgamation of Non Banking Financial process could be complete without understanding of the
Company (NBFC) with Banking Company complex process involved in them. Banking sector is also a
vibrant part of the economy. As of now, the Reserve Bank
Change in control of Non Banking Financial of India has proposed that licences for commercial banks
Companies by transfer of shares and would be made available on tap. We are also seeing new
types of institutions like payment banks, small commercial
acquisition banks and local area banks. During the year 2015-16 new
licences for small commercial banks and payment banks
Procedure for amalgamation of Government were issued. When the different types of financial
Companies. intermediaries would be in play, the natural course of
restructuring of such institutions would also be happening.
Procedures for merger and amalgamation of banks are
subject to the guidelines made by the sectoral regulator, viz,
Reserve Bank of India. The Reserve Bank of India is
empowered to approve amalgamation of banks under
section 44A of the Banking Regulation Act, 1949. The
master direction issued by the Reserve Banks covers the
procedure for amalgamation of Banks inter-se and also for
merger of non banking financial companies with a banking
company.
Section 237 of the Companies Act, 2013 deals with the
Power of Central Government to provide for amalgamation
of companies in public interest. This section corresponds to
the section 396 of the Companies Act, 1956. This section
has been used sparingly in the past and it is subject to the
satisfaction of the Central Government that in public interest
two or more companies should amalgamate into a single
entity. During the year 2011, by a circular the Ministry of
Corporate Affairs informed that in appropriate cases, the
simpler route available under section 396 (now
corresponding to new section 237) shall be utilised for
amalgamation of Government Companies.
A study of the chapter will enable a clear understanding of
the relevant provisions covering the above topics.
96 PP-CRVI
AMALGAMATION OF BANKING COMPANIES
Background
The Banking Regulation Act, 1949 is the important legislation with regard to licensing of commercial banks,
their operation, supervision and restructuring and winding up. As per this Act, the provisions of applicable
company legislation would apply to the commercial banks which are incorporated as companies to the extent
the same not superseded in the Banking Regulation Act, 1949 and the rules and regulations framed
thereunder.
Section 5(c) of the Banking Regulation Act, 1949 defines a banking company as any company which
transacts the business of banking in India. The term banking too has been given the definition in the said
Act vide section 5(i)(b) which states that banking means the accepting, for the purpose of lending or
investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by
cheque, draft, order or otherwise.
In the Companies Act, 2013, vide sub-section (9) of Section 2, the term Banking Company has been
defined. It states that the terms banking company means a banking company as defined in clause (c) of
section 5 of the Banking Regulation Act, 1949.
Mergers implemented since the year 2000
Year Transferor Bank Transferee Bank
2001 Bank of Madura ICICI Bank Limited
2002 Benares State Bank Limited Bank of Baroda
2003 Bank of Muscat Centurion Bank of Punjab Ltd
2004 Global Trust Bank Limited Oriental Bank of Commerce
2004 Nedungadi Bank Limited Punjab National Bank
2005 Bank of Punjab Limited Centurion Bank of Punjab Ltd
2006 Lord Krishna Bank Ltd. Centurion Bank of Punjab Ltd.
2006 United Western Bank Limited IDBI Bank Limited
2007 The Sangli Bank Limited ICICI Bank Limited
2008 State Bank of Saurashtra State Bank of India
2009 Centurion Bank of Punjab HDFC Bank Limited
2010 Bank of Rajasthan ICICI Bank Limited
2015 ING Vysya Bank Limited Kotak Mahindra Bank Limited
As of January 2017, a merger of the associate banks of State Bank of India (viz. State Bank of Bikaner and
Jaipur, State Bank of Mysore and the State Bank of Indore) and the Bharatiya Mahila Bank Ltd. with the
State Bank of India is in process. It would be noted that merger/amalgamation of banks and also mergers of
Lesson 7 Amalgamation of Banking and Government Companies 97
Non Banking financial companies with banking companies is a matter of commercial expediency. In the past,
when the banking sector was predominantly controlled by state ownership, mergers were not witnessed
except for the orders of moratorium upon some small and unhealthy private sector commercial banks. There
was hardly any restructuring of banks. Now with different categories of banks coming up like payment banks,
small commercial banks and local area banks, one would see frequent restructuring of banks.
Master Direction issued by the Reserve Bank of India for amalgamation of Banking
company inter se and also for amalgamation of Non Banking Financial Company with a
Banking company
The Reserve Bank of India issues master circulars and directions every year with a view to consolidate their
instructions from time to time. The Reserve Bank of India announces various policy decisions by circulars
and also wherever legal prescription is required, the same is issued by way of directions and notifications.
Since there are frequent amendments to such directions and notifications, the Reserve Bank issues master
circulars once a year on various topics and also has now started issuing master directions consolidating
various instructions with regard to the topics so that anyone interested in them may access the latest master
circulars/directions and only check if any further circular have been issued subsequent to the date of such
circulars/directions. One need not go back to search older records though the same are all available in the
website of the Reserve Bank of India. One such master direction bearing no. RBI/DBR/2015-16/22 dated the
st
21 April, 2016 is the latest one with regard to amalgamation of private sector banks and the salient features
of the same are given in the next paragraph. This direction repeals the earlier guidelines contained in
th
DBOD.No.PSBS.BC.89/16.13.100/2004-05 dated the 11 May, 2005 on guidelines for merger/amalgamation
of Private sector banks. This master direction would apply to amalgamation between two banking
Companies and also for amalgamation of a Non Banking Financial Company (NBFC) with a Banking
Company. The principles contained in this direction would also be applicable for public sector banks. For
amalgamation of two banking companies, the authority solely vests with the Reserve Bank of India in terms
of section 44A of the Banking Regulation Act, 1949. In case a NBFC is to be merged with a banking
Company, the provisions applicable under Companies Act, 2013 sections 232-234 would apply. The scheme
of amalgamation would have to be approved by the National Company Law Tribunal. Wherever NCLT is
involved, the normal provisions under Companies Act, 2013 and the rules thereunder would apply.
AMALGAMATION BETWEEN TWO BANKING COMPANIES

In terms of paragraph 6 of the said master direction, the decision of amalgamation is required to be approved
by the Board of the Bank concerned with a two thirds majority and not just those present and voting. This
means that if the Board has say 12 directors, then 8 directors must be present and vote in favour of the
amalgamation. The Banks shall also have to bear in mind the deed of covenants as recommended by the
Ganguly Working Group on Corporate Governance. The draft scheme of amalgamation is also required to be
approved by the Board of Directors with the same majority.
As stated in paragraph 7, in terms of section 44A of the Banking Regulation Act, 1949, the draft scheme of
amalgamation shall be approved by the shareholders of each banking company by a resolution passed by a
majority in number representing two thirds in value of the shareholders, present in person or by proxy at a
meeting called for the purpose. The ceiling on voting rights under section 12(2) i.e. ten per cent of maximum
vote irrespective of holding by the shareholder would apply in the context of section 44A when there is a poll
to determine whether the resolution has been passed by requisite majority.
As per paragraph 9, the Boards should give particular attention to the following:
The values at which the assets, liabilities and the reserves of the amalgamated company are
proposed to be incorporated into the books of the amalgamating company and whether such
98 PP-CRVI
incorporation will result in a revaluation of assets upwards or credit being taken for unrealized gains.
Whether due diligence exercise has been undertaken in respect of the amalgamated company.
The nature of the consideration, which, the amalgamating company will pay to the shareholders of
the amalgamated company.
Whether the swap ratio has been determined by independent valuers having required competence
and experience and whether in the opinion of the Board such swap ratio is fair and proper.
The shareholding pattern in the two banking companies and whether as a result of the
amalgamation and the swap ratio, the shareholding of any individual, entity or group in the
amalgamating company will be violative of the Reserve Bank guidelines or require its prior approval.
The impact of the amalgamation on the profitability and the capital adequacy ratio of the
amalgamating company.
The changes which are proposed to be made in the composition of the Board of Directors of the
amalgamating banking company, consequent upon the amalgamation and whether the resultant
composition of the Board will be in conformity with the Reserve Bank guidelines in that behalf.
As per paragraph 11, while submitting the application the companies should submit to the Reserve Bank the
information and documents as contained in the Schedule to the Directions. The information/documents to be
submitted are as under:
1. Draft scheme of amalgamation as placed before the shareholders of the respective banking
companies for approval.
2. Copies of the notices of every meeting of the shareholders called for such approval together with
newspaper cuttings evidencing that notices of the meetings were published in newspapers at least
once a week for three consecutive weeks in two newspapers circulating in the locality or localities in
which the registered offices of the banking companies are situated and that one of the newspapers
was in a language commonly understood in the locality or localities.
3. Certificates signed by each of the officers presiding at the meeting of shareholders certifying the
following:
(a) a copy of the resolution passed at the meeting;
(b) the number of shareholders present at the meeting in person or by proxy;
(c) the number of shareholders who voted in favour of the resolution and the aggregate number of
shares held by them;
(d) the number of shareholders who voted against the resolution and the aggregate number of
(e) the number of shareholders whose votes were declared as invalid and the aggregate number of
(f) the names and ledger folios of the shareholders who voted against the resolution and the
number of shares held by each such shareholder;
(g) the names and designations of the scrutineers appointed for counting the votes at the meeting
together with certificates from such scrutineers confirming the information given in items (c) to
(f) above;
(h) the name of shareholders who have given notice in writing to the Presiding Officer that they
dissented from the scheme of amalgamation together with the number of shares held by each of
them.
4. Certificates from the concerned officers of the banking companies giving names of shareholders
who have given notice in writing at or prior to the meeting to the banking company that they
dissented from the scheme of amalgamation together with the number of shares held by each of
them.
5. The names, addresses and occupations of the Directors of the amalgamating banking company as
proposed to be reconstituted after the amalgamation and indicating how the composition will be in
compliance with Reserve Bank regulations.
6. The details of the proposed Chief Executive Officer of the amalgamating banking company after the
amalgamation.
7. Copies of the reports of the valuers appointed for the determination of the swap ratios.
8. All relevant information for the consideration of the scheme of amalgamation including the following
particulars:
(a) annual reports of each of the banking companies for each of the three completed financial years
immediately preceding the Appointed date for amalgamation;
(b) financial results, if any, published by each of the banking companies for any period subsequent
to the financial statements prepared for the financial year immediately preceding the Appointed
Date;
(c) pro-forma combined balance sheet of the amalgamating company as it will appear as of the
Appointed Date consequent on the amalgamation;
(d) computation based on such proforma balance sheet of the following:
(i) Tier I Capital
(ii) Tier II Capital
(iii) Risk-weighted assets
(iv) Gross and Net NPAs
(v) Ratio of Tier I Capital to Risk Weighted Assets
(vi) Ratio of Tier II Capital to Risk Weighted Assets
(vii) Ratio of Total Capital to Risk Weighted Assets
(viii) Tier I Capital to Total Assets
(ix) Ratio of Gross and Net NPAs to Advances
9. Information certified by the valuers as is considered relevant to understand the proposed swap ratio
including in particular:
(a) the methods of valuation used by the valuers;
(b) the information and documents on which the valuers have relied and the extent of the
verification, if any, made by the valuers to test the accuracy of such information;
(c) if the valuers have relied upon projected information, the names and designations of the
persons who have provided such information and the extent of verification, if any, made by the
valuers in relation to such information;
(d) details of the projected information on which the valuers have relied;
(e) detailed computations of the swap ratios containing explanations for adjustments made to the
published financial information for the purposes of the valuation;
100 PP-CRVI
(f) if these adjustments are made based on valuations made by third parties, details regarding the
persons who have made such valuations;
(g) capitalisation factor and weighted average cost of capital (WACC) used for the purposes of the
valuation and justification for the same;
(h) if market values of shares have been considered in the computation of the swap ratio, the
market values considered and the source from which such values have been derived;
(i) if there are more than one valuer, whether each of the valuers have recommended a different
swap ratio and if so, the above details should be given separately in respect of each valuer and
it may be indicated how the final swap ratio is arrived at.
10. Such other information and explanations as the Reserve Bank may require.
Entitlement of dissenting Shareholders
In terms of paragraph 12 of the Directions, a dissenting shareholder is entitled in the event of the scheme
being sanctioned by the Reserve Bank, 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 when sanctioning the scheme and such determination by the Reserve Bank 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 to determine such value, the amalgamated banking company should submit the
following:-
(a) A report on the valuation of the share of the 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 amalgamated company are quoted on the stock exchange:-
(i) Details of the monthly high and low of the quotation 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 explanations as the Reserve Bank may require.
Approval by Reserve Bank of India

If the scheme of amalgamation is approved by the requisite majority of shareholders in accordance
with the provisions of this section, it shall be submitted to the RBI (Reserve Bank of India) for its
sanction [section 44A(4)].
The RBI may sanction a scheme by an order in writing [section 44A(4)].
A scheme sanctioned by the RBI shall be binding on the banking companies concerned and also on
all the shareholders thereof [section 44A(4)].
An order sanctioning a Scheme of Amalgamation, passed by the RBI under section 44A(4) shall be
conclusive evidence that all the requirements of this section relating to amalgamation have been
complied with [section 44A(6C)].
A copy of the said order certified in writing by an officer of the RBI to be a true copy of such order
and a copy of the scheme certified in the like manner to be a true copy thereof shall, in all legal
proceedings (whether in appeal or otherwise) be admitted as evidence to the same extent as the
original order and the original scheme [section 44A(6C)].
Transfer of property
On the sanctioning of a scheme of amalgamation by the RBI, the property of the amalgamated
banking company, i.e. the transferor company, shall, by virtue of the order of sanction, be
transferred to and vest in the transferee company. No other or further document will be necessary
for effecting the transfer and vesting of the property from the transferor company to the transferee
company The borrowal accounts in the transferor banking company would be in tact transferred to
the transferee banking company. [section 44A(6)].
Similarly, the liabilities of the transferor company shall, by virtue of the said order, be transferred to,
and become the liabilities of the transferee company [section 44A(6)]. The depositors of the
transferor bank shall be entitled to get the balances lying in their account from the transferee bank
branches.
Dissolution of transferor company

Where a scheme of amalgamation is sanctioned by the RBI, the RBI may, by a further order in
writing, direct that on the date specified in the order, the amalgamated banking company i.e., the
transferor company, shall stand dissolved and such direction shall take effect notwithstanding
anything to the contrary contained in any other law [section 44A(6A)].
A copy of the order directing dissolution of the amalgamated banking company shall be forwarded
by the RBI to the office of the Registrar of companies at which it has been registered. On receipt of
such order, the Registrar shall strike off the name of the company. [section 44A(6B)]
In terms of section 44A(7), provisions of section 44A would not affect the power of the Central Government
to provide for amalgamation of two or more banking companies under section 396 of the Companies Act,
1956. In the Companies Act, 2013, the corresponding section is section 237. We have yet to see the use of
section 237 of the new Act or section 396 of the previous act for merger of banking companies.
AMALGAMATION OF A NON BANKING FINANCIAL COMPANY WITH A BANKING COMPANY

In the past, some of the Non Banking Financial Companies have been merged with the commercial banks
with the approval Reserve Bank of India and further approval of the High Courts. The erstwhile Industrial
Credit and Investment Corporation of India Limited which was one of the Development Financial Institutions
merged with ICICI Bank Limited. Now since as per the Companies Act, 2013, the jurisdiction has shifted
from High Courts to the National Company Law Tribunal, the consequent approval of the merger of NBFC
with a Banking Company would be obtained from the National Company Law Tribunal in terms of Companies
(Compromises, Arrangements and Amalgamation) Rules, 2016.
As per paragraphs 15 and 16 of the master direction, while according approval to the scheme, the Board of
the Banking Company shall give consideration to the matters listed in paragraph 9 referred to above. In
addition, the Board of the Banking Company shall examine whether
(a) the NBFC has violated/is likely to violate any of the RBI/SEBI norms and if so, shall ensure that
these norms are complied with before the scheme of amalgamation is approved;
(b) The NBFC has complied with KYC (Know your customer) norms for all the accounts, which will
become accounts of the banking company after amalgamation;
102 PP-CRVI
(c) If the NBFC has availed of credit facilities from banks/FIs, whether the loan agreements mandate
the NBFC to seek consent of the bank/FI concerned for the proposed merger/amalgamation.
As per paragraph 17 of the master direction, to enable the Reserve Bank of India to consider the application
for approval, the banking company shall furnish to the Reserve Bank of India, information as specified in the
schedule to the direction (except certificate in respect of names of shareholders who gave notice in writing at
or prior to the meeting to the NBFC that they dissented from the scheme of amalgamation) and also the
information and documents relating to the valuation along with its computation and the quoted price details.
The aforesaid direction and its terms will also apply in respect of amalgamation of a banking company with a
Non Banking Financial Company.
PRIOR APPROVAL OF RBI IN CASES OF ACQUISITION OR TRANSFER OF CONTROL OF

DEPOSIT TAKING NBFCs
As per, Non-Banking Financial Companies (Deposit Accepting) (Approval of Acquisition or Transfer of
Control) Directions, 2009 (As amended by Notification No. DNBS.(PD) 275/GM(AM)-2014 dated May 26,
2014), any takeover or acquisition of control of a deposit taking NBFC, whether by acquisition of shares or
otherwise, or any merger/amalgamation of a deposit taking NBFC with another entity, or any
merger/amalgamation of an entity with a deposit taking NBFC, shall require prior written approval of Reserve
Bank of India. The Reserve Bank of India may, if it considers necessary for avoiding any hardship or for any
other just and sufficient reason, exempt any NBFC or class of NBFCs, from all or any of the provisions of
these Directions either generally or for any specified period, subject to such conditions as the Reserve Bank
of India may impose. It is also clarified that approval shall be taken before approaching the Court or the
National Company Law Tribunal (after Companies Act, 2013) in the following situations:
(i) any takeover or acquisition of control of an NBFC, whether by acquisition of shares or otherwise;
(ii) any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity
with an NBFC that would give the acquirer / another entity control of the NBFC;
(iii) any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity
with an NBFC which would result in acquisition/transfer of shareholding in excess of 10 percent of
the paid up capital of the NBFC.
PRIOR APPROVAL OF THE RESERVE BANK OF INDIA FOR ACQUISITION AND CHANGE IN
CONTROL OF MANAGEMENT OF NON BANKING FINANCIAL COMPANY
Whenever, there is a change in management of any Non Banking Financial Company (Core Investment
Company, Deposit Accepting Non Banking Financial Company, Non Deposit Accepting Financial Company)
by transfer of shares or change in control of management of Non Banking Financial Company, the prior
approval for change in management shall be obtained from the Reserve Bank of India. In other words, any
restructuring proposal of Non Banking Financial Companies requires the clearance of the Reserve Bank of
India in terms of the directions/guidelines/circulars issued by the Reserve Bank of India. Change in control
can arise by a change in the shareholding of the companies which hold shares in the Non Banking Financial
Companies. Whenever there is change in the shareholding pattern of ultimate holding company, in effect the
control of Non Banking Financial Company would also change and thus the approval of the Reserve Bank of
India is necessary.
In cases of Systemically Important Core Investment Companies, directions/guidelines to the above effect
th
could be found in chapter VI of Section III of the Master direction dated the 25 August, 2016. The following
are the instances provided in the said master direction:

(a) any takeover or acquisition of control of CIC, which may or may not result in change of
management;
(b) any change in the shareholding of CIC, including progressive increases over time, which results in
acquisition / transfer of shareholding of 26 per cent or more of the paid up equity capital of the CIC.
Provided that, prior approval shall not be required in case of any shareholding going beyond 26 per
cent due to buyback of shares / reduction in capital where it has approval of a competent Court. The
same is to be reported to the Bank not later than one month from its occurrence;
(c) any change in the management of the CIC which results in change in more than 30 per cent of the
directors, excluding independent directors.
Provided that, prior approval shall not be required in case of directors who get re-elected on retirement by
rotation.
st
Similar guidelines are also provided in the master direction dated the 1 September, 2016 in chapter IX,
Section III, paragraph 59 applicable to the non systemically important non deposit taking Non Banking
Financial Companies also. In cases of systemically important non deposit taking Non Banking Financial
Companies, instructions to similar effect are contained in Chapter X, Section III vide paragraph 64 in the
st
master direction dated the 1 September, 2016.
PROCEDURE FOR MERGER AND AMALGAMATION RELATED TO GOVERNMENT

COMPANIES (vide MCA circular dated 20.04.2011 in the context of Section 233 of the
Companies Act, 2013)
The Ministry of Corporate Affairs (MCA) has been dealing with the amalgamation of Government Companies
in the Public Interest under section 396 of the Companies Act, 1956 by following the procedures prescribed
under Companies (Court) Rules, 1959 which are applicable to amalgamation under Sections 391-394 of the
th
Companies Act, 1956. The Government announced vide circular dated the 20 April 2011 Without prejudice
to the generality of the circular that it has been decided that, in appropriate cases, simpler procedures shall
be adopted for the amalgamation of Government Companies under section 396 of the Companies Act, 1956.
However, in the new Companies Act of 2013, the same provisions are contained in section 233. This section
has been implemented with effect from 15.12.2016 and the relevant rules are found in Rule 25 of the
Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. The Government has not
announced any fresh policy with regard to following the procedure of simplified merger utilizing the provision
of section 237 of the Companies Act, 2013. However, it is expected that the Government will follow the same
procedure for merger / amalgamation of Government Companies as announced earlier as per circular dated
20.4.2011 and the salient features and conditions of the scheme for amalgamation of Government
Companies are given below:-
(1) (a) Every Central Government Company which is applying to the Central Government for
amalgamation with any other Government Company or Companies under the simplified
prescribed procedure, shall obtain approval of the Cabinet i.e. Union Council of Ministers to the
effect that the proposed amalgamation is essential in the public interest.
(b) In the case of State Government Companies, the approval of the State Council of Ministers
would be required.
(c) Where both Central and State Government Companies are involved, approval of both State
Cabinet(s) and Central Cabinet shall be necessary.
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(2) (i) A Government Company may, by a resolution passed at its general meeting decide to
amalgamate with any other Government Company, which agrees to such transfer by a
resolution passed at its general meeting;
(ii) Any two or more Government Companies may, by a resolution passed at any general meetings
of its Members, decide to amalgamate and with a new Government Company.
(3) Every resolution of a Government Company under this section shall be passed at its general
meeting by members holding 100% of the voting power and such resolution shall contain all
particulars of the assets and liabilities of amalgamating Government Companies.
(4) Before passing a resolution under this section, the Government Company shall give notice thereof
of not less than 30 days in writing together with a copy of the proposed resolution to all the
Members and Creditors.
(5) A resolution passed by a Government Company under this section shall not take effect until (i) the
assent of all creditors has been obtained, or (ii) the assent of 90% of the creditors by value has
been received and the company certifies that there is no objection from any other creditor.
(6) The resolutions passed by the Transferor and Transferee Companies along with written
confirmation of the Cabinet decision shall then be submitted to the Central Government which shall,
if it is satisfied that all the requirements of Section 396 and the circular issued by MCA on this behalf
have been fulfilled, order by notification in the Gazette that the said amalgamation shall take effect.
(7) The order of the Central Government shall provide:-
(a) for the transfer to the Transferee Company of the whole or any part of the undertaking, property
or liabilities of any transferor company
(b) that the amalgamation of companies under the foregoing sub-sections shall not in any manner
whatsoever affect the pre-existing rights or obligations and any legal proceedings that might
have been continued or commenced by or against any erstwhile company before the
amalgamation, may be continued or commenced by, or against, the concerned resulting
company, or transferee company, as the case may be.
(c) for such incidental, consequential and supplemental matters as are necessary to secure that the
amalgamation shall be fully and effectively carried out
(8) The Cabinet decision referred to in para (1) above may precede or follow the passing of the
resolution referred to in para (2).
(9) When an order has been passed by the Central Government under this section, it shall be a
sufficient conveyance to vest the assets and liabilities in the transferee.
(10) Where one government company is amalgamated with another government company, under these
provisions, the registration of the first-mentioned Company i.e. transferor company, shall stand
cancelled and that Company shall be deemed to have been dissolved and shall cease to exist
forthwith as a corporate body.
(11) Where two or more Government Companies are amalgamated into a new Government Company in
accordance with these provisions and the Government Company so formed is duly registered by the
Registrar, the registration of each of the amalgamating companies shall stand cancelled forthwith on
such registration and each of the Companies shall thereupon cease to exist as a corporate body.
(12) The amalgamation of companies under the foregoing sub-sections shall not in any manner
whatsoever affect the pre-existing rights or obligations, and any legal proceedings that might have
been continued or commenced by or against any erstwhile company before the amalgamation, may
be continued or commenced by, or against, the concerned resulting company, or transferee
company, as the case may be.
(13) The Registrar shall strike off the names of every Government Company deemed to have been
dissolved under sub-sections (10) to (11).
(14) Government companies are not prevented from applying for amalgamation before the Central
Government under Sections 391-394 of the Companies Act.
Further developments in regard to this topic may be watched and as and when any new notification under
section 237 is issued for merger of two or more Government companies, the same may be compared with
th
the past circular of 20 April, 2011.
LESSON ROUND UP
Amalgamation of one banking company with another banking company is governed by the
provisions of Banking Regulation Act, 1949. The provisions of the Companies Act, 2013 are not
applicable in this case. Restructuring of Banks has been seen in the last one and a half decade
and even the state owned banks to have been merged for reasons of commercial expediency.
Section 44A of the Banking Regulation Act, 1949 requires that the draft scheme of amalgamation
has to be approved by the shareholders of each banking company by a resolution passed by a
majority in number representing two-third in value of the shareholders, present in person or by
proxy at a meeting called for the purpose. Further the approval of the Reserve Bank of India is
needed. Such companies do not need to go to the National Company Law Tribunal (NCLT).
Where the NBFC is proposed to be amalgamated into a banking company, the banking company
should obtain the approval of the Reserve Bank of India after the scheme of amalgamation is
approved by its Board but before it is submitted to the National Company Law Board (earlier it
was the jurisdictional High Court) for approval.
As per, Non-Banking Financial Companies (Deposit Accepting) (Approval of Acquisition or
Transfer of Control) Directions, 2009, any takeover or acquisition of control of a deposit taking
NBFC, whether by acquisition of shares or otherwise, or any merger/amalgamation of a deposit
taking NBFC with another entity, or any merger/amalgamation of an entity with a deposit taking
NBFC, shall require prior written approval of Reserve Bank of India.
In the case of non banking financial companies, whenever there is any kind of change of control
by acquisition or transfer of shares or change in ultimate holding company, the same would need
the approval of the Reserve Bank of India.
Without prejudice to the generality of Section 396, it has now been notified by the Ministry of
Corporate Affairs that, in appropriate cases, simpler procedures shall be adopted for the
amalgamation of Government Companies under section 396 of the Companies Act, 1956.
SELF TEST QUESTIONS
1. Describe the procedure for amalgamation of private sector banks.
2. Explain the procedural aspects with respect to amalgamation of NBFC with a banking company.
106 PP-CRVI
3. What is the requirement to be complied whenever there is change in control or management of Non
Banking Financial Companies due to transfer of shareholding?
4. Amalgamation of government companies follow a simplified procedure to be complied with. Explain

this statement.
Lesson 8
Corporate Demergers and Reverse Mergers

Meaning of demerger, demerged and Companies have to downsize their operations in
resulting company certain circumstances such as when a division of the
company is performing poorly or simply because it no
Difference between demerger and longer fits into the companys plans. This may also
reconstruction be necessary to undo a previous merger or
Legal aspects of demerger acquisition which proved unsuccessful. Such down
sizing of corporate restructuring is carried out
Spin off and split off
through strategies such as demerger or spin off, split
Modes of demerger off, etc.
Importance of appointed date
In a reverse merger, a healthy company merges with
Procedural aspects a financially weak company. The main reason for this
Taxation aspects type of reverse merger is to avail tax benefits under
the Income-Tax Act, 1961.
Reverse merger
understand the concepts of demerger, its methods,
procedural compliances as to demerger, taxation
aspects relating to demerger or reverse merger etc.
Section 230-240 of Companies Act, 2013 have been

notified on 7th December, 2016 (except Section 234,
which is yet to be notified) and came into force w.e.f.
15th December, 2016.
Further, In exercise of the powers conferred by sub-

sections (1) and (2) of sections 469 read with
sections 230 to 233 and sections 235 to 240 of
Companies Act, 2013, the Central Government have
notified on 14th December, 2016, the rules, namely,
the Companies (Compromises, Arrangements and
Amalgamations) Rule, 2016 and these rules came
into force with effect from 15th December, 2016.
108 PP-CRVI
INTRODUCTION
In the era of globalization, corporates all over the world are moving towards consolidation and redefining
core competencies to survive and achieve their objectives. The corporate sector in India is also resorting to
various mechanism of corporate restructuring to improve efficiency. Over the last few years, different modes
of corporate restructuring such as stock splits, capital restructuring, mergers and acquisitions etc. have been
adopted by companies in India.
Companies have to downsize or contract their operations in certain circumstances such as when a division
of the company is performing poorly or simply because it no longer fits into the companys plans or to give
effect to rationalisation or specialisation in the manufacturing process. This may also be necessary to undo a
previous merger or acquisition which proved unsuccessful. This type of restructuring can take various forms
such as demerger or spin off, split off, etc.
Large entities sometimes hinder entrepreneurial initiative, sideline core activities, reduce accountability and
promote investment in non-core activities. There is an increasing realisation among companies that
demerger may allow them to strengthen their core competence and realise the true value of their business.
DEMERGER UNDER THE COMPANIES ACT, 2013

A demerger is a form of corporate restructuring in which the entity's business operations are segregated into
one or more components. It is the converse of a merger or acquisition. A demerger can take place through
a spin-off by distributed or transferring the shares in a subsidiary holding the business to company
shareholders carrying out the demerger. The demerger can also occur by transferring the relevant business
to a new company or business to which then that company's shareholders are issued shares of. In
contrast, divestment can also "undo" a merger or acquisition, but the assets are sold off rather than retained
under a renamed corporate entity.
The expression demerger is not expressly defined in the Companies Act, 2013 (the Act). However
Explanation to Section 230(1) gives a clue about the word demerger.
Section 230(1) of the Act states that where a compromise or arrangement is proposed (a) between a
company and its creditors or any class of them; or (b) between a company and its members or any class of
them, the Tribunal may, on the application of the company or of any creditor or member of the company, or
in the case of a company which is being wound up, of the liquidator,appointed under this Act or under the
Insolvency and Bankruptcy Code, 2016, as the case may be, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the case may be, to be called, held and conducted in
such manner as the Tribunal directs.
Explanation: For the purposes of this sub-section, arrangement includes a reorganisation of the companys
share capital by the consolidation of shares of different classes or by the division of shares into shares of
different classes, or by both of those methods.
The Explanation to Section 230(1), thus provides an inclusive definition of arrangement i.e. consolidation or
by the division of shares into shares of difference classes or by both the methods and the literary meaning of
demerger is some what explained.
Lesson 8 Corporate Demergers and Reverse Mergers 109
DEMERGER UNDER INCOME TAX ACT, 1961
The word demerger has been defined in Section 2(19AA) of the Income-tax Act, 1961 as follows :
Section "demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement
2(19AA) under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its
one or more undertakings to any resulting company in such a manner that
(i) all the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting company by virtue
of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company,
immediately before the demerger, become the liabilities of the resulting company by virtue of
the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at values appearing in its books of account immediately
before the demerger;
(iv) the resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis except where the resulting
company itself is a shareholder of the demerged company;
(v) the shareholders holding not less than three-fourths in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by a
nominee for, the resulting company or, its subsidiary) become share-holders of the resulting
company or companies by virtue of the demerger,
otherwise than as a result of the acquisition of the property or assets of the demerged
company or any undertaking thereof by the resulting company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5)
of section 72A by the Central Government in this behalf.
Explanation 1.For the purposes of this clause, "undertaking" shall include any part of an
undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does
not include individual assets or liabilities or any combination thereof not constituting a business
activity.
Explanation 2.For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall
include
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely
for the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of
general or multipurpose borrowings, if any, of the demerged company as stand in the same
proportion which the value of the assets transferred in a demerger bears to the total value of
the assets of such demerged company immediately before the demerger.
Explanation 3.For determining the value of the property referred to in sub-clause (iii), any
change in the value of assets consequent to their revaluation shall be ignored.
Explanation 4.For the purposes of this clause, the splitting up or the reconstruction of any
authority or a body constituted or established under a Central, State or Provincial Act, or a local
110 PP-CRVI
authority or a public sector company, into separate authorities or bodies or local authorities or
companies, as the case may be, shall be deemed to be a demerger if such split up or
reconstruction fulfils such conditions as may be notified in the Official Gazette, by the Central
Government;
Following Explanation 5 shall be inserted after Explanation 4 in clause (19AA) of section 2
by the Taxation Laws (Amendment) Act, 2016, w.e.f. 1-4-2017 :
Explanation 5.For the purposes of this clause, the reconstruction or splitting up of a company,
which ceased to be a public sector company as a result of transfer of its shares by the Central
Government, into separate companies, shall be deemed to be a demerger, if such reconstruction
or splitting up has been made to give effect to any condition attached to the said transfer of
shares and also fulfils such other conditions as may be notified by the Central Government in the
Official Gazette.
Meaning of Demerged Company
According to section 2(19AAA) of Income Tax Act demerged company means the company whose
undertaking is transferred, pursuant to a demerger, to a resulting company.
Meaning of Resulting Company
According to section 2(41A) of Income Tax Act resulting company means one or more companies (including
a wholly owned subsidiary thereof) to which the undertaking of the demerged company is transferred in a
demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the
shareholders of the demerged company and includes any authority or body or local authority or public sector
company or a company established, constituted or formed as a result of demerger.
Compromise, Arrangments and Amalgamation under Chapter XV of the Companies Act, 2013
1
Chapter XV (Section 230 to 240) of the Act, which deals with the Compromises, Arrangements and
Amalgamation. The rules framed under Chapter XV is known as Companies (Compromises, Arrangements
th
and Amalgamations) Rule, 2016 and it came into force w.e.f 15 December, 2016.
The scheme of Chapter XV goes as follows:
Section 230: Power to compromise or make arrangements with creditors and members.
Section 231: Power of Tribunal to enforce compromise or arrangement
Section 232: Merger and amalgamation of companies
Section 233: Merger or amalgamation of certain companies
Section 234: Merger or amalgamation of company with foreign company
Section 235: Power to acquire shares of shareholders dissenting from scheme or contract approved by
majority
Section 236: Purchase of Minority shareholding
Section 237: Power of central government to provide for amalgamation of companies in public interest.
Section 238: Registration of offer of schemes involving transfer of shares.
Section 239: Preservation of books and papers of amalgamated companies.
Section 240: Liability of officers in respect of offences committed prior to merger, amalgamation etc.
1 Section 230 to 240 (Except Section 234, which is yet to be notified) have been notified and came into force w.e.f. 15th December,
2016.
Some Examples Demerger
Reliance Industries Limited Demerger of Four Units
Reliance Communication
Ventures Limited (Resulting
Reliance Company)
Industries Limited
Reliance Energy Ventures

Limited (Resulting
Company)
Reliance Capital Ventures

Limited (Resulting
Company)
Reliance Natural Resources

Ventures Limited (Resulting
Company)
Reliance Industries Limited

(Demerged Company)
Demerger of the cement division of Larsen and Toubro Ltd
The demerger of the cement division of Larsen and Toubro Ltd. (L&T), named Ultratech Cement Ltd., seems
to be one of the L&Ts grand strategies to concentrate more on infrastructure, engineering, energy and
turnkey businesses.
Ultratech Cement Ltd.

(Resulting Company)
Larsen & Toubro Limited
Larsen and Toubro Ltd.

(Demerged Company)
112 PP-CRVI
Let us understand the recent Wipro Demerger which was approved by Karnataka High Court
in March 2013
The scheme
The demerger of the
Wipro Consumer Care & Lighting (including Furniture business),
Wipro Infrastructure Engineering (Hydraulics & Water businesses), and
Medical Diagnostic Product & Services business (through its strategic joint venture),
into a separate company to be named Wipro Enterprises Limited(Resulting Company). Wipro Limited
(Demerged Company) will remain a publicly listed company that will focus exclusively on information
technology. Wipro Enterprises Limited will be an unlisted company.
Background
In fiscal year 2011-12, the IT Business contributed to 86% of revenue and 94% of operating profit of Wipro
Limited. The demerger is anticipated to provide fresh impetus for both Wipro Limited and Wipro Enterprises
Limited to pursue their individual growth strategies. The demerger is also expected to improve the
competitiveness in their respective markets.
According to the restructuring scheme as currently proposed, resident Indian shareholders of Wipro Limited
on the record date can choose from multiple options as per their investment objectives. They may opt to:
(i) receive one equity share with face value of Rs.10 in Wipro Enterprises Limited for every five equity
shares with face value of Rs.2 each in Wipro Limited that they hold; or
(ii) receive one 7% Redeemable Preference Share in Wipro Enterprises Limited, with face value of
Rs.50, for every five equity shares of Wipro Limited that they hold; or
(iii) exchange the equity shares of Wipro Enterprises Limited and receive as consideration equity
shares of Wipro Limited held by the Promoter. The exchange ratio will be 1 equity share in Wipro
Limited for every 1.65 equity shares in Wipro Enterprises Limited.
Non-resident shareholders (excluding ADR holders) and the ADR holders on the record date would be
entitled to receive equity shares of Wipro Enterprises Limited in the aforesaid ratio. The Non-resident
shareholders (excluding ADR holders) shall further have the option to exchange the Wipro Enterprises
Limited equity shares that they are entitled to and receive equity shares of Wipro Limited held by the
Promoter in the aforesaid ratio.
The meeting pursuant to court order approving Demerger.
Pursuant to the Order dated the 26th day of November, 2012, passed by the High Court of Karnataka,
Bangalore, the meeting of the equity shareholders of Wipro Limited held on the 28th day of December, 2012.
The Court Order Approving Demerger
Wipro Limited has informed the Exchange on March 21, 2013 that Hon'ble High Court of Karnataka has
approved the Scheme of Arrangement for demerger of 'Diversified Business' of the Company as provided in
the Scheme.
DIFFERENCE BETWEEN DEMERGER AND RECONSTRUCTION

As discussed above demerger means transfer, pursuant to a scheme of arrangement under Chapter XV of
the Companies Act, 2013 comprising of sections 230 to 240, by the demerged company of its one or more
undertakings to a new company formed for the purpose, known as the resulting company, in such a manner
that all the property of the undertaking, being transferred by the demerged company becomes the property of
the resulting company by virtue of the demerger; all the liabilities relatable to the undertaking, being
transferred by the demerged company become the liabilities of resulting company by virtue of the demerger;
the property and the liabilities of the undertaking or undertakings being transferred by the demerged
company are transferred at values appearing in its books of account immediately before demerger; the
resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged
company on a proportionate basis; the shareholders holding not less than three fourths in value of the shares
in the demerged company become shareholders of the resulting company or companies by virtue of the
demerger; the transfer of the undertaking is on a going concern basis; the demerger is in accordance with
the conditions, if any, notified under sub-section (5) of section 72 A by the Central Government in this behalf.
In the case of reconstruction, a new company (hereinafter referred to the transferee company) is formed,
the existing company (hereinafter referred to the transferor company) is dissolved by passing a special
resolution for members voluntary winding up and authorising the liquidator to transfer the undertaking,
business, assets and liabilities of the transferor company to the transferee company. The transferee
company, instead of paying cash in lieu of their shares in the transferor company, issues and allots its shares
to the shareholders of the transferor company in accordance with the pre-determined shares exchange ratio.
In this process, the old company is demolished and is reconstructed in the form of new company with
substantially the same shareholders and the same undertaking and business.
TYPES OF DEMERGER
Partial Demerger
In a partial demerger, one of the undertakings or a part of the undertaking or a department or a division of an
existing company is separated and transferred to one or more new company/companies, formed with
substantially the same shareholders, who are allotted shares in the new company in the same proportion as
the separated division, department etc. bears to the total undertaking of the company.
Complete Demerger
In the first case, i.e. in the case of partial demerger, the existing company also continues to maintain its
separate legal identity and the new company, a separate legal identity, carries on the separated or spun off
business and undertaking of the existing company.
In a complete demerger, an existing company transfers its various divisions, undertakings etc. to one or
more new companies formed for this purpose. The existing company is dissolved by passing a special
resolution for members voluntary winding up and also authorising the liquidator to transfer its undertakings,
divisions etc. to one or more companies as per the scheme of demerger approved by the shareholders of the
company by a special resolution. The shareholders of the dissolved company are issued and allotted shares
in the new company or companies, as the case may be, on the basis of the pre-determined shares exchange
ratio, as per the scheme of demerger.
In the case of complete demerger, the existing company disappears from the corporate scene. It is voluntarily
wound up and its entire business, undertakings etc. are transferred to one or more new companies.
114 PP-CRVI
Procedure in respect of approval of Scheme of Demerger

The procedure for convening, holding and conducting class meetings for affecting demerger, is laid down in
rules titled as The Companies (Compromises, Arrangements and Amalgamations) Rule, 2016. The relevant
rules are as under:
Rule 3. Application for order of a meeting
(1) An application under sub-section (1) of section 230 of the Act may be submitted in Form no. NCLT-1
(appended in the National Company Law Tribunal Rules, 2016) along with:-
(i) a notice of admission in Form No. NCLT-2 (appended in the National Company Law Tribunal Rules,
2016);
(ii) an affidavit in Form No. NCLT-6 (appended in the National Company Law Tribunal Rules, 2016);
(iii) a copy of scheme of compromise or arrangement, which should include disclosures as per sub-
section (2) of section 230 of the Act; and
(iv) fee as prescribed in the Schedule of Fees.
(2) Where more than one company is involved in a scheme in relation to which an application under sub-rule
(1) is being filed, such application may, at the discretion of such companies, be filed as a joint-application.
(3) Where the company is not the applicant, a copy of the notice of admission and of the affidavit shall be
served on the company, or, where the company is being wound up, on its liquidator, not less than fourteen
days before the date fixed for the hearing of the notice of admission.
(4) The applicant shall also disclose to the Tribunal in the application under sub-rule (1), the basis on which
each class of members or creditors has been identified for the purposes of approval of the scheme.
Rule 4. Disclosures in application made to the Tribunal for compromise or arrangement.Creditors
Responsibility Statement
For the purposes of sub-clause (i) of clause (c) of sub-section (2) of section 230 of the Act, the creditors
responsibility statement in Form No. CAA. 1 shall be included in the scheme of corporate debt restructuring.
Explanation:- For the purpose of this rule, it is clarified that a scheme of corporate debt restructuring as
referred to in clause (c) of sub-section (2) of section 230 of the Act shall mean a scheme that restructures or
varies the debt obligations of a company towards its creditors.
Rule 5. Directions at hearing of the application:
Upon hearing the application under sub-section (1) of section 230 of the Act, the Tribunal shall, unless it
thinks fit for any reason to dismiss the application, give such directions as it may think necessary in respect
of the following matters:-
(a) determining the class or classes of creditors or of members whose meeting or meetings have to be
held for considering the proposed compromise or arrangement; or dispensing with the meeting or
meetings for any class or classes of creditors in terms of sub-section (9) of section 230;
(b) fixing the time and place of the meeting or meetings;
(c) appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case may
be and fixing the terms of his appointment including remuneration;
(d) fixing the quorum and the procedure to be followed at the meeting or meetings, including voting in
person or by proxy or by postal ballot or by voting through electronic means;

Explanation. For the purposes of these rules, voting through electronic means shall take place,
mutatis mutandis, in accordance with the procedure as specified in rule 20 of Companies
(Management and Administration) Rules, 2014.
(e) determining the values of the creditors or the members, or the creditors or members of any class, as
the case may be, whose meetings have to be held;
(f) notice to be given of the meeting or meetings and the advertisement of such notice;
(g) notice to be given to sectoral regulators or authorities as required under sub-section (5) of section
230;
(h) the time within which the chairperson of the meeting is required to report the result of the meeting to
the Tribunal; and
(i) such other matters as the Tribunal may deem necessary.
Rule 6. Notice of meeting:
(1) Where a meeting of any class or classes of creditors or members has been directed to be convened, the
notice of the meeting pursuant to the order of the Tribunal to be given in the manner provided in subsection
(3) of section 230 of the Act shall be in Form No. CAA.2 and shall be sent individually to each of the creditors
or members.
(2) The notice shall be sent by the Chairperson appointed for the meeting, or, if the Tribunal so directs, by
the company (or its liquidator), or any other person as the Tribunal may direct, by registered post or speed
post or by courier or by email or by hand delivery or any other mode as directed by the Tribunal to their last
known address at least one month before the date fixed for the meeting. Explanation: - It is hereby clarified
that the service of notice of meeting shall be deemed to have been effected in case of delivery by post, at the
expiration of forty eight hours after the letter containing the same is posted.
(3) The notice of the meeting to the creditors and members shall be accompanied by a copy of the scheme
of compromise or arrangement and a statement disclosing the following details of the compromise or
arrangement, if such details are not already included in the said scheme:-
(i) details of the order of the Tribunal directing the calling, convening and conducting of the meeting:-
(a) date of the Order;
(b) date, time and venue of the meeting
(ii) details of the company including:
(a) Corporate Identification Number (CIN) or Global Location Number (GLN) of the company;
(b) Permanent Account Number (PAN);
(c) name of the company;
(d) date of incorporation;
(e) type of the company (whether public or private or one-person company);
(f) registered office address and e-mail address;
(g) summary of main object as per the memorandum of association; and main business carried on
by the company;
(h) details of change of name, registered office and objects of the company during the last five
years;
116 PP-CRVI
(i) name of the stock exchange (s) where securities of the company are listed, if applicable;
(j) details of the capital structure of the company including authorised, issued, subscribed and paid
up share capital; and
(k) names of the promoters and directors along with their addresses.
(iii) if the scheme of compromise or arrangement relates to more than one company, the fact and
details of any relationship subsisting between such companies who are parties to such scheme of
compromise or arrangement, including holding, subsidiary or of associate companies;
(iv) the date of the board meeting at which the scheme was approved by the board of directors including
the name of the directors who voted in favour of the resolution, who voted against the resolution and
who did not vote or participate on such resolution;
(v) explanatory statement disclosing details of the scheme of compromise or arrangement including:-
(a) parties involved in such compromise or arrangement;
(b) in case of amalgamation or merger, appointed date, effective date, share exchange ratio (if
applicable) and other considerations, if any;
(c) summary of valuation report (if applicable) including basis of valuation and fairness opinion of
the registered valuer, if any, and the declaration that the valuation report is available for
inspection at the registered office of the company;
(d) details of capital or debt restructuring, if any;
(e) rationale for the compromise or arrangement;
(f) benefits of the compromise or arrangement as perceived by the Board of directors to the
company, members, creditors and others (as applicable);
(g) amount due to unsecured creditors.
(vi) disclosure about the effect of the compromise or arrangement on:
(a) key managerial personnel;
(b) directors;
(c) promoters;
(d) non-promoter members;
(e) depositors;
(f) creditors;
(g) debenture holders;
(h) deposit trustee and debenture trustee;
(i) employees of the company:
(vii) Disclosure about effect of compromise or arrangement on material interests of directors, Key
Managerial Personnel (KMP) and debenture trustee.
Explanation For the purposes of these rules it is clarified that- (a) the term interest extends
beyond an interest in the shares of the company, and is with reference to the proposed scheme of
compromise or arrangement. (b) the valuation report shall be made by a registered valuer, and till
the registration of persons as valuers is prescribed under section 247 of the Act, the valuation report
shall be made by an independent merchant banker who is registered with the Securities and
Exchange Board or an independent chartered accountant in practice having a minimum experience
of ten years.
(viii) investigation or proceedings, if any, pending against the company under the Act.
(ix) details of the availability of the following documents for obtaining extract from or for making or
obtaining copies of or for inspection by the members and creditors, namely:
(a) latest audited financial statements of the company including consolidated financial statements;
(b) copy of the order of Tribunal in pursuance of which the meeting is to be convened or has been
dispensed with;
(c) copy of scheme of compromise or arrangement;
(d) contracts or agreements material to the compromise or arrangement;
(e) the certificate issued by Auditor of the company to the effect that the accounting treatment, if
Accounting Standards prescribed under Section 133 of the Companies Act, 2013; and
(f) such other information or documents as the Board or Management believes necessary and
relevant for making decision for or against the scheme;
(x) details of approvals, sanctions or no-objection(s), if any, from regulatory or any other governmental
authorities required, received or pending for the proposed scheme of compromise or arrangement.
(xi) a statement to the effect that the persons to whom the notice is sent may vote in the meeting
either in person or by proxies, or where applicable, by voting through electronic means.
Explanation- For the purposes of this rule, disclosure required to be made by a company shall be
made in respect of all the companies, which are part of the compromise or arrangement.
Rule 7. Advertisement of the notice of the meeting:
The notice of the meeting under sub-section (3) of Section 230 of the Act shall be advertised in Form No.
CAA.2 in at least one English newspaper and in at least one vernacular newspaper having wide circulation in
the State in which the registered office of the company is situated, or such newspapers as may be directed
by the Tribunal and shall also be placed, not less than thirty days before the date fixed for the meeting, on
the website of the company (if any) and in case of listed companies also on the website of the SEBI and the
recognized stock exchange where the securities of the company are listed: Provided that where separate
meetings of classes of creditors or members are to be held, a joint advertisement for such meetings may be
given.
Rule 8. Notice to statutory authorities:
(1) For the purposes of sub-section (5) of section 230 of the Act, the notice shall be in Form No. CAA.3, and
shall be accompanied with a copy of the scheme of compromise or arrangement, the explanatory statement
and the disclosures mentioned under rule 6, and shall be sent to.-
(i) the Central Government, the Registrar of Companies, the Income-tax authorities, in all cases;
(ii) the Reserve Bank of India, the Securities and Exchange Board of India, the Competition
Commission of India, and the stock exchanges, as may be applicable;
(iii) other sectoral regulators or authorities, as required by Tribunal.
(2) The notice to the authorities mentioned in sub-rule (1) shall be sent forthwith, after the notice is sent to
the members or creditors of the company, by registered post or by speed post or by courier or by hand
delivery at the office of the authority.
(3) If the authorities referred to under sub-rule (1) desire to make any representation under sub-section (5) of
section 230, the same shall be sent to the Tribunal within a period of thirty days from the date of receipt of
such notice and copy of such representation shall simultaneously be sent to the concerned companies and in
118 PP-CRVI
case no representation is received within the stated period of thirty days by the Tribunal, it shall be presumed
that the authorities have no representation to make on the proposed scheme of compromise or arrangement.
Rule 9. Voting:
The person who receives the notice may within one month from the date of receipt of the notice vote in the
meeting either in person or through proxy or through postal ballot or through electronic means to the
adoption of the scheme of compromise and arrangement. Explanation. For the purposes of voting by
persons who receive the notice as shareholder or creditor under this rule
(a) shareholding shall mean the shareholding of the members of the class who are entitled to vote on
the proposal; and
(b) outstanding debt shall mean all debt owed by the company to the respective class or classes of
creditors that remains outstanding as per the latest audited financial statement, or if such statement
is more than six months old, as per provisional financial statement not preceding the date of
application by more than six months.
Rule 10. Proxies:

(1) Voting by proxy shall be permitted, provided a proxy in the prescribed form duly signed by the person
entitled to attend and vote at the meeting is filed with the company at its registered office not later than 48
hours before the meeting.
(2) Where a body corporate which is a member or creditor (including holder of debentures) of a company
authorises any person to act as its representative at the meeting, of the members or creditors of the
company, or of any class of them, as the case may be, a copy of the resolution of the Board of Directors or
other governing body of such body corporate authorising such person to act as its representative at the
meeting, and certified to be a true copy by a director, the manager, the secretary, or other authorised officer
of such body corporate shall be lodged with the company at its registered office not later than 48 hours
before the meeting.
(3) No person shall be appointed as a proxy who is a minor.
(4) The proxy of a member or creditor blind or incapable of writing may be accepted if such member or creditor
has attached his signature or mark thereto in the presence of a witness who shall add to his signature his
description and address : provided that all insertions in the proxy are in the handwriting of the witness and such
witness shall have certified at the foot of the proxy that all such insertions have been made by him at the
request and in the presence of the member or creditor before he attached his signature or mark.
(5) The proxy of a member or creditor who does not know English may be accepted if it is executed in the
manner prescribed in the preceding sub-rule and the witness certifies that it was explained to the member or
creditor in the language known to him, and gives the members or creditor's name in English below the
signature.
Rule 11. Copy of compromise or arrangement to be furnished by the company
Every creditor or member entitled to attend the meeting shall be furnished by the company, free of charge,
within one day on a requisition being made for the same, with a copy of the scheme of the proposed
compromise or arrangement together with a copy of the statement required to be furnished under section
230 of Act.
Rule 12. Affidavit of service:
(1) The Chairperson appointed for the meeting of the company or other person directed to issue the
advertisement and the notices of the meeting shall file an affidavit before the Tribunal not less than seven
days before the date fixed for the meeting or the date of the first of the meetings, as the case may be, stating
that the directions regarding the issue of notices and the advertisement have been duly complied with.
(2) In case of default under sub-rule (1), the application along with copy of the last order issued shall be
posted before the Tribunal for such orders as it may think fit to make.
Rule 13. Result of the meeting to be decided by voting:
(1) The voting at the meeting or meetings held in pursuance of the directions of the Tribunal under Rule 5 on
all resolutions shall take place by poll or by voting through electronic means.
(2) The report of the result of the meeting under sub - rule (1) shall be in Form No. CAA. 4 and shall state
accurately the number of creditors or class of creditors or the number of members or class of members, as
the case may be, who were present and who voted at the meeting either in person or by proxy, and where
applicable, who voted through electronic means, their individual values and the way they voted.
Rule 14. Report of the result of the meeting by Chairperson:
The Chairperson of the meeting (or where there are separate meetings, the Chairperson of each meeting)
shall, within the time fixed by the Tribunal, or where no time has been fixed, within three days after the
conclusion of the meeting, submit a report to the Tribunal on the result of the meeting in Form No. CAA.4.
Rule 15. Petition for confirming compromise or arrangement:
(1) Where the proposed compromise or arrangement is agreed to by the members or creditors or both as the
case may be, with or without modification, the company (or its liquidator), shall, within seven days of the filing
of the report by the Chairperson, present a petition to the Tribunal in Form No. CAA.5 for sanction of the
scheme of compromise or arrangement.
(2) Where a compromise or arrangement is proposed for the purposes of or in connection with scheme for
the reconstruction of any company or companies, or for the amalgamation of any two or more companies,
the petition shall pray for appropriate orders and directions under section 230 read with section 232 of the
Act.
(3) Where the company fails to present the petition for confirmation of the compromise or arrangement as
aforesaid, it shall be open to any creditor or member as the case may be, with the leave of the Tribunal, to
present the petition and the company shall be liable for the cost thereof.
Rule 16. Date and notice of hearing:
(1) The Tribunal shall fix a date for the hearing of the petition, and notice of the hearing shall be advertised in
the same newspaper in which the notice of the meeting was advertised, or in such other newspaper as the
Tribunal may direct, not less than ten days before the date fixed for the hearing.
(2) The notice of the hearing of the petition shall also be served by the Tribunal to the objectors or to their
representatives under sub-section (4) of section 230 of the Act and to the Central Government and other
authorities who have made representation under rule 8 and have desired to be heard in their representation.
Rule 17. Order on petition:
(1) Where the Tribunal sanctions the compromise or arrangement, the order shall include such directions in
regard to any matter or such modifications in the compromise or arrangement as the Tribunal may think fit to
make for the proper working of the compromise or arrangement.
120 PP-CRVI
(2) The order shall direct that a certified copy of the same shall be filed with the Registrar of Companies
within thirty days from the date of the receipt of copy of the order, or such other time as may be fixed by the
Tribunal.
(3) The order shall be in Form No. CAA. 6, with such variations as may be necessary.
Rule 18. Application for directions under section 232 of the Act:
(1) Where the compromise or arrangement has been proposed for the purposes of or in connection with a
scheme for the reconstruction of any company or companies or the amalgamation of any two or more
companies, and the matters involved cannot be dealt with or dealt with adequately on the petition for
sanction of the compromise or arrangement, an application shall be made to the Tribunal under section 232
of the Act, by a notice of admission supported by an affidavit for directions of the Tribunal as to the
proceedings to be taken.
(2) Notice of admission in such cases shall be given in such manner and to such persons as the Tribunal
may direct.
Rule 19. Directions at hearing of application: Upon the hearing of the notice of admission given under rule
18 or upon any adjourned hearing thereof, the Tribunal may make such order or give such directions as it
may think fit, as to the proceedings to be taken for the purpose of reconstruction or amalgamation, as the
case may be, including, where necessary, an inquiry as to the creditors of the transferor company and the
securing of the debts and claims of any of the dissenting creditors in such manner as the Tribunal may think
just and appropriate.
Rule 20. Order under section 232 of the Act:
An order made under section 232 read with section 230 of the Act shall be in Form No.CAA.7 with such
variation as the circumstances may require
Rule 21. Statement of compliance in mergers and amalgamations:
For the purpose of sub-section (7) of section 232 of the Act, every company in relation to which an order is
made under sub-section (3) of section 232 of the Act shall until the scheme is fully implemented, file with the
Registrar of Companies, the statement in Form No. CAA.8 along with such fee as specified in the
Companies (Registration Offices and Fees) Rules, 2014 within two hundred and ten days from the end of
each financial year.
Rule 22. Report on working of compromise or arrangement
At any time after issuing an order sanctioning the compromise or arrangement, the Tribunal may, either on
its own motion or on the application of any interested person, make an order directing the company or where
the company is being wound-up, its liquidator, to submit to the Tribunal within such time as the Tribunal may
fix, a report on the working of the said compromise or arrangement and on consideration of the report, the
Tribunal may pass such orders or give such directions as it may think fit.
Rule 23. Liberty to apply
(1) The company, or any creditor or member thereof, or in case of a company which is being wound-up, its
liquidator, may, at any time after the passing of the order sanctioning the compromise or arrangement, apply
to the Tribunal for the determination of any question relating to the working of the compromise or
arrangement.
(2) The application shall in the first instance be posted before the Tribunal for directions as to the notices and
the advertisement, if any, to be issued, as the Tribunal may direct.
(3) The Tribunal may, on such application, pass such orders and give such directions as it may think fit in
regard to the matter, and may make such modifications in the compromise or arrangement as it may
consider necessary for the proper working thereof, or pass such orders as it may think fit in the
circumstances of the case.
Rule 24. Liberty of the Tribunal
(1) At any time during the proceedings, if the Tribunal hearing a petition or application under these Rules is
of the opinion that the petition or application or evidence or information or statement is required to be filed in
the form of affidavit, the same may be ordered by the Tribunal in the manner as the Tribunal may think fit.
(2) The Tribunal may pass any direction(s) or order or dispense with any procedure prescribed by these rules
in pursuance of the object of the provisions for implementation of the scheme of arrangement or compromise
or restructuring or otherwise practicable except on those matters specifically provided in the Act.
Rule 25. Merger or Amalgamation of certain companies
(1) The notice of the proposed scheme, under clause (a) of subsection (1) of section 233 of the Act, to invite
objections or suggestions from the Registrar and Official Liquidator or persons affected by the scheme shall
be in Form No. CAA.9.
(2) For the purposes of clause (c) of sub-section (1) of section 233 of the Act the declaration of solvency
shall be filed by each of the companies involved in the scheme of merger or amalgamation in Form No.
CAA.10 along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014, before
convening the meeting of members and creditors for approval of the scheme.
(3) For the purposes of clause (b) and (d) of sub-section (1) of section 233 of the Act, the notice of the
meeting to the members and creditors shall be accompanied by
(a) a statement, as far as applicable, referred to in sub-section (3) of section 230 of the Act read with
sub-rule (3) of rule 6 hereof;
(b) the declaration of solvency made in pursuance of clause (c) of sub-section (1) of section 233 of the
Act in Form No. CAA.10;
(c) a copy of the scheme.
(4)(a) For the purposes of sub-section (2) of section 233 of the Act, the transferee company shall, within
seven days after the conclusion of the meeting of members or class of members or creditors or class of
creditors, file a copy of the scheme as agreed to by the members and creditors, along with a report of the
result of each of the meetings in Form No. CAA.11 with the Central Government, along with the fees as
provided under the Companies (Registration Offices and Fees) Rules, 2014.
(b) Copy of the scheme shall also be filed, along with Form No. CAA. 11 with
(i) the Registrar of Companies in Form No. GNL-1 along with fees provided under the Companies
(Registration Offices and Fees) Rules, 2014; and
(ii) the Official Liquidator through hand delivery or by registered post or speed post.
(5) Where no objection or suggestion is received to the scheme from the Registrar of Companies and Official
Liquidator or where the objection or suggestion of Registrar and Official Liquidator is deemed to be not
122 PP-CRVI
sustainable and the Central Government is of the opinion that the scheme is in the public interest or in the
interest of creditors, the Central Government shall issue a confirmation order of such scheme of merger or
amalgamation in Form No. CAA.12.
(6) Where objections or suggestions are received from the Registrar of Companies or Official Liquidator and
the Central Government is of the opinion, whether on the basis of such objections or otherwise, that the
scheme is not in the public interest or in the interest of creditors, it may file an application before the Tribunal
in Form No. CAA.13 within sixty days of the receipt of the scheme stating its objections or opinion and
requesting that Tribunal may consider the scheme under section 232 of the Act.
(7) The confirmation order of the scheme issued by the Central Government or Tribunal under sub-section
(7) of section 233 of the Act, shall be filed, within thirty days of the receipt of the order of confirmation, in
Form INC-28 along with the fees as provided under Companies (Registration Offices and Fees) Rules, 2014
with the Registrar of Companies having jurisdiction over the transferee and transferor companies
respectively.
(8) For the purpose of this rule, it is clarified that with respect to schemes of arrangement or compromise
falling within the purview of section 233 of the Act, the concerned companies may, at their discretion, opt to
undertake such schemes under sections 230 to 232 of the Act, including where the condition prescribed in
clause (d) of sub-section (1) of section 233 of the Act has not been met.
Rule 26. Notice to dissenting shareholders for acquiring the shares
For the purposes of sub-section (1) of section 235 of the Act, the transferee company shall send a notice to
the dissenting shareholder(s) of the transferor company, in Form No. CAA.14 at the last intimated address of
such shareholder, for acquiring the shares of such dissenting shareholders.
Rule 27. Determination of price for purchase of minority shareholding
For the purposes of sub-section (2) of section 236 of the Act, the registered valuer shall determine the price
(hereinafter called as offer price) to be paid by the acquirer, person or group of persons referred to in sub-
section(1) of section 236 of the Act for purchase of equity shares of the minority shareholders of the
company, in accordance with the following rules:-
(1) In the 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--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.
Rule 28. Circular containing scheme of amalgamation or merger
(1) For the purposes of clause (a) of sub-section (1) of section 238 of the Act, every circular containing the
offer of scheme or contract involving transfer of shares or any class of shares and recommendation to the
members of the transferor company by its directors to accept such offer, shall be accompanied by such
information as set out in Form No. CAA.15.
(2) The circular shall be presented to the Registrar for registration.
Rule 29. Appeal under sub-section (2) of section 238 of the Act: Any aggrieved party may file an appeal
against the order of the Registrar of Companies refusing to register any circular under sub-section (2) of
section 238 of the Act and the said appeal shall be in the Form No. NCLT.9 (appended in the National
Company Law Tribunal Rules, 2016) supported with an affidavit in the Form No. NCLT.6 (appended in the
National Company Law Tribunal Rules, 2016).
The Rules also set out the following forms for various purposes:
Form Relevent Section Particulars
No. Rule
CAA 1 4 230(2)(c) (i) Creditors Responsibility Statement
CAA 2 6&7 230(3) Notice and Advertisement of notice of the meeting of creditors or
members
CAA 3 8 230(5) Notice to central government, regulatory authorities
CAA 4 13(2) & Report of result of meeting by Chairperson

14
CAA 5 15(1) 230 Petition to sanction compromise or arrangement
CAA 6 17(3) 230(7) Order on petition
CAA 7 20 232 Heading as in form NCLT. 4
CAA 8 21 232(7) Statement to be filed with Registrar of Companies
CAA 9 25(1) 233(1)(a) Notice of the scheme inviting objections or suggestions
CAA 10 25(2) 233(1)(C) Declaration of solvency
CAA 11 25(4) 233(2) Notice of approval of the scheme of merger
CAA 12 25(5) 233 Confirmation order of scheme of merger or amalgamation between
CAA 13 25(6) 233(5) Application by the Central Government to the Tribunal
CAA 14 26 235(1) Notice to dissenting shareholders
CAA 15 28 238(1)(9) Information to be furnished along with circular in relation to any

scheme or contract involving the transfer of shares or any class of
shares in the transferor company to the transferee company.
124 PP-CRVI
TAX ASPECTS OF DEMERGER

Tax concession/incentives in case of demerger
If any demerger takes places within the meaning of section 2(19AA) of the Income-tax Act, 1961 the
following tax concessions shall be available to:
1. Demerged company.
2. Shareholders of demerged company.
3. Resulting company
These concessions are on similar lines as are available in case of amalgamation. However some
concessions available in case of amalgamation are not available in case of demerger.
1. Tax concession to demerged company
(i) Capital gains tax not attracted [Section 47(vib)]

According to section 47(vib), where there is a transfer of any capital asset in case of a demerger by
the demerged company to the resulting company, such transfer will not be regarded as a transfer
for the purpose of capital gain provided the resulting company is an Indian company.
(ii) Tax concession to a foreign demerged company [Section 47(vic)]
Where a foreign company holds any shares in an Indian company and transfers the same, in case
of a demerger, to another resulting foreign company, such transaction will not be regarded as
transfer for the purpose of capital gain under section 45 if the following conditions are satisfied:
(a) the shareholders holding not less than three-fourths in value of the shares] of the demerged
foreign company continue to remain shareholders of the resulting foreign company; and
(b) such transfer does not attract tax on capital gains in the country, in which the demerged foreign
company is incorporated :
Provided that the provisions of sections 391 to 394 of the Companies Act, 1956 (1 of 1956)
shall not apply in case of demergers referred to in this clause;
in which the demerged foreign company is incorporated.
(iii) Reserves for shipping business: Where a ship acquired out of the reserve is transferred in a
scheme of demerger, even within the period of eight years of acquisition there will be no deemed
profits to the demerged company.
2. Tax concessions to the shareholders of the demerged company [Section 47(vid)]

Any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the
demerged company shall not be regarded as a transfer if the transfer or issue is made in consideration of
demerger of the undertaking.
In the case of demerger the existing shareholder of the demerged company will hold after demerger:
(a) shares in resulting company; and
(b) shares in demerged company.
and in case the shareholder transfers any of the above shares subsequent to the demerger, the cost of such
shares shall be calculated as under:
Cost of acquisition of shares in the resulting company [Section 49(2C)]:
The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of
acquisition of shares held by the assessee in the demerged company the same proportion as the net book
value of the assets transferred in a demerger bears to the net worth of the demerged company immediately
before such demerger.
Cost of acquisition of shares in the demerged company [Section 49(2 D)]:
The cost of acquisition of the original shares held by the shareholder in the demerged company shall be
deemed to have been reduced by the amount as so arrived at under sub-section (2C).]
For the above purpose net worth shall mean the aggregate of the paid up share capital and general reserves
as appearing in the books of account of the demerged company immediately before the demerger.
Period of holding of shares of the resulting company [Section 2(42A)(g)]:
In the case of a capital asset, being a share or shares in an Indian company, which becomes the property of
the assessee in consideration of a demerger, there shall be included the period for which the share or shares
held in the demerged company were held by the assessee.
3. Tax concession to the resulting company

The resulting company shall be eligible for tax concessions only if the following two conditions are satisfied:
(i) The demerger satisfies all the conditions laid down in section 2(19AA); and
(ii) The resulting company is an Indian company.
The following concessions are available to the resulting company pursuant to a scheme of demerger:
(a) Expenditure on acquisition of patent rights or copy rights [Section 35A]
35A. (1) In respect of any expenditure of a capital nature incurred after the 28th day of February, 1966 [but
before the 1st day of April, 1998], on the acquisition of patent rights or copyrights (hereafter, in this section,
referred to as rights) used for the purposes of the business, there shall, subject to and in accordance with the
provisions of this section, be allowed for each of the relevant previous years, a deduction equal to the
appropriate fraction of the amount of such expenditure.
Explanation.For the purposes of this section,
(i) "relevant previous years" means the fourteen previous years beginning with the previous year in
which such expenditure is incurred or, where such expenditure is incurred before the commencement
of the business, the fourteen previous years beginning with the previous year in which the business
commenced :
Provided that where the rights commenced, that is to say, became effective, in any year prior to the
previous year in which expenditure on the acquisition thereof was incurred by the assessee, this
clause shall have effect with the substitution for the reference to fourteen years of a reference to
fourteen years less the number of complete years which, when the rights are acquired by the
assessee, have elapsed since the commencement thereof, and if fourteen years have elapsed as
aforesaid, of a reference to one year;
(ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of which
is the number of the relevant previous years.
(2) Where the rights come to an end without being subsequently revived or where the whole or any part of
126 PP-CRVI
the rights is sold and the proceeds of the sale (so far as they consist of capital sums) are not less than the
cost of acquisition thereof remaining unallowed, no deduction under sub-section (1) shall be allowed in
respect of the previous year in which the rights come to an end or, as the case may be, the whole or any part
of the rights is sold or in respect of any subsequent previous year.
(3) Where the rights either come to an end without being subsequently revived or are sold in their entirety
and the proceeds of the sale (so far as they consist of capital sums) are less than the cost of acquisition
thereof remaining unallowed, a deduction equal to such cost remaining unallowed or, as the case may be,
such cost remaining unallowed as reduced by the proceeds of the sale, shall be allowed in respect of the
previous year in which the rights come to an end, or, as the case may be, are sold.
(4) Where the whole or any part of the rights is sold and the proceeds of the sale (so far as they consist of
capital sums) exceed the amount of the cost of acquisition thereof remaining unallowed, so much of the
excess as does not exceed the difference between the cost of acquisition of the rights and the amount of
such cost remaining unallowed shall be chargeable to income-tax as income of the business of the previous
year in which the whole or any part of the rights is sold.
Explanation.Where the whole or any part of the rights is sold in a previous year in which the business is no
longer in existence, the provisions of this sub-section shall apply as if the business is in existence in that
previous year.
(5) Where a part of the rights is sold and sub-section (4) does not apply, the amount of the deduction to be
allowed under sub-section (1) shall be arrived at by
(a) subtracting the proceeds of the sale (so far as they consist of capital sums) from the amount of the
cost of acquisition of the rights remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have not expired at the
beginning of the previous year during which the rights are sold.]
(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights
to the amalgamated company (being an Indian company),
(i) the provisions of sub-sections (3) and (4) shall not apply in the case of the amalgamating company;
and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they
would have applied to the amalga-mating company if the latter had not so sold or otherwise
transferred the rights.
(7) Where in a scheme of demerger, the demerged company sells or otherwise transfers the rights to the
resulting company (being an Indian company),
(i) the provisions of sub-sections (3) and (4) shall not apply in the case of the demerged company; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company as they would
have applied to the demerged company, if the latter had not sold or otherwise transferred the rights.
(b) Expenditure on know-how [Section 35AB]
35AB. (1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous
year relevant to the assessment year commencing on or before the 1st day of April, 1998 any lump sum
consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount
so paid shall be deducted in computing the profits and gains of the business for that previous year, and the
balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous
years.
(2) Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution
referred to in sub-section (2B) of section 32A, one-third of the said lump sum consideration paid in the
previous year by the assessee shall be deducted in computing the profits and gains of the business for that
year, and the balance amount shall be deducted in equal instalments for each of the two immediately
succeeding previous years.
(3) Where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the
amalgamating or the demerged company is entitled to a deduction under this section, then, the amalgamated
company or the resulting company, as the case may be, shall be entitled to claim deduction under this
section in respect of such undertaking to the same extent and in respect of the residual period as it would
have been allowable to the amalgamating company or the demerged company, as the case may be, had
such amalgamation or demerger not taken place.
Explanation.For the purposes of this section, "know-how" means any industrial information or technique
likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources
of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access
thereto).
(c) Expenditure for obtaining licence to operate telecommunication services [Section 35ABB]
35ABB. (1) In respect of any expenditure, being in the nature of capital expenditure, incurred for acquiring
any right to operate telecommunication services either before the commencement of the business to operate
telecommunication services or thereafter at any time during any previous year and for which payment has
actually been made to obtain a licence, there shall, subject to and in accordance with the provisions of this
section, be allowed for each of the relevant previous years, a deduction equal to the appropriate fraction of
the amount of such expenditure.
Explanation.For the purposes of this section,
(i) "relevant previous years" means,

(A) in a case where the licence fee is actually paid before the commencement of the business
to operate telecommunication services, the previous years beginning with the previous year
in which such business commenced;
(B) in any other case, the previous years beginning with the previous year in which the licence
fee is actually paid,
and the subsequent previous year or years during which the licence, for which the fee is paid, shall
be in force;
(ii) "appropriate fraction" means the fraction the numerator of which is one and the denominator of which
is the total number of the relevant previous years;
(iii) "payment has actually been made" means the actual payment of expenditure irrespective of the
previous year in which the liability for the expenditure was incurred according to the method of
accounting regularly employed by the assessee.
(2) Where the licence is transferred and the proceeds of the transfer (so far as they consist of capital sums)
are less than the expenditure incurred remaining unallowed, a deduction equal to such expenditure
remaining unallowed, as reduced by the proceeds of the transfer, shall be allowed in respect of the previous
year in which the licence is transferred.
128 PP-CRVI
(3) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they
consist of capital sums) exceed the amount of the expenditure incurred remaining unallowed, so much of the
excess as does not exceed the difference between the expenditure incurred to obtain the licence and the
amount of such expenditure remaining unallowed shall be chargeable to income-tax as profits and gains of
the business in the previous year in which the licence has been transferred.
Explanation.Where the licence is transferred in a previous year in which the business is no longer in
existence, the provisions of this sub-section shall apply as if the business is in existence in that previous
year.
(4) Where the whole or any part of the licence is transferred and the proceeds of the transfer (so far as they
consist of capital sums) are not less than the amount of expenditure incurred remaining unallowed, no
deduction for such expenditure shall be allowed under sub-section (1) in respect of the previous year in
which the licence is transferred or in respect of any subsequent previous year or years.
(5) Where a part of the licence is transferred in a previous year and sub-section (3) does not apply, the
deduction to be allowed under sub-section (1) for expenditure incurred remaining unallowed shall be arrived
at by
(a) subtracting the proceeds of transfer (so far as they consist of capital sums) from the expenditure
remaining unallowed; and
(b) dividing the remainder by the number of relevant previous years which have not expired at the
beginning of the previous year during which the licence is transferred.
(6) Where, in a scheme of amalgamation, the amalgamating company sells or otherwise transfers the licence
to the amalgamated company (being an Indian company),
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating
company; and
would have applied to the amalga-mating company if the latter had not transferred the licence.]
(7) Where, in a scheme of demerger, the demerged company sells or otherwise transfers the licence to the
resulting company (being an Indian company),
(i) the provisions of sub-sections (2), (3) and (4) shall not apply in the case of the demerged company;
and
have applied to the demerged company if the latter had not transferred the licence.]
(8) Where a deduction for any previous year under sub-section (1) is claimed and allowed in respect of any
expenditure referred to in that sub-section, no deduction shall be allowed under sub-section (1) of section
32 for the same previous year or any subsequent previous year.
(d) Amortisation of certain preliminary expenses [Section 35D]
35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident
in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his undertaking or in
connection with his setting up a new unit,
the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction
of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning
with the previous year in which the business commences or, as the case may be, the previous year in which
the extension of the undertaking is completed or the new unit commences production or operation:
Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-
section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one-
tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one-
fifth of such expenditure for each of the five successive previous years" had been substituted.
(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of
the following clauses, namely :
(a) expenditure in connection with
(i) preparation of feasibility report;

(ii) preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee;
(iv) engineering services relating to the business of the assessee :
Provided that the work in connection with the preparation of the feasibility report or the project report
or the conducting of market survey or of any other survey or the engineering services referred to in
this clause is carried out by the assessee himself or by a concern which is for the time being
approved in this behalf by the Board;
(b) legal charges for drafting any agreement between the assessee and any other person for any
purpose relating to the setting up or conduct of the business of the assessee;
(c) where the assessee is a company, also expenditure
(i) by way of legal charges for drafting the Memorandum and Articles of Association of the
company;
(ii) on printing of the Memorandum and Articles of Association;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956
(1 of 1956);
(iv) in connection with the issue, for public subscription, of shares in or debentures of the
company, being underwriting commission, brokerage and charges for drafting, typing,
printing and advertisement of the prospectus;
(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under
any other provision of this Act) as may be prescribed.
(3) Where the aggregate amount of the expenditure referred to in sub-section (2) exceeds an amount
calculated at two and one-half per cent
(a) of the cost of the project, or
(b) where the assessee is an Indian company, at the option of the company, of the capital employed in
the business of the company,
the excess shall be ignored for the purpose of computing the deduction allowable under sub-section (1):
Provided that where the aggregate amount of expenditure referred to in sub-section (2) is incurred after the
31st day of March, 1998, the provisions of this sub-section shall have effect as if for the words "two and one-
half per cent", the words "five per cent" had been substituted.
130 PP-CRVI
Explanation.In this sub-section
(a) "cost of the project" means
(i) in a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets, being
land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including
expenditure on development of land and buildings), which are shown in the books of the
assessee as on the last day of the previous year in which the business of the assessee
commences;
(ii) in a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being
land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including
expenditure on development of land and buildings), which are shown in the books of the
assessee as on the last day of the previous year in which the extension of the undertaking is
completed or, as the case may be, the new unit commences production or operation, in so
far as such fixed assets have been acquired or developed in connection with the extension
of the undertaking or the setting up of the new unit of the assessee;
(b) "capital employed in the business of the company" means
(i) in a case referred to in clause (i) of sub-section (1), the aggregate of the issued share
capital, debentures and long-term borrowings as on the last day of the previous year in
which the business of the company commences;
(ii) in a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share
capital, debentures and long-term borrowings as on the last day of the previous year in
which the extension of the undertaking is completed or, as the case may be, the new unit
commences production or operation, in so far as such capital, debentures and long-term
borrowings have been issued or obtained in connection with the extension of the
undertaking or the setting up of the new unit of the company;
(c) "long-term borrowings" means
(i) any moneys borrowed by the company from Government or the Industrial Finance
Corporation of India or the Industrial Credit and Investment Corporation of India or any other
financial institution [which is eligible for deduction under clause (viii) of sub-section (1) of
section 36] or any banking institution (not being a financial institution referred to above), or
(ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase
outside India of capital plant and machinery, where the terms under which such moneys are
borrowed or the debt is incurred provide for the repayment thereof during a period of not
less than seven years.
(4) Where the assessee is a person other than a company or a co-operative society, no deduction shall be
admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the
expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in
the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of
income for the first year in which the deduction under this section is claimed, the report of such audit in the
prescribed form duly signed and verified by such accountant and setting forth such particulars as may be
prescribed.
(5) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
transferred, before the expiry of the period of ten years specified in sub-section (1), to another Indian
company in a scheme of amalgamation,
(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for
the previous year in which the amalgamation takes place; and
would have applied to the amalga-mating company if the amalgamation had not taken place.
(5A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
transferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of
demerger,
(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the
previous year in which the demerger takes place; and
(ii) the provisions of this section shall, as far as may be, apply to the resulting company, as they would
have applied to the demerged company, if the demerger had not taken place.
(6) Where a deduction under this section is claimed and allowed for any assessment year in respect of any
expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not
qualify for deduction under any other provision of this Act for the same or any other assessment year.
(e) Treatment of expenditure on prospecting, etc. of certain minerals [Section 35E(7A)]
35E. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident
in India, is engaged in any operations relating to prospecting for, or extraction or production of, any mineral
and incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2), the assessee
shall, in accordance with and subject to the provisions of this section, be allowed for each one of the relevant
previous years a deduction of an amount equal to one-tenth of the amount of such expenditure.
(2) The expenditure referred to in sub-section (1) is that incurred by the assessee after the date specified in
that sub-section at any time during the year of commercial production and any one or more of the four years
immediately preceding that year, wholly and exclusively on any operations relating to prospecting for any
mineral or group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule
or on the development of a mine or other natural deposit of any such mineral or group of associated
minerals:
Provided that there shall be excluded from such expenditure any portion thereof which is met directly or
indirectly by any other person or authority and any sale, salvage, compensation or insurance moneys
realised by the assessee in respect of any property or rights brought into existence as a result of the
expenditure.
(3) Any expenditure
(i) on the acquisition of the site of the source of any mineral or group of associated minerals referred to
in sub-section (2) or of any rights in or over such site;
(ii) on the acquisition of the deposits of such mineral or group of associated minerals or of any rights in or
over such deposits; or
(iii) of a capital nature in respect of any building, machinery, plant or furniture for which allowance by way
of depreciation is admissible under section 32,
132 PP-CRVI
shall not be deemed to be expenditure incurred by the assessee for any of the purposes specified in sub-
section (2).
(4) The deduction to be allowed under sub-section (1) for any relevant previous year shall be
(a) an amount equal to one-tenth of the expenditure specified in sub-section (2) (such one-tenth being
hereafter in this sub-section referred to as the instalment); or
(b) such amount as is sufficient to reduce to nil the income (as computed before making the deduction
under this section) of that previous year arising from the commercial exploitation [whether or not such
commercial exploitation is as a result of the operations or development referred to in sub-section (2)]
of any mine or other natural deposit of the mineral or any one or more of the minerals in a group of
associated minerals as aforesaid in respect of which the expenditure was incurred,
whichever amount is less:
Provided that the amount of the instalment relating to any relevant previous year, to the extent to which it
remains unallowed, shall be carried forward and added to the instalment relating to the previous year next
following and deemed to be part of that instalment, and so on, for succeeding previous years, so, however,
that no part of any instalment shall be carried forward beyond the tenth previous year as reckoned from the
year of commercial production.
(5) For the purposes of this section,

(a) "operation relating to prospecting" means any operation undertaken for the purposes of exploring,
locating or proving deposits of any mineral, and includes any such operation which proves to be
infructuous or abortive;
(b) "year of commercial production" means the previous year in which as a result of any operation
relating to prospecting, commercial production of any mineral or any one or more of the minerals in a
group of associated minerals specified in Part A or Part B, respectively, of the Seventh Schedule,
commences;
(c) "relevant previous years" means the ten previous years beginning with the year of commercial
production.
(6) Where the assessee is a person other than a company or a co-operative society, no deduction shall be
admissible under sub-section (1) unless the accounts of the assessee for the year or years in which the
expenditure specified in sub-section (2) is incurred have been audited by an accountant as defined in
the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of
income for the first year in which the deduction under this section is claimed, the report of such audit in the
23
prescribed form duly signed and verified by such accountant and setting forth such particulars as may be
prescribed.
(7) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
company in a scheme of amalgamation
(i) no deduction shall be admissible under sub-section (1) in the case of the amalgamating company for
the previous year in which the amalgamation takes place; and
would have applied to the amalga-mating company if the amalgamation had not taken place.
(7A) Where the undertaking of an Indian company which is entitled to the deduction under sub-section (1) is
company in a scheme of demerger,
(i) no deduction shall be admissible under sub-section (1) in the case of the demerged company for the
previous year in which the demerger takes place; and
have applied to the demerged company, if the demerger had not taken place.
(8) Where a deduction under this section is claimed and allowed for any assessment year in respect of any
expenditure specified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not
qualify for deduction under any other provision of this Act for the same or any other assessment year.
(f) Treatment of bad debts [Section 36(1)(vii)]
Where due to demerger the debts of the demerged company have been taken over by the resulting company
and subsequently by such debt or part of debt becomes bad such bad debt will be allowed as a deduction to
the resulting company. This is based upon the decision of the Supreme Court in the case of CIT v.
Veerabhadra Rao (T.), K. Koteswara Rao & Co. (1985) 155 ITR 152 (SC) which was decided in the case of
amalgamation of companies.
Section 36. (1) (vii) provides that the deductions provided for in the following clauses shall be allowed in
respect of the matters dealt with therein, in computing the income referred to in section 28
Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is
written off as irrecoverable in the accounts of the assessee for the previous year:
Provided that in the case of an assessee to which clause (viia) applies, the amount of the deduction
relating to any such debt or part thereof shall be limited to the amount by which such debt or part
thereof exceeds the credit balance in the provision for bad and doubtful debts account made under
that clause:
Provided further that where the amount of such debt or part thereof has been taken into account in
computing the income of the assessee of the previous year in which the amount of such debt or part
thereof becomes irrecoverable or of an earlier previous year on the basis of income computation and
disclosure standards notified under sub-section (2) of section 145 without recording the same in the
accounts, then, such debt or part thereof shall be allowed in the previous year in which such debt or
part thereof becomes irrecoverable and it shall be deemed that such debt or part thereof has been
written off as irrecoverable in the accounts for the purposes of this clause.
Explanation 1.For the purposes of this clause, any bad debt or part thereof written off as
irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful
debts made in the accounts of the assessee;
Explanation 2.For the removal of doubts, it is hereby clarified that for the purposes of the proviso to
clause (vii)of this sub-section and clause (v)of sub-section (2), the account referred to therein shall be
only one account in respect of provision for bad and doubtful debts under clause (viia) and such
account shall relate to all types of advances, including advances made by rural branches;
(g) Amortisation of expenditure in case of amalgamation or demerger[Section 35DD].
35DD. (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of
April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the
134 PP-CRVI
assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the
five successive previous years beginning with the previous year in which the amalgamation or demerger
takes place.
(2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other
provision of this Act.]
(h) Carry forward and set off of business losses and unabsorbed depreciation of the demerged
company [Section 72A(4) & (5)]
Section 72A (4) Notwithstanding anything contained in any other provisions of this Act, in the case of a
demerger, the accumulated loss and the allowance for unabsorbed depreciation of the demerged company
shall
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the
resulting company, be allowed to be carried forward and set off in the hands of the resulting
company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to
the resulting company, be apportioned between the demerged company and the resulting company in
the same proportion in which the assets of the undertakings have been retained by the demerged
company and transferred to the resulting company, and be allowed to be carried forward and set off
in the hands of the demerged company or the resulting company, as the case may be.
Section 72A(5) The Central Government may, for the purposes of this Act, by notification in the Official
Gazette, specify such conditions as it considers necessary to ensure that the demerger is for genuine
business purposes.
(i) Deduction available under section 80-1A(12) or 80-1B(12)
Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in
infrastructure development, etc.:
Section 80-IA (12): Where any undertaking of an Indian company which is entitled to the deduction under this
section is transferred, before the expiry of the period specified in this section, to another Indian company in a
scheme of amalgamation or demerger
(a) no deduction shall be admissible under this section to the amalgamating or the demerged company
for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting
company as they would have applied to the amalgamating or the demerged company if the
amalgamation or demerger had not taken place.
Deduction in respect of profits and gains from certain industrial undertakings other than
infrastructure development undertakings:
Section 80-IB(12): Where any undertaking of an Indian company which is entitled to the deduction under this
section is transferred, before the expiry of the period specified in this section, to another Indian company in a
scheme of amalgamation or demerger
(a) no deduction shall be admissible under this section to the amalgamating or the demerged
company for the previous year in which the amalgamation or the demerger takes place; and
(b) the provisions of this section shall, as far as may be, apply to the amalgamated or the resulting
company as they would have applied to the amalgamating or the demerged company if the
amalgamation or demerger had not taken place.
JUDICIAL PRONOUNCEMENTS ON DEMERGER

Disclosure of Ratio of Exchange of Shares
In Mercury Containers (P.) Ltd., [2010] 98 SCL 43 (ALL.), High Court Of Allahabad, Petitioner-
company/demerged-company filed a petition under section 391 for sanction of proposed scheme of its
demerger - Pursuant to an order of Court, meeting of creditors of demerged company was convened and
they unanimously approved proposed scheme of demerger - Advertisement of petition was published in
newspapers and notices were issued to Official Liquidator and Regional Director - Official Liquidator had no
objection to proposed scheme - However, Regional Director had objected to proposed scheme by stating
that ratio of exchange of shares had not been disclosed - It was found that objection in respect of ratio of
exchange of shares had been explained before authorities It was held that scheme of arrangement or
demerger was in interest of shareholders/creditors of companies, proposed scheme was to be approved.
Application of AS-14 to Demergers

In Gallops Realty (P.) Ltd., In re [2010] 97 SCL 93 (GUJ.), High Court Of Gujarat
Petitioner-companies, i.e., demerged company and resulting company, sought for sanction of composite
scheme of arrangement in nature of purchase of shares and demerger of hotel business of demerged
company to resulting company and consequent reconstruction of share capital of demerged company under
section 391, read with sections 394, 78 and 100 consisting of reduction of paid-up share capital as well as
utilization of share premium account.
Meetings of equity shareholders of both companies and unsecured creditors of demerged company had
been dispensed with in view of their written consent. Regional Director stated that as per the scheme,
capital profit on demerger would be transferred to general reserve in books of resulting company which was
not in consonance with generally accepted accounting principles as also Accounting Standard- 14 which
provide that any profit arising out of a capital transaction, like merger or demerger, ought to be treated as
capital profit and, hence, would be transferred to capital reserve and not to general reserve. The observation
of Regional Director about the scheme not in consonance with Accounting Standard-14 and not tenable, as
Accounting Standard-14 is applicable only in case of amalgamation and not in case of demerger. It was held
that since proposed scheme of arrangement was in interest of companies and their members, same was to
be sanctioned.
REVERSE MERGER
It must be understood at the outset that amalgamation and merger are corporate restructuring methods. Both the
terms are synonymous. The procedure to be adopted for both is the same and the consequences of both are also
the same. For achieving amalgamation as well as merger, an existing company (which is referred to as the
amalgamating or merging or transferor company), under a scheme of amalgamation or merger, loses its own
legal identity and is dissolved without being wound up and its assets, properties and liabilities are transferred to
another existing company (which is referred to as the amalgamated or merged or transferee company).
Generally, a loss making or less profit earning company merges with a company with track record, to obtain
the benefits of economies of scale of production, marketing network, etc. This situation arises when the sick
companys survival becomes more important for strategic reasons and to conserve the interest of
community.
136 PP-CRVI
In a reverse merger, a healthy company merges with a financially weak company. The main reason for this
type of reverse merger is the tax savings under the Income-Tax Act, 1961. Section 72A ensures the tax
relief, which becomes attractive for such reverse mergers, since the healthy and profitable company can take
advantage of the carry forward losses/of the other company. The healthy units loses its name and surviving
sick company retains its name. In the context of the Companies Act, 2013 there is no difference between a
merger and a reverse merger. It is like any amalgamation. A reverse merger is carried out through the High
Court route.
To save the Government from social costs in terms of loss of production and employment and to relieve the
Government of the uneconomical burden of taking over and running sick industrial units, Section 72A was
introduced in Income Tax Act, 1961.
Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation
allowance in amalgamation or demerger, etc.
Section 72A. (1) Where there has been an amalgamation of

(a) a company owning an industrial undertaking or a ship or a hotel with another company; or
(b) a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of
1949) with a specified bank; or
(c) one or more public sector company or companies engaged in the business of operation of aircraft
with one or more public sector company or companies engaged in similar business,
then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the
unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may
be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the
amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and
allowance for depreciation shall apply accordingly.
(2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried
forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated
company unless
(a) the amalgamating company
(i) has been engaged in the business, in which the accumulated loss occurred or depreciation
remains unabsorbed, for three or more years;
(ii) has held continuously as on the date of the amalgamation at least three-fourths of the book
value of fixed assets held by it two years prior to the date of amalgamation;
(b) the amalgamated company
(i) holds continuously for a minimum period of five years from the date of amalgamation at
least three-fourths of the book value of fixed assets of the amalgamating company acquired
in a scheme of amalgamation;
(ii) continues the business of the amalgamating company for a minimum period of five years
from the date of amalgamation;
(iii) fulfils such other conditions as may be prescribed to ensure the revival of the business of
the amalgamating company or to ensure that the amalgamation is for genuine business
purpose.
(3) In a case where any of the conditions laid down in sub-section (2) are not complied with, the set off of
loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall
be deemed to be the income of the amalgamated company chargeable to tax for the year in which such
conditions are not complied with.
(4) Notwithstanding anything contained in any other provisions of this Act, in the case of a demerger, the
accumulated loss and the allowance for unabsorbed depreciation of the demerged company shall
(a) where such loss or unabsorbed depreciation is directly relatable to the undertakings transferred to the
resulting company, be allowed to be carried forward and set off in the hands of the resulting
company;
(b) where such loss or unabsorbed depreciation is not directly relatable to the undertakings transferred to
the resulting company, be apportioned between the demerged company and the resulting company in
the same proportion in which the assets of the undertakings have been retained by the demerged
company and transferred to the resulting company, and be allowed to be carried forward and set off
in the hands of the demerged company or the resulting company, as the case may be.
(5) The Central Government may, for the purposes of this Act, by notification in the Official Gazette, specify
such conditions as it considers necessary to ensure that the demerger is for genuine business purposes.
(6) Where there has been reorganisation of business, whereby, a firm is succeeded by a company fulfilling
the conditions laid down in clause (xiii) of section 47 or a proprietary concern is succeeded by a company
fulfilling the conditions laid down in clause (xiv) of section 47, then, notwithstanding anything contained in
any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor
firm or the proprietary concern, as the case may be, shall be deemed to be the loss or allowance for
depreciation of the successor company for the purpose of previous year in which business reorganisation
was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for
depreciation shall apply accordingly :
Provided that if any of the conditions laid down in the proviso to clause (xiii) or the proviso to clause (xiv)
to section 47 are not complied with, the set off of loss or allowance of depreciation made in any previous
year in the hands of the successor company, shall be deemed to be the income of the company chargeable
to tax in the year in which such conditions are not complied with.
(6A) Where there has been reorganisation of business whereby a private company or unlisted public
company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to
clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the
accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the
loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous
year in which business reorganisation was effected and other provisions of this Act relating to set off and
carry forward of loss and allowance for depreciation shall apply accordingly :
Provided that if any of the conditions laid down in the proviso to clause (xiiib) of section 47 are not complied
with, the set off of loss or allowance of depreciation made in any previous year in the hands of the successor
limited liability partnership, shall be deemed to be the income of the limited liability partnership chargeable to
tax in the year in which such conditions are not complied with.
(7) For the purposes of this section,

138 PP-CRVI
(a) "accumulated loss" means so much of the loss of the predecessor firm or the proprietary concern or
the private company or unlisted public company before conversion into limited liability partnership or
the amalgamating company or the demerged company, as the case may be, under the head "Profits
and gains of business or profession" (not being a loss sustained in a speculation business) which
such predecessor firm or the proprietary concern or the company or amalgamating company or
demerged company, would have been entitled to carry forward and set off under the provisions
of section 72 if the reorganisation of business or conversion or amalgamation or demerger had not
taken place.
(aa) "industrial undertaking" means any undertaking which is engaged in
(i) the manufacture or processing of goods; or

(ii) the manufacture of computer software; or
(iii) the business of generation or distribution of electricity or any other form of power; or
(iiia) the business of providing telecommunication services, whether basic or cellular, including
radio paging, domestic satellite service, network of trunking, broadband network and
internet services; or]
(iv) mining; or
(v) the construction of ships, aircrafts or rail systems.
(b) "unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm
or the proprietary concern or the private company or unlisted public company before conversion into
limited liability partnership or the amalgamating company or the demerged company, as the case may
be, which remains to be allowed and which would have been allowed to the predecessor firm or the
proprietary concern or the company or amalgamating company or demerged company, as the case
may be, under the provisions of this Act, if the reorganisation of business or conversion or
amalgamation or demerger had not taken place;
(c) "specified bank" means the State Bank of India constituted under the State Bank of India Act, 1955
(23 of 1955) or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959
(38 of 1959) or a corresponding new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or under section 3 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980)
Salient features of Reverse Mergers under Section 72A

1. Amalgamation should be between the companies and none of them should be a firm of partners or sole-
proprietor. In other words, partnership firm or sole-proprietary concerns cannot get the benefit of tax relief
under Section 72A merger.
2. The companies entering into amalgamation should be engaged in either industrial activity or shipping
business or hotel with another company or banking business under Section 5(c) of the Banking Regulation
Act, 1949 or Public Sector Companies engaged in the business of operation of aircraft. In other words, the
tax relief under Section 72A would not be made available to companies engaged in trading activities or
services.
3. After amalgamation, the sick or financially unviable company shall survive and the other income
generating company shall extinct. In other words, essential condition to be fulfilled is that the acquiring
company will be able to revive or rehabilitate having consumed the healthy company.
4. One of the merger partners should be financially unviable and have accumulated losses to qualify for the
merger and the other merger partner should be profit earning so that tax relief to the maximum extent could
be had. In other words, the company which is financially unviable should be technically sound and feasible,
commercially and economically viable but financially weak because of financial stringency or lack of financial
resources or its liabilities have exceeded its assets and is on the brink of insolvency. The second requisite
qualification associated with financial unviability is the accumulation of losses for past few years.
5. Amalgamation should be in the public interest i.e. it should not be against public policy, should not defeat
the basic tenets of law, and must safeguard the interest of employees, consumers, customers, creditors and
shareholders apart from the promoters of the company through the revival of the company.
6. The merger should result into the following benefits to the amalgamated (acquired/target) company i.e. (a)
carry forward of accumulated business losses of the amalgamating company; (b) carry forward of
unabsorbed depreciation of the amalgamating company and (c) accumulated loss would be allowed to be
carried forward and set of for eight subsequent years under Section 72A of the Income-tax Act, from the A.Y.
2009-10, the accumulated loss or the case may be, allowance for unabsorbed depreciation of amalgamating
company shall be deemed to be the loss or as the case may be, allowance for unabsorbed depreciation of
the amalgamated company for the previous year in which the amalgamation was effected and other
provisions of the Income Tax Act relating to set off and carry forward of loss and allowance for depreciation.
7. Accumulated loss should arise from Profits and Gains from business or profession and not be loss under
the head Capital Gains or Speculation.
8. For qualifying carry forward loss, the provisions of Section 72 should not have been contravened.
9. Similarly for carry forward of unabsorbed depreciation the conditions of Section 32 should not have been
violated.
10. Specified Authority has to be satisfied of the eligibility of the company for the relief under Section 72 of
the Income-tax Act. It is only on the recommendation of the specified authority that Central Government may
allow the relief.
11. The company should make an application to the specified authority for requisite recommendation of the
case to the Central Government for granting or allowing the relief.
12. Procedure for merger or amalgamation to be followed in such cases is the same as discussed above.
Specified Authority makes recommendation after taking into consideration the courts direction on scheme of
amalgamation.
Repeal of SICA Act, 1985

NOTIFICATION No. SO 3568(E) [F.No.3/2/2011-IF-II], dated 25-11-2016.In exercise of powers conferred
by sub-section (2) of section 1 of the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 (1 of
st
2004), the Central Government hereby notifies the 1 day of December, 2016, as the date on which
provisions of the said Act shall come into force.
LESSON ROUND UP
Companies have to downsize or contract their operation in certain circumstances such as when
a division of the company is performing poorly or simply because it no longer fits into the
companys plans or to give effect to rationalization.
Demerger is defined as division or separation of different undertakings of a business functioning
140 PP-CRVI
hitherto under a common umbrella.

Demerger may take the shape of spin off, split off or split up.
Demerger may be partial or complete.
Demerger may be by agreement between promoters or under scheme of arrangement with
approval by the court under section 391 or under voluntary winding up.
Chapter covers in detail the procedure for demerger of a company.
There are various tax incentives to demerged company, to shareholders of demerged company
and to resulting company.
In a reverse merger, a healthy company merges with a financially weak company. The chapter
provides for salient features of reverse merger and the provisions of Section 72A of Income-tax
Act, 1961.
SELF TEST QUESTIONS

(These are meant for recapitulation only. Answers to these questions are not required to be submitted for
evaluation).
1. Define the term Demerger and Reverse merger and briefly explain their relevance as a tool of
restructuring.
2. What do you mean by demerged company and resulting company?
3. Is demerger different from reconstruction in concept? If so, how?
4. X Ltd. and Y Ltd. propose to effectuate a scheme of demerger. Assuming any of them as a loss
making company, enumerate the steps to be taken in this respect.
5. Explain in brief the tax reliefs emerging in demerger to:
(a) Shareholders;
(b) Demerged company;
(c) Resulting company.
Lesson 9
Takeovers
Concept of Takeover Corporate Sector is an attractive medium for carrying
on business as it offers a lot of benefits. Raising
Kinds of Takeover
money from public has its own positive features and it
Takeover bids helps setting up big projects. When promoters of a
Legal aspects of Takeover company desire to expand, they take a quick view of
the industrial and business map. If they find there are
Bail out Takeover and Takeover of sick units
opportunities, they will always yearn for capitalizing
Takeover Defenses such opportunities. Compared to the efforts required,
Cross Border Takeovers cost and time needed in setting up a new business, it
would make sense to them to look at the possibilities
of acquiring an existing entity. SEBI (Substantial
Acquisition of Shares and Takeovers) 2011
prescribes disclosure requirements, open offer
thresholds and other procedural aspects to takeover.
understand the meaning, concept, objectives of
takeover, procedural requirements as to takeover of
listed/unlisted companies, takeover defenses etc.
142 PP-CRVI
MEANING AND CONCEPT OF TAKEOVERS

A high level of competitive pressure and an increasing appetite for growth have led firms across
geographies and industries to choose the inorganic growth path. Mergers & Acquisitions and Takeovers
provide a robust growth vehicle often best suited for such firms seeking an entry into a market,
geography, product category or broadening its product and/or client base.
Takeover is an inorganic corporate growth device whereby one company acquires control over another
company, usually by purchasing all or a majority of its shares.
Takeover implies acquisition of control of a company, which is already registered, through the purchase
or exchange of shares. Takeovers usually take place when shares are acquired or purchased from the
shareholders of a company at a specified price to the extent of at least controlling interest in order to
gain control of that company.
Takeover of management and control of a business enterprise could take place in different modes. The
management of a company may be acquired by acquiring the majority stake in the share capital of a
company. A company may acquire shares of an unlisted company through what is called the
acquisition under Sections 235 and 236 of the Companies Act, 2013. Where the shares of the company
are closely held by a small number of persons, a takeover may be effected by agreement with the
holders of those shares. However, where the shares of a company are widely held by the general
public, it involves the process as set out in the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011.
Ordinarily, a larger company takes over a smaller company. In a reverse takeover, a smaller company
acquires control over a larger company.
The takeover strategy has been conceived to improve corporate value, achieve better productivity and
profitability by making optimum use of the available resources in the form of men, materials and
machines.
Company Secretaries have an important role to play in the take over process especially with regard to
compliances under the Companies Act, SEBI (SAST) Regulations 2011, Competition Law aspects,
FEMA etc. The role would be with respect to preparation of checklist, drafting of documents, obtaining
of necessary approvals etc. The advisory role of company secretaries in the effective execution of
takeover deals is vital throughout the takeover process.
Emergence of concept of Takeover

Corporate Sector is an attractive medium for carrying on business as it offers a lot of benefits. Raising
money from public has its own positive features and it helps setting up big projects. When promoters of
a company desire to expand, they take a quick view of the industrial and business map. If they find
there are opportunities, they will always yearn for capitalizing such opportunities. Compared to the
efforts required, cost and time needed in setting up a new business, it would make sense to them to
look at the possibilities of acquiring an existing entity.
While the possibility of takeover of a company through share acquisition is desirable for achieving
certain strategic objectives, there has to be well defined regulations so that the interests of all
concerned are not jeopardized by sudden takeover threats. In this perspective, if one were to analyse, it
would be clear that there has to be a systematic approach enabling and leading the takeovers, while
Lesson 9 Takeover 143
simultaneously providing adequate opportunity to the original promoters to protect/counter such moves.
Thus, while the acquirer should adopt a disciplined method with proper disclosure of intentions so that
not only the original promoters who are in command are protected but also the investors. It would be in
the interests of all concerned that the takeover is carried out in a transparent manner.
When adequate checks and balances are introduced and ensured, takeovers become a good tool. That
is the reason why regulations have been put in place and these regulations require sufficient
disclosures at every stage of acquisition. These regulations take so much care that they cover not only
direct acquisition of the acquirer but also includes acquisitions through relatives and associates and
group concerns.
In India, the process of economic liberalisation and globalisation ushered in the early 1990s created a
highly competitive business environment, which motivated many companies to restructure their
corporate strategies. The restructuring process led to an unprecedented rise in strategies like
amalgamations, mergers including reverse mergers, demergers, takeovers, reverse takeovers and
other strategic alliances.
Objects of Takeover
The objects of a takeover may inter alia be
(i) To effect savings in overheads and other working expenses on the strength of combined
resources;
(ii) To achieve product development through acquiring firms with compatible products and
technological/manufacturing competence, which can be sold to the acquirers existing
marketing areas, dealers and end users;
(iii) To diversify through acquiring companies with new product lines as well as new market areas,
as one of the entry strategies to reduce some of the risks inherent in stepping out of the
acquirers historical core competence;
(iv) To improve productivity and profitability by joint efforts of technical and other personnel of both
companies as a consequence of unified control;
(v) To create shareholder value and wealth by optimum utilisation of the resources of both
companies;
(vi) To achieve economy of numbers by mass production at economical costs;
(vii) To secure advantage of vertical combination by having under one command and under one
roof, all the stages or processes in the manufacture of the end product, which had earlier been
available in two companies at different locations, thereby saving loading, unloading,
transportation costs and other expenses and also by affecting saving of time and energy
unnecessarily spent on excise formalities at different places and stages;
(viii) To secure substantial facilities as available to a large company compared to smaller companies
for raising additional capital, increasing market potential, expanding consumer base, buying
raw materials at economical rates and for having own combined and improved research and
development activities for continuous improvement of the products, so as to ensure a
permanent market share in the industry;
(ix) To increase market share;
(x) To achieve market development by acquiring one or more companies in new geographical
territories or segments, in which the activities of acquirer are absent or do not have a strong
presence.
144 PP-CRVI
KINDS OF TAKEOVER
Takeovers may be broadly classified into three kinds:
(i) Friendly Takeover: Friendly takeover is with the consent of taken over company. In friendly
takeover, there is an agreement between the management of two companies through
negotiations and the takeover bid may be with the consent of majority or all shareholders of the
target company. This kind of takeover is done through negotiations between two groups.
Therefore, it is also called negotiated takeover.
(ii) Hostile Takeover: When an acquirer company does not offer the target company the proposal
to acquire its undertaking but silently and unilaterally pursues efforts to gain control against the
wishes of existing management.
(iii) Bail Out Takeover: Takeover of a financially sick company by a profit earning company to bail
out the former is known as bail out takeover. There are several advantages for a profit making
company to takeover a sick company. The price would be very attractive as creditors, mostly
banks and financial institutions having a charge on the industrial assets, would like to recover
to the extent possible. Banks and other lending financial institutions would evaluate various
options and if there is no other go except to sell the property, they will invite bids. Such a sale
could take place in the form by transfer of shares. While identifying a party (acquirer), lenders
do evaluate the bids received, the purchase price, the track record of the acquirer and the
overall financial position of the acquirer. Thus a bail out takeover takes place with the approval
of the Financial Institutions and banks.
TAKEOVER BIDS
Takeover bid is an offer to the shareholders of a company, who are not the promoters of the company
or the sellers of the shares under an agreement, to buy their shares in the company at the offered price
within the stipulated period of time. It is addressed to the shareholders with a view to acquiring sufficient
number of shares to give the Offeror Company, voting control of the target company.
A takeover bid is a technique, which is adopted by a company for taking over control of the
management and affairs of another company by acquiring its controlling shares.
Type of takeover bids

A takeover bid may be a friendly takeover bid or a hostile takeover bid. Bids may be
mandatory/competitive bids.
Mandatory Bid
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, require acquirers to
make bids for acquisition of certain level of holdings subject to certain conditions. A takeover bid is
required to be made by way of a a public announcement issued to the stock exchanges, followed by a
Detailed Public Statement in the newspapers. Such requirements arise in the following cases:
(a) for acquisition of 25% or more of the shares or voting rights;
(b) for acquiring additional shares or voting rights to the extent of 5% of the voting rights in any
financial year beginning April 01, if such person already holds not less than 25% but not more
than 75% or 90% of the shares or voting rights in a company as the case may be;
(c) for acquiring control over a company.

Factors Determining Vulnerability of Companies to Takeover Bids

The enquiry into such strategies is best initiated by an analysis of factors, which determine the
vulnerability of companies to takeover bids. It is possible to identify such characteristics that make a
company a desirable candidate for a takeover from the acquirers point of view. Thus, the factors which
make a company vulnerable are:
Low stock price with relation to the replacement cost of assets or their potential earning power;
A highly liquid balance sheet with large amounts of excess cash, a valuable securities portfolio,
and significantly unused debt capacity;
Good cash flow in relation to current stock prices;
Subsidiaries and properties which could be sold off without significantly impairing cash flow;
and
Relatively small stockholdings under the control of an incumbent management.
A combination of these factors can simultaneously make a company an attractive proposition or

investment opportunity and facilitate its financing. The companys assets may act as collateral for an
acquirers borrowings, and the targets cash flows from operations and divestitures can be used to
repay the loans.
LEGAL ASPECTS OF TAKEOVER
The legislations/regulations that mainly govern takeover is as under:

1. SEBI (SAST) Regulations, 2011 (The Regulations)
2. Companies Act, 2013
SEBI (SAST) Regulations 2011 lays down the procedure to be followed by an acquirer for acquiring
majority shares or controlling interest in another company.
As far as Companies Act is concerned, the provisions of Section 186 apply to the acquisition of shares
through a Company. Section 235 and 236 of the Companies Act lays down legal requirements for
purpose of take-over of an unlisted company through transfer of undertaking to another company.
As per Regulation 31A (8) of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 If any public shareholder seeks to re-classify itself as a promoter, such a public shareholder shall
be required to make an open offer in accordance with the provisions of SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011.
Exception from the applicability
The regulations shall not apply to direct and indirect acquisition of shares or voting rights in, or control
over a company listed without making a public issue, on the institutional trading platform of a
recognised stock exchange.
Takeover of Unlisted and Closely Held Companies
Section 236 of the Companies Act contains a compulsory acquisition mode for the transferee company
to acquire the shares of minority shareholders of Transferor Company.
Where the scheme has been approved by the holders of not less than nine tenth (90%) in value of the
146 PP-CRVI
shares of the transferor company whose transfer is involved, the transferee company, may, give notice
to any dissenting shareholders that transferee company desires to acquire their shares. The scheme
shall be binding on all the shareholders of the transferor company (including dissenting shareholders),
unless the Tribunal orders otherwise (i.e. that the scheme shall not be binding on all shareholders).
When the scheme is binding on minority shareholders including dissenting shareholders?
When the scheme is approved by the holders of not less than nine tenth (90%) in value of the shares of
the transferor company whose transfer is involved, it shall be binding on all the shareholders of the
transferor company (including dissenting shareholders), unless the Court Orders otherwise.
Case Law 1: Power of Acquisition of Shares of dissentient minority shareholders is not ultra vires the
constitution of India. S Viswanathan v. East India Distilleries & Sugar Factories Limited (1957) 27 Com
Cases 175: AIR 1957 Mad 341.
Case Law 2: Where the scheme or contract has been approved by 90% of the shareholders, the offer of
the transferee company will be treated as prima-facie a fair one and the onus will be on the dissentients to
show the contrary. Benarasi Das Saraf v. dalmia Dadri Cement Ltd. (1958) 28 Com cases 435 (Punj)
Accordingly, the transferor company shall be entitled and bound to acquire these shares on the terms
on which it acquires under the scheme (the binding provision).
The advantage of going through the route contained in Section 235 of the Companies Act is the facility
for acquisition of minority stake. The transferee company shall give notice to the minority dissenting
shareholders and express its desire to acquire their shares within a period of 4 months after making an
offer as envisaged under Section 235 of the Act.
When a Company intends to take over another Company through acquisition of 90% or more in value of
the shares of that Company, the procedure laid down under Section 235 of the Act could be beneficially
utilized. When one Company has been able to acquire more than 90% control in another Company, the
shareholders holding the remaining control in the other Company are reduced to a miserable minority.
They do not even command a 10% stake so as to make any meaningful utilization of the power. Such
minority cannot even call an extra-ordinary general meeting under Section 100 of the Act nor can they
constitute a valid strength on the grounds of their proportion of issued capital for making an application
to Company Law Board under Section 241 of the Act alleging acts of oppression and/or
mismanagement. Hence the statute itself provides them a meaningful exit route.
The advantage of going through the route is the facility for acquisition of minority stake. But even
without going through this process, if an acquirer is confident of acquiring the entire control, there is no
need to go through Section 235 of the Act. It is purely an option recognized by the statute.
The merit of this scheme is that without resort to tedious court procedures the takeover is affected. Only
in cases where any dissentient shareholder or shareholders exist, the procedures prescribed by this
section will have to be followed. It provides machinery for adequately safeguarding the rights of the
dissentient shareholders also.
Section 235 lays down two safeguard in respect of expropriation of private property (by compulsory
acquisition of majority shares). First the scheme requires approval of a large majority of shareholders.
Second the Tribunals discretion to prevent compulsory acquisition.
The following are the important ingredients of the Section 235 route:
The Company, which intends to acquire control over another Company by acquiring share,
held by shareholders of that another Company is known under Section 235 of the Act as the
Transferee Company.
The Company whose shares are proposed to be acquired is called the Transferor Company.
The Transferee Company and Transferor Company join together at the Board level and
come out with a scheme or contract.
Every offer or every circular containing the terms of the scheme shall be duly approved by the
Board of Directors of the companies and every recommendation to the members of the
transferor Company by its directors to accept such offer. It shall be accompanied by such
information as provided under the said Act. The circular shall be sent to the dissenting
shareholders in Form No: CAA 14 to the last known address of the dissenting shareholder
Every 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. This condition shall apply if
the terms of acquisition as per the scheme or the contract provide for payment of cash in lieu of
the shares of the Transferor Company which are proposed to be acquired.
Any person issuing a circular containing any false statement or giving any false impression or
containing any omission shall be punishable with fine, which may extend to five hundred
rupees.
After the scheme or contract and the recommendation of the Board of Directors of the
transferor Company, if any, shall be circulated and approval of not less than 9/10th in value of
Transferor Company should be obtained within 4 months from the date of circulation. It is
necessary that the Memorandum of Association of the transferee company should contain as
one of the objects of the company, a provision to takeover the controlling shares in another
company. If the memorandum does not have such a provision, the company must alter the
objects clause in its memorandum, by convening an extra ordinary general meeting. The
approval is not required to be necessarily obtained in a general meeting of the shareholders of
the Transferor Company.
Once approval is available, the Transferee Company becomes eligible for the right of
compulsory acquisition of minority interest.
The Transferee Company has to send notice to the shareholders who have not accepted the
offer (i.e. dissenting shareholders) intimating them the need to surrender their shares.
Once the acquisition of shares in value, not less than 90% has been registered in the books of
the transferor Company, the transferor Company shall within one month of the date of such
registration, inform the dissenting shareholders of the fact of such registration and of the
receipt of the amount or other consideration representing the price payable to them by the
transferee Company.
The transferee Company having acquired shares in value not less than 90% is under an
obligation to acquire the minority stake as stated aforesaid and hence it is required to transfer
the amount or other consideration equal to the amount or other consideration required for
acquiring the minority stake to the transferee Company. The amount or consideration required
to be so transferred by the transferee Company to the transferor company, shall not in any
way, less than the terms of acquisition offered under the scheme or contract.
Any amount or other consideration received by the Transferor Company in the manner
aforesaid shall be paid into a separate bank account. Any such sums and any other
148 PP-CRVI
consideration so received shall be held by the transferor Company in trust for the several
persons entitled to the shares in respect of which the said sums or other consideration were
respectively received.
The takeover achieved in the above process through this Section 235 of the Act will not fall within the
meaning of amalgamation under the Income Tax Act and as such benefits of amalgamation provided
under the said Act will not be available to the acquisition under consideration. The takeover in the
above process will not enable carrying forward of unabsorbed depreciation and accumulated losses of
the transferor Company in the transferee Company for the reason that the takeover does not result in
the transferor Company losing its identity.
Check list
Transferor Company
The transferor company has to take care of the following points:

1. The offer of a company (Transferee Company) to acquire shares of a Transferor Company
should be received from the transferee company.
2. It should have been approved by the Board of Directors at a duly convened and held meeting.
3. Offer received from the transferee company along with other documents, particulars etc. should
have been circulated to the members of the company in Form CAA 14.
4. The scheme or contract for transfer of shares of the company to the transferee company has
been approved by the shareholders of not less than nine-tenths in value of the shares within
the stipulated period of four months.
5. If the transferee company wanted to acquire the shares held by dissenting shareholders, the
transferor company has received from the transferee company a copy of the notice sent by the
transferor company to the dissenting shareholders together with duly filled in and signed
transfer instruments along with value of the shares sought to be transferred.
6. The transferee company should have been registered as holder of the transferred shares and
the consideration received for the shares has been deposited in a separate bank account to be
held in trust for the dissenting shareholders.
Documents etc. involved in this process:
1. Offer of a scheme or contract from the transferee company.
2. Minutes of Board meeting containing consideration of the offer and its acceptance or rejection.
3. Notice calling general meeting.
4. Form CAA 14 circulated to the members.
5. Minutes of general meeting of the company containing approval of the offer by statutory
majority in value and in numbers also, if required.
6. Court order if any.
7. Register of Members.
8. Notice sent by the transferee company to dissenting shareholders for acquiring their shares.
9. Duly filled in and executed instrument(s) of transfer of shares held by the dissenting
shareholders.
10. Bank Pass Book or Statement of Account in respect of the amount deposited in the special
bank account to be kept in trust for the dissenting shareholders.
11. Annual Report.
Transferee Company
The transferee company has to take care of the following points:

1. Offer made to the transferor company.
2. Copy of notice for the general meeting along with a copy of Form CAA 14 circulated by the
transferor company to its members.
3. Intimation received from the transferor company in respect of approval of the offer by the
requisite majority of the shareholders of that company.
4. Notice as prescribed in Section 235 of the Companies Act, 2013 given by the company to
dissenting shareholders of the transferor company for the purpose of acquiring their shares.
5. If there is any Court order in favour of the dissenting shareholders of the transferor company,
terms of the same has been complied with.
6. If Sub-section (2) is attracted, the company must ensure that the prescribed notice has been
sent to those shareholders of the transferor company who have not assented to the transfer of
the shares and that such shareholders have agreed to transfer their shares to the company.
7. To ensure that a copy of the notice has been sent to the dissenting shareholders of the
transferor company and duly executed instrument(s) of transfer together with the value of the
shares have been sent to the transferor company.
Documents etc. involved in this process

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.
TAKEOVER OF LISTED COMPANIES

Takeover of companies whose securities are listed on one or more recognized stock exchanges in India
150 PP-CRVI
is regulated by the Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (the Regulations).
Therefore, before planning a takeover of a listed company, any acquirer should understand the
compliance requirements under the Regulations and also the requirements under the SEBI (LODR)
Regulations, and the Companies Act. There could also be some compliance requirements under the
Foreign Exchange Management Act if the acquirer were a person resident outside India.
As per Regulation 38, the listed entity shall comply with the minimum public shareholding requirements
as specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 in the
manner as specified by the Board from time to time. In other words, the listed entity shall ensure that
the public shareholding shall be maintained at 25% of the total paid up share capital of the company
failing which the company shall take steps to increase the public shareholding to 25% of the total paid
up share capital by the methods as specified in Rule 19(2) and Rule 19A of the Securities Contracts
(Regulation) Rules, 1957
This provisions shall not apply to entities listed on institutional trading platform without making a public
issue.
REQUIREMENTS UNDER SEBI REGULATIONS
Introduction
The earliest attempts at regulating takeovers in India can be traced back to the 1990s with the
incorporation of Clause 40 in the Listing Agreement.
While, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1994 which
were notified in November 1994 made way for regulation of hostile takeovers and competitive
offers for the first time; the subsequent regulatory experience from such offers brought out
certain inadequacies existing in those Regulations. As a result, the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 were introduced and notified on
February 20, 1997, pursuant to repeal of the 1994 Regulations.
Owing to several factors such as the growth of Mergers & Acquisitions activity in India as the
preferred mode of restructuring, the increasing sophistication of takeover market, the decade
long regulatory experience and various judicial pronouncements, it was felt necessary to review
the Takeover Regulations 1997. Accordingly, SEBI formed a Takeover Regulations Advisory
Committee (TRAC) in September 2009 under the Chairmanship of (Late) Shri. C. Achuthan,
Former Presiding Officer, Securities Appellate Tribunal (SAT) for this purpose. After extensive
public consultation on the report submitted by TRAC, SEBI came out with the SAST
Regulations 2011 which were notified on September 23, 2011. The Takeover Regulations, 1997
stands repealed from October 22, 2011, i.e. the date on which SAST Regulations, 2011 come
into force.
Meaning of certain terms

Acquirer
Acquirer means any person who, whether by himself, or through, or with persons acting in concert with
him, directly or indirectly, acquires or agrees to acquire shares or voting rights in, or control over a
target company. An acquirer can be a natural person, a corporate entity or any other legal entity.
Person Acting in Concert (PACs)

PACs are individual(s)/company (ies) or any other legal entity (ies) who, with a common objective or
purpose of acquisition of shares or voting rights in, or exercise of control over the target company,
pursuant to an agreement or understanding, formal or informal, directly or indirectly cooperate for
acquisition of shares or voting rights in, or exercise of control over the target company. SAST
Regulations, 2011 define various categories of persons who are deemed to be acting in concert with
other persons in the same category, unless the contrary is established.
Target Company
The company/body corporate or corporation whose equity shares are listed in a stock Exchange and in
which a change of shareholding or control is proposed by an acquirer, or which is being taken over is
referred to as the Target Company.
Control
control includes the right to appoint majority of the directors or to control the management or policy
decisions exercisable by a person or persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding or management rights or shareholders agreements or voting
agreements or in any other manner:
Provided that a director or officer of a target company shall not be considered to be in control over such
target company, merely by virtue of holding such a position;
Shares
Shares means shares in the equity share capital of a target company carrying voting rights, and
includes any security which entitles the holder thereof to exercise voting rights. Shares shall also
include all depository receipts carrying an entitlement to exercise voting rights in the target company.
Disclosures related provisions ( Regulations, 29, 30 and 31)

It may be noted that the word shares for disclosure purposes include convertible securities
also.
Event based Disclosures ( Regulation 29)

(a) Any person, who along with PACs crosses the threshold limit of 5% of shares or voting rights, has to
disclose his aggregate shareholding and voting rights to the Target Company at its registered office and
to every Stock Exchange where the shares of the Target Company are listed within 2 working days of
acquisition as per the format specified by SEBI.
(b). Any person who holds 5% or more of shares or Voting rights of the target company and who
acquires or sells shares representing 2% or more of the voting rights, shall disclose details of such
acquisitions/sales to the Target company at its registered office and to every Stock Exchanges where
the shares of the Target Company are listed within 2 working days of such transaction, as per the
format specified by SEBI.
Shares taken by way of encumbrance shall be treated as an acquisition and on release of such
encumbrance as a disposal.
Continual Disclosures (Regulation 30)
Continual disclosures of aggregate shareholding shall be made within 7 working days from the end of
152 PP-CRVI
the financial year (ending on March 31) to the target company at its registered office and every stock
exchange where the shares of the Target Company are listed by:
(a) Shareholders (along with PACs, if any) holding shares or voting rights entitling them to exercise
25% or more of the voting rights in the target company.
(b) Promoter (along with PACs, if any) of the target company irrespective of their percentage of
holding.
Disclosures of encumbered shares ( Regulation 31)
The promoter of the target company shall disclose details of shares encumbered by them or by their
PACs within 7 working days of such creation to the target company at its registered office and to the
stock exchange where the shares of the company are listed. Further the promoter of the company shall
intimate the the target company at its registered office and to the stock exchange where the shares of
the company are listed dtails of any invocation or release of such encumbrance of shares held by them
within 7 working days of the occurrence of such an event.
As per Regulation 28(3), the term encumbrance shall include a pledge, lien or any such transaction,
by whatever name called. The promoters have to understand the nature of encumbrance and those
encumbrances which entail a risk of the shares held by promoters being appropriated or sold by a third
party, directly or indirectly, are required to be disclosed to the stock exchanges in terms of the Takeover
Regulations, 2011.
Computation of trigger limits for disclosures.
The word shares for disclosure purposes include convertible securities also. Hence for computation of
trigger limits for disclosures given above, percentage w.r.t shares shall be computed taking in to
account total number of equity shares and convertibles and the percentage w.r.t voting rights shall be
computed after considering voting rights on equity shares and other securities (like GDRs, if such GDRs
carry voting rights)
Illustration
An illustration is provided below for the calculation of trigger limits for disclosures.
Total Shares/voting capital of the company
Company A has 100 equity shares, 50 partly convertible Debentures (PCDs) and 10 GDRs. 1
GDR carries 1 voting right.
Total shares of company A= 100+50+10 = 160
Total voting capital of Company A= 100+10=110
Persons Bs holding of shares and voting rights
Person B has 8 equity shares, 7 PCDs and 1 GDR.
Person B has 8+7+1 =16 shares (shares for disclosure purpose includes convertible
securities)
Person Bs holding in terms of shares= 16/160=10% of shares
Person Bs voting rights= 8+1= 9 voting rights
Person Bs holding in terms of voting rights = 9/110=8 % of voting rights
Since person B is holding more than 5% of shares or voting rights, he is required to make disclosures
for any acquisition/ sale of 2% or more of shares or voting rights.
Acquisition by Person B
Scenario I
Person B acquires 2 equity shares and 2 PCDs.
In terms of shares, person B has acquired 4/160=2.5% of shares
In terms of voting rights, person B has acquired 2/110= 1.8% of voting rights
Since acquisition done by person B represents 2 % or more of shares, the disclosure obligation is
triggered.
Scenario II
Person B acquires 20 PCDs
In terms of shares, person B has acquired 20 shares, i.e. 20/160 i.e. 12.5% shares.
In terms of voting rights, he has not acquired a single voting right i.e. 0 voting right
However, since acquisition done by person B represents 2% or more of shares (though no voting
rights), the disclosure obligations is triggered.
Open offer thresholds (Regulation 3)
The following are the threshold limits for acquisition of shares/voting rights, beyond which an obligation
to make an open offer is triggered
Acquisition of 25% or more shares or voting rights: An acquirer, who (along with PACs, if any)
holds less than 25% shares or voting rights in a target company and agrees to acquire shares or
acquires shares which along with his/PACs existing shareholding would entitle him to exercise 25% or
more shares or voting rights in a target company, will need to make a public announcement of making
an open offer to acquire the shares before acquiring such additional shares.
Acquisition of more than 5% shares or voting rights in a financial year: An acquirer who (along
with PACs, if any) holds 25% or more but less than the maximum permissible non-public shareholding
in a target company, can acquire additional shares in the target company as would entitle him to
exercise more than 5% of the voting rights in any financial year beginning April 01, only after making a
public announcement of making an open offer to acquire the shares.
Indirect acquisition of shares or control (Regulation 5)
(1) For the purposes of regulation 3 and regulation 4, acquisition of shares or voting rights in, or control
over, any company or other entity, that would enable any person and persons acting in concert with him
to exercise or direct the exercise of such percentage of voting rights in, or control over, a target
company, the acquisition of which would otherwise attract the obligation to make a public
announcement of an open offer for acquiring shares under these regulations, shall be considered as an
indirect acquisition of shares or voting rights in, or control over the target company.
(2) Notwithstanding anything contained in these regulations, in the case of an indirect acquisition
attracting the provisions of sub-regulation (1) where,
(a) the proportionate net asset value of the target company as a percentage of the consolidated
net asset value of the entity or business being acquired;
154 PP-CRVI
(b) the proportionate sales turnover of the target company as a percentage of the consolidated
sales turnover of the entity or business being acquired; or
(c) the proportionate market capitalisation of the target company as a percentage of the enterprise
value for the entity or business being acquired; is in excess of eighty per cent, on the basis of
the most recent audited annual financial statements, such indirect acquisition shall be regarded
as a direct acquisition of the target company for all purposes of these regulations including
without limitation, the obligations relating to timing, pricing and other compliance requirements
for the open offer.
Explanation. For the purposes of computing the percentage referred to in clause (c) of this
sub-regulation, the market capitalisation of the target company shall be taken into account on
the basis of the volume-weighted average market price of such shares on the stock exchange
for a period of sixty trading days preceding the earlier of, the date on which the primary
acquisition is contracted, and the date on which the intention or the decision to make the
primary acquisition is announced in the public domain, as traded on the stock exchange where
the maximum volume of trading in the shares of the target company are recorded during such
period.
Delisting offer (Regulation 5A)

(1) Notwithstanding anything contained in these regulations, in the event the acquirer makes a public
announcement of an open offer for acquiring shares of a target company in terms of regulations 3, 4 or
5, he may delist the company in accordance with provisions of the Securities and Exchange Board of
India (Delisting of Equity Shares) Regulations, 2009:
Provided that the acquirer shall have declared upfront his intention to so delist at the time of making the
Detailed Public Statement.
(2) Where an offer made under sub-regulation (1) is not successful,-

(i) on account of nonreceipt of prior approval of shareholders in terms of clause (b) of sub-
regulation (1) of regulation 8 of Securities and Exchange Board of India (Delisting of Equity
Shares) Regulations, 2009; or
(ii) in terms of regulation 17 of Securities and Exchange Board of India (Delisting of Equity Shares)
Regulations, 2009; or
(iii) on account of the acquirer rejecting the discovered price determined by the book building
process in terms of sub-regulation (1) of regulation 16 of Securities and Exchange Board of
India (Delisting of Equity Shares) Regulations, 2009,
the acquirer shall make an announcement within two working days in respect of such failure in all the
newspapers in which the detailed public statement was made and shall comply with all applicable
provisions of these regulations.
(3) In the event of the failure of the delisting offer made under sub regulation (1), the acquirer, through
the manager to the open offer, shall within five working days from the date of the announcement under
sub regulation (2), file with the Board, a draft of the letter of offer as specified in sub-regulation (1) of
regulation 16 and shall comply with all other applicable provisions of these regulations:
Provided that the offer price shall stand enhanced by an amount equal to a sum determined at the rate
of ten per cent per annum for the period between the scheduled date of payment of consideration to the
shareholders and the actual date of payment of consideration to the shareholders.
Explanation: For the purpose of this sub-regulation, scheduled date shall be the date on which the
payment of consideration ought to have been made to the shareholders in terms of the timelines in
these regulations.
(4) Where a competing offer is made in terms of sub-regulation (1) of regulation 20,-
(a) the acquirer shall not be entitled to delist the company;
(b) the acquirer shall not be liable to pay interest to the shareholders on account of delay due to
competing offer;
(c) the acquirer shall comply with all the applicable provisions of these regulations and make an
announcement in this regard, within two working days from the date of public announcement
made in terms of sub-regulation (1) of regulation 20, in all the newspapers in which the detailed
public statement was made.
(5) Shareholders who have tendered shares in acceptance of the offer made under sub-regulation (1),
shall be entitled to withdraw such shares tendered, within 10 working days from the date of the
announcement under sub regulation (2) .
(6) Shareholders who have not tendered their shares in acceptance of the offer made under sub-
regulation (1) shall be entitled to tender their shares in acceptance of the offer made under these
regulations.
Maximum Permissible non-Public Shareholding means such percentage shareholding in the target
Company excluding the minimum Public Shareholding required under Securities Contracts Regulation
(Rules) 1957. The SCRR requires minimum Public Shareholding in case of every listed company other
than Public Sector Company to be at least 25%. In case of listed public sector company minimum
Public Shareholding to be maintained at least 10%. Thus maximum permissible non public share
holding r may be 75% and in case of Public Sector companies it shall be 90%.
Voluntary Offer (Regulation 6)

A voluntary open offer under Regulation 6, is an offer made by a person who himself or through or
along with Persons acting in concert with him if any, holds 25% or more shares or voting rights in the
target company, but less than the maximum permissible non-public shareholding limit, for such number
of shares such that the aggregate of the shareholding of the acquirer after the offer shall not exceed the
maximum permissible non public shareholding.
Restrictions on voluntary open offer

A voluntary offer cannot be made if the acquirer or PACs with him has acquired any shares of the target
company in the 52 weeks prior to the voluntary offer without attracting the provisions of the regulations,
to make a public announcment. The acquirer is prohibited from acquiring any shares during the offer
period other than through the acquisitions in the open offer. The acquirer is also not entitled to acquire
any shares for a period of 6 months, after completion of open offer except pursuant to another voluntary
open offer.
Exemptions from open offer (Regulation 10)

Exemption may be
Automatic Exemption (under Regulation 10)
156 PP-CRVI
Exemption by SEBI (Regulation 11)
Exemption under Regulation 10 (Automatic exemption)

The following acquisitions shall be exempt from the obligation to make an open offer under regulation 3
and regulation 4 subject to fulfillment of the conditions stipulated therefor,
(a) acquisition pursuant to inter se transfer of shares amongst qualifying persons, being,
(i) immediate relatives;
(ii) persons named as promoters in the shareholding pattern filed by the target company in
terms of the listing agreement or these regulations for not less than three years prior to the
proposed acquisition;
(iii) a company, its subsidiaries, its holding company, other subsidiaries of such holding
company, persons holding not less than fifty per cent of the equity shares of such
company, other companies in which such persons hold not less than fifty per cent of the
equity shares, and their subsidiaries subject to control over such qualifying persons being
exclusively held by the same persons;
(iv) persons acting in concert for not less than three years prior to the proposed acquisition,
and disclosed as such pursuant to filings under the listing agreement;
(v) shareholders of a target company who have been persons acting in concert for a period of
not less than three years prior to the proposed acquisition and are disclosed as such
pursuant to filings under the listing agreement, and any company in which the entire equity
share capital is owned by such shareholders in the same proportion as their holdings in the
target company without any differential entitlement to exercise voting rights in such
company:
Provided that for purposes of availing of the exemption under this clause,
(i) If the shares of the target company are frequently traded, the acquisition price per
share shall not be higher by more than twenty-five per cent of the volume-weighted
average market price for a period of sixty trading days preceding the date of issuance
of notice for the proposed inter se transfer under sub-regulation (5), as traded on the
stock exchange where the maximum volume of trading in the shares of the target
company are recorded during such period, and if the shares of the target company are
infrequently traded, the acquisition price shall not be higher by more than twenty-five
percent of the price determined in terms of clause (e) of sub-regulation (2) of
regulation 8; and
(ii) the transferor and the transferee shall have complied with applicable disclosure
requirements set out in Chapter V of the SEBI (SAST) Regulations.
(b) acquisition in the ordinary course of business by,
(i) an underwriter registered with the Board by way of allotment pursuant to an underwriting
agreement in terms of the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009;
(ii) a stock broker registered with the Board on behalf of his client in exercise of lien over the
shares purchased on behalf of the client under the bye-laws of the stock exchange where
such stock broker is a member;
(iii) a merchant banker registered with the Board or a nominated investor in the process of
market making or subscription to the unsubscribed portion of issue in terms of Chapter XB
of the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009;
(iv) any person acquiring shares pursuant to a scheme of safety net in terms of regulation 44 of
the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009;
(v) a merchant banker registered with the Board acting as a stabilizing agent or by the
promoter or pre-issue shareholder in terms of regulation 45 of the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;
(vi) by a registered market-maker of a stock exchange in respect of shares for which he is the
market maker during the course of market making;
(vii) a Scheduled Commercial Bank, acting as an escrow agent; and
(viii) invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a
pledgee.
(c) acquisitions at subsequent stages, by an acquirer who has made a public announcement of an
open offer for acquiring shares pursuant to an agreement of disinvestment, as contemplated in
such agreement:
Provided that,
(i) both the acquirer and the seller are the same at all the stages of acquisition; and
(ii) full disclosures of all the subsequent stages of acquisition, if any, have been made in the
public announcement of the open offer and in the letter of offer.
(d) acquisition pursuant to a scheme,
(i) made under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1
of 1986) or any statutory modification or re-enactment thereto; This Act has been repealed
and all applications have to be made to the NCLT under the Companies Act, 2013,
however no corresponding changes have been made in the SEBI Regulations.
(ii) of arrangement involving the target company as a transferor company or as a transferee
company, or reconstruction of the target company, including amalgamation, merger or
demerger, pursuant to an order of a court or a competent authority under any law or
regulation, Indian or foreign; or
(iii) of arrangement not directly involving the target company as a transferor company or as a
transferee company, or reconstruction not involving the target companys undertaking,
including amalgamation, merger or demerger, pursuant to an order of a court or a
competent authority under any law or regulation, Indian or foreign, subject to,
(A) the component of cash and cash equivalents in the consideration paid being less than
twenty-five per cent of the consideration paid under the scheme; and
(B) where after implementation of the scheme of arrangement, persons directly or indirectly
holding at least thirty-three per cent of the voting rights in the combined entity are the same
as the persons who held the entire voting rights before the implementation of the scheme.
(e) acquisition pursuant to the provisions of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(f) acquisition pursuant to the provisions of the Securities and Exchange Board of India (Delisting
158 PP-CRVI
of Equity Shares) Regulations, 2009;

(g) acquisition by way of transmission, succession or inheritance;
(h) acquisition of voting rights or preference shares carrying voting rights arising out of the
operation of section 47 of the Companies Act, 2013.
(i) Conversion of debt into equity under Strategic Debt Restructuring Scheme - Acquisition of
equity shares by the consortium of banks, financial institutions and other secured lenders
pursuant to conversion of their debt as part of the Strategic Debt Restructuring Scheme in
accordance with the guidelines specified by the Reserve Bank of India:
Provided that the conditions specified under sub-regulation (5) or (6) of regulation 70 of the
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as may be applicable, are complied with.
(2) The acquisition of shares of a target company, not involving a change of control over such target
company, pursuant to a scheme of corporate debt restructuring in terms of the Corporate Debt
Restructuring Scheme notified by the Reserve Bank of India vide circular no. B.P.BC 15/21.04,
114/2001 dated August 23, 2001, or any modification or re-notification thereto provided such scheme
has been authorised by shareholders by way of a special resolution passed by postal ballot, shall be
exempted from the obligation to make an open offer under regulation 3.
(3) An increase in voting rights in a target company of any shareholder beyond the limit attracting an
obligation to make an open offer under sub-regulation (1) of regulation 3, pursuant to buy-back of
shares by the target company shall be exempt from the obligation to make an open offer provided such
shareholder reduces his shareholding such that his voting rights fall to below the threshold referred to in
sub-regulation (1) of regulation 3 within ninety days from the date of closure of the said buy-back offer.
(4) The following acquisitions shall be exempt from the obligation to make an open offer under sub-
regulation (2) of regulation 3,
(a) acquisition of shares by any shareholder of a target company, upto his entitlement, pursuant to
a rights issue;
(b) acquisition of shares by any shareholder of a target company, beyond his entitlement, pursuant
to a rights issue, subject to fulfillment of the following conditions,
(i) the acquirer has not renounced any of his entitlements in such rights issue; and
(ii) the price at which the rights issue is made is not higher than the ex-rights price of the
shares of the target company, being the sum of,
(A) the volume weighted average market price of the shares of the target company during a
period of sixty trading days ending on the day prior to the date of determination of the
rights issue price, multiplied by the number of shares outstanding prior to the rights issue,
divided by the total number of shares outstanding after allotment under the rights issue:
Provided that such volume weighted average market price shall be determined on the
basis of trading on the stock exchange where the maximum volume of trading in the shares
of such target company is recorded during such period; and
(B) the price at which the shares are offered in the rights issue, multiplied by the number of
shares so offered in the rights issue divided by the total number of shares outstanding after
allotment under the rights issue:
(c) increase in voting rights in a target company of any shareholder pursuant to buy-back of
shares:
Provided that,
(i) such shareholder has not voted in favour of the resolution authorising the buy-back of
securities under section 68 of the Companies Act, 2013);
(ii) in the case of a shareholder resolution, voting is by way of postal ballot;
(iii) where a resolution of shareholders is not required for the buyback, such shareholder, in his
capacity as a director, or any other interested director has not voted in favour of the
resolution of the board of directors of the target company authorising the buy-back of
securities under section 68 of the Companies Act, 2013; and
Note: Although no change has been made in the SEBI Takeover Regulations, the students
must refer to the appropriate section in the Companies Act, 2013
(iv) the increase in voting rights does not result in an acquisition of control by such shareholder
over the target company:
Provided further that where the aforesaid conditions are not met, in the event such
shareholder reduces his shareholding such that his voting rights fall below the level at
which the obligation to make an open offer would be attracted under sub-regulation (2) of
regulation 3, within ninety days from the date of closure of the buy-back offer by the target
company, the shareholder shall be exempt from the obligation to make an open offer;
(d) acquisition of shares in a target company by any person in exchange for shares of another
target company tendered pursuant to an open offer for acquiring shares under these
regulations;
(e) acquisition of shares in a target company from state-level financial institutions or their
subsidiaries or companies promoted by them, by promoters of the target company pursuant to
an agreement between such transferors and such promoter;
(f) acquisition of shares in a target company from a venture capital fund or category I Alternate
Investment Fund or a foreign venture capital investor registered with the Board, by promoters
of the target company pursuant to an agreement between such venture capital fund or category
I Alternate Investment Fund or foreign venture capital investor and such promoters.
(5) In respect of acquisitions under clause (a) of sub-regulation (1), and clauses (e) and (f) of sub-
regulation (4), the acquirer shall intimate the stock exchanges where the shares of the target company are
listed, the details of the proposed acquisition in such form as may be specified, at least four working
days prior to the proposed acquisition, and the stock exchange shall forthwith disseminate such
information to the public.
(6) In respect of any acquisition made pursuant to exemption provided for in this regulation, the acquirer
shall file a report with the stock exchanges where the shares of the target company are listed, in such
form as may be specified not later than four working days from the acquisition, and the stock exchange
shall forthwith disseminate such information to the public.
(7) In respect of any acquisition of or increase in voting rights pursuant to exemption provided for in
clause (a) of sub-regulation (1), sub-clause (iii) of clause (d) of sub regulation (1), clause (h) of sub-
regulation (1), sub-regulation (2), sub-regulation (3) and clause (c) of sub-regulation (4), clauses (a), (b)
and (f) of sub-regulation (4), the acquirer shall, within twenty-one working days of the date of
acquisition, submit a report in such form as may be specified along with supporting documents to the
Board giving all details in respect of acquisitions, along with a non-refundable fee of rupees one lakh
160 PP-CRVI
fifty thousand by way of a bankers cheque or demand draft payable in Mumbai in favour of the Board.
Explanation. For the purposes of sub-regulation (5), sub-regulation (6) and sub regulation (7) in the
case of convertible securities, the date of the acquisition shall be the date of conversion of such
securities.
Exemptions by the SEBI (Regulation 11)
(1) SEBI(The Board) may for reasons recorded in writing, grant exemption from the obligation to make
an open offer for acquiring shares under these regulations subject to such conditions as the Board
deems fit to impose in the interests of investors in securities and the securities market.
(2) The Board may for reasons recorded in writing, grant a relaxation from strict compliance with any
procedural requirement under Chapter III and Chapter IV subject to such conditions as the Board
deems fit to impose in the interests of investors in securities and the securities market on being satisfied
that,
(a) the target company is a company in respect of which the Central Government or State
Government or any other regulatory authority has superseded the board of directors of the
target company and has appointed new directors under any law for the time being in force, if,
(i) such board of directors has formulated a plan which provides for transparent, open, and
competitive process for acquisition of shares or voting rights in, or control over the target
company to secure the smooth and continued operation of the target company in the
interests of all stakeholders of the target company and such plan does not further the
interests of any particular acquirer;
(ii) the conditions and requirements of the competitive process are reasonable and fair;
(iii) the process adopted by the board of directors of the target company provides for details
including the time when the open offer for acquiring shares would be made, completed and
the manner in which the change in control would be effected; and
(b) the provisions of Chapter III and Chapter IV are likely to act as impediment to implementation
of the plan of the target company and exemption from strict compliance with one or more of
such provisions is in public interest, the interests of investors in securities and the securities
market.
(3) For seeking exemption under sub-regulation (1), the acquirer shall, and for seeking relaxation under
sub-regulation (2) the target company shall file an application with the Board, supported by a duly sworn
affidavit, giving details of the proposed acquisition and the grounds on which the exemption has been
sought.
(4) The acquirer or the target company, as the case may be, shall along with the application referred to
under sub-regulation (3) pay a non-refundable fee of rupees three lakh, by way of a bankers cheque or
demand draft payable in Mumbai in favour of the Board.
(5) The Board may after affording reasonable opportunity of being heard to the applicant and after
considering all the relevant facts and circumstances, pass a reasoned order either granting or rejecting
the exemption or relaxation sought as expeditiously as possible:
Provided that the Board may constitute a panel of experts to which an application for an exemption
under sub-regulation (1) may, if considered necessary, be referred to make recommendations on the
application to the Board.
(6) The order passed under sub-regulation (5) shall be hosted by the Board on its official website.
Open offer Process

1. Appointment of Manager to the offer
Prior to making of a public announcement, the acquirer shall appoint Merchant Banker
registered with SEBI, who is not an associate of the acquirer, as manager to the offer.
2. The public announcement of the open offer for acquiring shares required under these
regulations shall be made by the acquirer through such manager to the open offer.
3. Public announcement.
SEBI (SAST) Regulation, 2011 provides that whenever Acquirer acquires the shares or voting rights of
the Target Company in excess of the limits prescribed under Regulation 3 and 4, then the Acquirer is
required to give a Public Announcement of an Open Offer to the shareholders of the Target Company.
During the process of making the Public Announcement of an Open Offer, the Acquirer is required to
give Public Announcement and publish a Detailed Public Statement (DPS). The regulations have
prescribed the separate timeline for Public Announcement as well as for Detailed Public Statement. The
details of time line can be referred at Lesson 7 of Secretarial Audit, Compliance Management and Due
Diligence.
Filing Draft Letter of offer (Regulation 16)

Within 5 working days of publication of the DPS, the acquirer through the manager to the offer is
required to file a draft letter of offer with SEBI for its observations.
The Board shall give its comments on the draft letter of offer as expeditiously as possible but not later
than fifteen working days of the receipt of the draft letter of offer and in the event of no comments being
issued by the Board within such period, it shall be deemed that the Board does not have comments to
offer:
Provided that in the event the Board has sought clarifications or additional information from the
manager to the open offer, the period for issuance of comments shall be extended to the fifth working
day from the date of receipt of satisfactory reply to the clarification or additional information sought.
Provided further that in the event the Board specifies any changes, the manager to the open offer and
the acquirer shall carry out such changes in the letter of offer before it is dispatched to the
shareholders.
Escrow account (Regulation 17)
Escrow Account means a bank account which is required to be opened by an acquirer who proposes to
make public announcement of an open offer in pursuance of regulation 3, 4, 5 and 6 of SEBI (SAST)
Regulations, 2011. The Regulations have made detailed provisions regarding the Escrow Account.
These provisions are contained in Regulation 17 of SEBI (SAST) Regulations, 2011. Regulation 17(1)
of SEBI (SAST) Regulations, 2011 provides that Not later than two working days prior to the date of the
publication of the detailed public statement of open offer for acquiring shares, the acquirer shall create
an escrow account towards security for performance of his obligations under these regulations, and
deposit in such escrow account such aggregate amount as specified. The purpose of these provisions
162 PP-CRVI
is to ensure that the acquirer has sufficient funds to pay the consideration under the offer and he has
secured sufficient financial arrangement.
I. Timing of opening of Escrow Account: [Regulation 17(1)]
The Acquirer shall open an escrow account atleast two working days prior to the date of Detailed Public
Statement.
II. Amount to be deposited in Escrow Account: [Regulation 17(1)]
Sl. No. Consideration payable under the Escrow Amount

Open Offer
a. On the first Rs. 500 Crores 25% of the consideration
b. On the balance consideration An additional amount equal to

10%
It is further provided that where offer is made conditional upon minimum level of acceptance, then
higher of following two shall be deposited in the Escrow Account:
Hundred percent of the consideration payable in Fifty per cent of the consideration payable under
respect of minimum level of acceptance the open offer
If the Acquirer makes any upward revision in the open offer, whether by way of increase in offer price,
or of the offer size, then the Acquirer shall make corresponding increases to the amount kept in escrow
account prior to making such revision. [Regulation 17(2)]
III. Mode of Deposit in Escrow Account: [Regulation 17(3)]

(a) Cash Deposit with any scheduled commercial bank
(b) Bank guarantee issued in favor of the manager to the open offer by any scheduled commercial
bank
(c) Deposit of frequently traded and freely transferable equity shares or other freely transferable
securities with appropriate margin subject to compliance with regulation 9(2).
Important Points:
Applicable Regulation Details

17(4) Bank Guarantee or Deposit of Deposit at least 1% of the total
Security consideration payable in cash
with schedule commercial bank
as part of Escrow Account.
17(5) Cash deposit Empower the manager to the
open offer to instruct the bank to
issue a bankers cheque or
demand draft or to make payment
of the amounts lying to the credit
of the escrow account lying to the
credit of the escrow account
17(6) Bank Guarantee The bank guarantee shall be in

the favor of manager to the offer
and shall be kept valid throughout
the offer period and additional 30
days after the payment to the
shareholders who have tendered
their shares have been made.
17(7) Securities Manager to the Open Offer shall
be empowered to realize the
value of escrow account by way
of sale or otherwise of the shares
so deposited.
Further in case of any shortfall in

the amount in the escrow
account, such shortfall shall be
made good by the Manager.
IV. Release of amount from Escrow Account [Regulation 17(10)]

The amount lying in escrow account can be released in the following cases only:
1. In case of withdrawal of offer, the entire amount can be released only after certification by the
managers to the open offer.
2. The amount deposited in special escrow account is transferred to special bank account opened
with the Bankers to an issue; however the amount so transferred shall not exceed 90% of the
cash deposited in the escrow account.
3. The balance 10% in the escrow account is to be released to the acquirer on the expiry of thirty
days from the completion of all obligations under the open offer.
4. The entire amount to the acquirer on the expiry of thirty days from the completion of all
obligations under the offer where the open offer is for exchange of shares or other secured
instruments.
5. In the event of forfeiture of amount, the entire amount is distributed in the following manner:
5.1 One third of the amount to Target Company;
5.2 One third of the escrow account to the Investor Protection and Education Fund established
under SEBI (Investor Protection and Education Fund) Regulations, 2009;
5.3 Residual one third is to be distributed to the shareholders who have tendered their shares
in the offer.
Draft Letter of offer to Target Company and stock exchanges [Regulation 18(1)]
Simultaneously with the filing of the draft letter of offer with the Board under sub-regulation (1) of
regulation 16, the acquirer shall send a copy of the draft letter of offer to the target company at its
registered office address and to all stock exchanges where the shares of the target company are listed.
Dispatch of letter of offer to share holders [Regulation 18(2)]
The letter of offer shall be dispatched to the shareholders whose names appear on the register of
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members of the target company as of the identified date, not later than seven working days from the
receipt of comments from the Board or where no comments are offered by the Board, within seven
working days from the expiry of the stipulated period in sub-regulation (4) of regulation 16:
Provided that where local laws or regulations of any jurisdiction outside India may expose the acquirer
or the target company to material risk of civil, regulatory or criminal liabilities in the event the letter of
offer in its final form were to be sent without material amendments or modifications into such
jurisdiction, and the shareholders resident in such jurisdiction hold shares entitling them to less than five
per cent of the voting rights of the target company, the acquirer may refrain from dispatch of the letter of
offer into such jurisdiction:
Provided further that every person holding shares, regardless of whether he held shares on the
identified date or has not received the letter of offer, shall be entitled to tender such shares in
acceptance of the open offer.
Letter of offer to the custodian of shares underlying depository receipts (Regulation 18(3)
Simultaneously with the dispatch of the letter of offer in terms of sub-regulation (2), of regulation 18 the
acquirer shall send the letter of offer to the custodian of shares underlying depository receipts, if any, of
the target company.
Offer Price
Offer price is the price at which the acquirer announces to acquire shares from the public shareholders
under the open offer. The offer price shall not be less than the price as calculated under regulation 8 of
the SEBI (SAST) Regulations, 2011 for frequently or infrequently traded shares.
Revision of offer price [Regulation 18(4&5)]
Irrespective of whether a competing offer has been made, an acquirer may make upward revisions to
the offer price, and subject to the other provisions of these regulations, to the number of shares sought
to be acquired under the open offer, at any time prior to the commencement of the last three working
days before the commencement of the tendering period.
In the event of any revision of the open offer, whether by way of an upward revision in offer price, or of
the offer size, the acquirer shall,
(a) make corresponding increases to the amount kept in escrow account under regulation 17 prior
to such revision;
(b) make an announcement in respect of such revisions in all the newspapers in which the detailed
public statement pursuant to the public announcement was made; and
(c) simultaneously with the issue of such an announcement, inform the Board, all the stock
exchanges on which the shares of the target company are listed, and the target company at its
registered office.
Size of an Open Offer

An open offer, other than a voluntary open offer under Regulation 6, must be made for a minimum of
26% of the paid up capital of the target company existing as at the end of ten working days from the
closure of the bidding period. This will have to account for all the outstanding securities which are likely
to be converted till that period of time . . The size of the voluntary open offer under Regulation 6 must
be for at least such number of shares as would entitle the holder to exercise an additional 10% of the
total shares of the target company and shall not exceed such number of shares as would result in the
post acquisition holding of the acquirer and persons acting in concert with him exceeding the maximum
permissible non public shareholding applicable to such a target company .
Disclosure of acquisition during offer period [Regulation 18(6)]
The acquirer shall disclose during the offer period every acquisition made by the acquirer or persons
acting in concert with him of any shares of the target company in such form as may be specified, to
each of the stock exchanges on which the shares of the target company are listed and to the target
company at its registered office within twenty-four hours of such acquisition, and the stock exchanges
shall forthwith disseminate such information to the public:
Provided that the acquirer and persons acting in concert with him shall not acquire or sell any shares of
the target company during the period between three working days prior to the commencement of the
tendering period and until the expiry of the tendering period.
The acquirer shall facilitate tendering of shares by the shareholders and settlement of the same,
through the stock exchange mechanism as specified by the Board. [Regulation 18(6A)]
Advertisement before the tendering period [Regulation 18(7)]
The acquirer shall issue an advertisement in such form as may be specified, one working day before
the commencement of the tendering period, announcing the schedule of activities for the open offer, the
status of statutory and other approvals, if any, whether for the acquisition attracting the obligation to
make an open offer under these regulations or for the open offer, unfulfilled conditions, if any, and their
status, the procedure for tendering acceptances and such other material detail as may be specified:
Provided that such advertisement shall be,

(a) published in all the newspapers in which the detailed public statement pursuant to the public
announcement was made; and
(b) simultaneously sent to SEBI, all the stock exchanges on which the shares of the target
company are listed, and the target company at its registered office.
Offer period and tendering period
The term offer period pertains to the period starting from the date of the event triggering open offer till
completion of payment of consideration to shareholders by the acquirer or withdrawal of the offer by the
acquirer as the case may be.
The term tendering period refers to the 10 working days period falling within the offer period, during
which the eligible shareholders who wish to accept the open offer can tender their shares in the open
offer.
Tenure of tendering period [Regulation 18(8)]
The tendering period shall start not later than twelve working days from date of receipt of comments
from the Board under sub-regulation (4) of regulation 16 and shall remain open for ten working days.
Tendered shares shall not been withdrawn [Regulation 18(9)]
Shareholders who have tendered shares in acceptance of the open offer shall not be entitled to
withdraw such acceptance during the tendering period.
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Completion of requirements [Regulation 18(10&11)]
The acquirer shall, within ten working days from the last date of the tendering period, complete all
requirements under these regulations and other applicable law relating to the open offer including
payment of consideration to the shareholders who have accepted the open offer.
The acquirer shall be responsible to pursue all statutory approvals required by the acquirer in order to
complete the open offer without any default, neglect or delay:
Provided that where the acquirer is unable to make the payment to the shareholders who have
accepted the open offer within such period owing to non-receipt of statutory approvals required by the
acquirer, the Board may, where it is satisfied that such non-receipt was not attributable to any willful
default, failure or neglect on the part of the acquirer to diligently pursue such approvals, grant extension
of time for making payments, subject to the acquirer agreeing to pay interest to the shareholders for the
delay at such rate as may be specified:
Provided further that where the statutory approval extends to some but not all shareholders, the
acquirer shall have the option to make payment to such shareholders in respect of whom no statutory
approvals are required in order to complete the open offer.
Post offer Advertisement [Regulation 18(12)]
The acquirer shall issue a post offer advertisement in such form as may be specified within five working
days after the offer period, giving details including aggregate number of shares tendered, accepted,
date of payment of consideration.
(b) Such advertisement shall be,

(i) published in all the newspapers in which the detailed public statement pursuant to the public
announcement was made; and
(ii) simultaneously sent to the Board, all the stock exchanges on which the shares of the target
company are listed, and the target company at its registered office.
Conditional offer (Regulation 19)

An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional
offer.
Minimum level of acceptance implies minimum number of shares which the acquirer desires under the
said conditional offer. If the number of shares validly tendered in the conditional offer, are less than the
minimum level of acceptance stipulated by the acquirer, then the acquirer is not bound to accept any
shares under the offer.
In a conditional offer, if the minimum level of acceptance is not reached, the acquirer shall not acquire
any shares in the target company under the open offer or the Share Purchase Agreement which has
triggered the open offer.
Competing offer (Regulation 20)

Competitive offer is an offer made by a person, other than the acquirer who has made the first public
announcement. A competitive offer shall be made within 15 working days of the date of the Detailed
Public Statement (DPS) made by the acquirer who has made the first Public Announcement.
If there is a competitive offer, the acquirer who has made the original public announcement can revise
the terms of his open offer provided the revised terms are favorable to the shareholders of the target
company. Further, the bidders are entitled to make revision in the offer price up to 3 working days prior
to the opening of the offer. The schedule of activities and the offer opening and closing of all competing
offers shall be carried out with identical timelines.
Payment of consideration: (Regulation 21)

The acquirer shall complete payment of consideration whether in the form of cash, or as the case may
be, by issue, exchange/transfer of Securities, to all shareholders who have tendered shares in
acceptance of the open offer within 10 working days of the expiry of the tendering period, by
transferring the consideration to a Special Escrow Account.
Completion of acquisition (Regulation 22)

The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the target
company, whether by way of subscription to shares or a purchase of shares attracting the obligation to
make an open offer for acquiring shares, until the expiry of the offer period:
Provided that in case of an offer made under sub-regulation (1) of regulation 20, pursuant to a
preferential allotment, the offer shall be completed within the period as provided under sub-regulation
(1) of regulation 74 of Securities and Exchange Board of India (Issue of Capital and Disclosure)
Regulations, 2009.
Provided further that in case of a delisting offer made under regulation 5A, the acquirer shall complete
the acquisition of shares attracting the obligation to make an offer for acquiring shares in terms of
regulations 3, 4 or 5, only after making the public announcement regarding the success of the delisting
proposal made in terms of sub-regulation (1) regulation 18 of Securities and Exchange Board of India
(Delisting of Equity Shares) Regulations, 2009.
(2) Notwithstanding anything contained in sub-regulation (1), subject to the acquirer depositing in the
escrow account under regulation 17, cash of an amount equal to one hundred per cent of the
consideration payable under the open offer assuming full acceptance of the open offer, the parties to
such agreement may after the expiry of twenty-one working days from the date of detailed public
statement, act upon the agreement and the acquirer may complete the acquisition of shares or voting
rights in, or control over the target company as contemplated.
(3) The acquirer shall complete the acquisitions contracted under any agreement attracting the
obligation to make an open offer not later than twenty-six weeks from the expiry of the offer period:
Provided that in the event of any extraordinary and supervening circumstances rendering it impossible
to complete such acquisition within such period, the Board may for reasons to be published, may grant
an extension of time by such period as it may deem fit in the interests of investors in securities and the
securities market.
Withdrawal of open offer (Regulation 23)

An open offer once made cannot be withdrawn except in the following circumstances:
Statutory approvals required for the open offer or for effecting the acquisitions attracting the
obligation to make an open offer have been refused subject to such requirement for
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approvals having been specifically disclosed in the DPS and the letter of offer;
Any condition stipulated in the Share Purchase Agreement attracting the obligation to make
the open offer is not met for reasons outside the reasonable control of the acquirer, subject
to such conditions having been specifically disclosed in the DPS and the letter of offer;
Sole acquirer being a natural person has died;
Such circumstances which in the opinion of SEBI merit withdrawal of open offer.
Obligations of the acquirer.(Regulation 25)

(1) Prior to making the public announcement of an open offer for acquiring shares under these
regulations, the acquirer shall ensure that firm financial arrangements have been made for fulfilling the
payment obligations under the open offer and that the acquirer is able to implement the open offer,
subject to any statutory approvals for the open offer that may be necessary.
(2) In the event the acquirer has not declared an intention in the detailed public statement and the letter
of offer to alienate any material assets of the target company or of any of its subsidiaries whether by
way of sale, lease, encumbrance or otherwise outside the ordinary course of business, the acquirer,
where he has acquired control over the target company, shall be debarred from causing such alienation
for a period of two years after the offer period:
Provided that in the event the target company or any of its subsidiaries is required to so alienate assets
despite the intention to alienate not having been expressed by the acquirer, such alienation shall
require a special resolution passed by shareholders of the target company, by way of a postal ballot
and the notice for such postal ballot shall inter alia contain reasons as to why such alienation is
necessary.
(3) The acquirer shall ensure that the contents of the public announcement, the detailed public
statement, the letter of offer and the post-offer advertisement are true, fair and adequate in all material
aspects and not misleading in any material particular, and are based on reliable sources, and state the
source wherever necessary.
(4) The acquirer and persons acting in concert with him shall not sell shares of the target company held
by them, during the offer period.
(5) The acquirer and persons acting in concert with him shall be jointly and severally responsible for
fulfillment of applicable obligations under these regulations.
Obligations of the target company.(Regulation 26)

(1) Upon a public announcement of an open offer for acquiring shares of a target company being made,
the board of directors of such target company shall ensure that during the offer period, the business of
the target company is conducted in the ordinary course consistent with past practice.
(2) During the offer period, unless the approval of shareholders of the target company by way of a
special resolution by postal ballot is obtained, the board of directors of either the target company or any
of its subsidiaries shall not,
(a) alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter
into any agreement therefor outside the ordinary course of business;
(b) effect any material borrowings outside the ordinary course of business;
(c) issue or allot any authorised but unissued securities entitling the holder to voting rights:
Provided that the target company or its subsidiaries may,

(i) issue or allot shares upon conversion of convertible securities issued prior to the public
announcement of the open offer, in accordance with pre-determined terms of such
conversion;
(ii) issue or allot shares pursuant to any public issue in respect of which the red herring
prospectus has been filed with the Registrar of Companies prior to the public
announcement of the open offer; or
(iii) issue or allot shares pursuant to any rights issue in respect of which the record date has
been announced prior to the public announcement of the open offer;
(d) implement any buy-back of shares or effect any other change to the capital structure of the
target company;
(e) enter into, amend or terminate any material contracts to which the target company or any of its
subsidiaries is a party, outside the ordinary course of business, whether such contract is with a
related party, within the meaning of the term under applicable accounting principles, or with any
other person; and
(f) accelerate any contingent vesting of a right of any person to whom the target company or any
of its subsidiaries may have an obligation, whether such obligation is to acquire shares of the
target company by way of employee stock options or otherwise.
(3) In any general meeting of a subsidiary of the target company in respect of the matters referred to in
sub-regulation (2), the target company and its subsidiaries, if any, shall vote in a manner consistent with
the special resolution passed by the shareholders of the target company.
(4) The target company shall be prohibited from fixing any record date for a corporate action on or after
the third working day prior to the commencement of the tendering period and until the expiry of the
tendering period.
(5) The target company shall furnish to the acquirer within two working days from the identified date, a
list of shareholders as per the register of members of the target company containing names, addresses,
shareholding and folio number, in electronic form, wherever available, and a list of persons whose
applications, if any, for registration of transfer of shares are pending with the target company:
Provided that the acquirer shall reimburse reasonable costs payable by the target company to external
agencies in order to furnish such information.
(6) Upon receipt of the detailed public statement, the board of directors of the target company shall
constitute a committee of independent directors to provide reasoned recommendations on such open
offer, and the target company shall publish such recommendations:
Provided that such committee shall be entitled to seek external professional advice at the expense of
the target company.
(7) The committee of independent directors shall provide its written reasoned recommendations on the
open offer to the shareholders of the target company and such recommendations shall be published in
such form as may be specified, at least two working days before the commencement of the tendering
period, in the same newspapers where the public announcement of the open offer was published, and
170 PP-CRVI
simultaneously, a copy of the same shall be sent to,

(i) the Board;
(ii) all the stock exchanges on which the shares of the target company are listed, and the stock
exchanges shall forthwith disseminate such information to the public; and
(iii) to the manager to the open offer, and where there are competing offers, to the manager to the
open offer for every competing offer.
(8) The board of directors of the target company shall facilitate the acquirer in verification of shares
tendered in acceptance of the open offer.
(9) The board of directors of the target company shall make available to all acquirers making competing
offers, any information and co-operation provided to any acquirer who has made a competing offer.
(10) Upon fulfillment by the acquirer, of the conditions required under these regulations, the board of
directors of the target company shall without any delay register the transfer of shares acquired by the
acquirer in physical form, whether under the agreement or from open market purchases, or pursuant to
the open offer.
Obligations of the manager to the open offer.(Regulation 27)

(1) Prior to public announcement being made, the manager to the open offer shall ensure that,
(a) the acquirer is able to implement the open offer; and
(b) firm arrangements for funds through verifiable means have been made by the acquirer to meet
the payment obligations under the open offer.
(2) The manager to the open offer shall ensure that the contents of the public announcement, the
detailed public statement and the letter of offer and the post offer advertisement are true, fair and
adequate in all material aspects, not misleading in any material particular, are based on reliable
sources, state the source wherever necessary, and are in compliance with the requirements under
these regulations.
(3) The manager to the open offer shall furnish to the Board a due diligence certificate along with the
draft letter of offer filed under regulation 16.
(4) The manager to the open offer shall ensure that market intermediaries engaged for the purposes of
the open offer are registered with the Board.
(5) The manager to the open offer shall exercise diligence, care and professional judgment to ensure
compliance with these regulations.
(6) The manager to the open offer shall not deal on his own account in the shares of the target
company during the offer period.
(7) The manager to the open offer shall file a report with the Board within fifteen working days from the
expiry of the tendering period, in such form as may be specified, confirming status of completion of
various open offer requirements.
DEFENSE STRATEGIES TO TAKEOVER BIDS
A hostile tender offer made directly to a target companys shareholders, with or without previous
overtures to the management, has become an increasingly frequent means of initiating a corporate
combination. As a result, there has been considerable interest in devising defense strategies by actual
and potential targets.
Defenses can take the form of fortifying one self, i.e., to make the company less attractive to takeover
bids or more difficult to take over and thus discourage any offers being made. These include, inter alia,
asset and ownership restructuring, anti-takeover constitutional amendments, adoption of poison pill
rights plans, and so forth. Defensive actions are also resorted to in the event of perceived threat to the
company, ranging from early intelligence that a raider or any acquirer has been accumulating the
companys stock to an open tender offer. Adjustments in asset and ownership structures may also be
made even after a hostile takeover bid has been announced.
Defensive Measures
Adjustments in Asset and Ownership Structure
Firstly, consideration has to be given to steps, which involve defensive restructuring that create barriers
specific to the bidder. These include purchase of assets that may cause legal problems, purchase of
controlling shares of the bidder itself, sale to the third party of assets which made the target attractive to
the bidder, and issuance of new securities with special provisions conflicting with aspects of the
takeover attempt.
A second common theme is to create a consolidated vote block allied with target management.
Thus, securities were issued through private placements to parties friendly or in business alliance with
management or to the management itself. Moreover, another method can be to repurchase publicly
held shares to increase an already sizable management-allied block in place.
A third common theme is the dilution of the bidders vote percentage through issuance of new equity
claims. However, this option in India is strictly regulated vide Section 81A and Regulation 23 of the
Takeover Code, 1997. A hostile bidder in these circumstances usually fails in the bid if the bidder has
resource constraints in increasing its interest proportionately.
The Crown Jewel Strategy
The central theme in such a strategy is the divestiture of major operating unit most coveted by the
bidder-commonly known as the crown jewel strategy. Consequently, the hostile bidder is deprived of
the primary intention behind the takeover bid. A variation of the crown jewel strategy is the more
radical scorched earth approach. Vide this novel strategy, the target sells off not only the crown jewel
but also properties to diminish its worth. Such a radical step may however be, self-destructive and
unwise in the companys interest. However, the practice in India is not so flexible. The Companies Act,
1956 has laid down certain restrictions on the power of the Board. Vide Section 293(1), the Board
cannot sell the whole or substantially the whole of its undertakings without obtaining the permission of
the company in a general meeting. However, the SEBI (Substantial Acquisitions and Takeover)
Regulations, 1997 vide Regulation 23 prescribes general obligations for the Board of Directors of the
target company. Under the said regulation, it will be difficult for any target company to sell, transfer,
encumber or otherwise dispose of or enter into an agreement to sell, transfer, encumber or for dispose
of assets once the predator has made a public announcement. Thus, the above defense can only be
used before the predator/bidder makes the public announcement of its intention to takeover the target
company.
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The Packman Defence
This strategy, although unusual, is called the packman strategy. Under this strategy, the target
company attempts to purchase the shares of the raider company. This is usually the scenario if the
raider company is smaller than the target company and the target company has a substantial cash flow
or liquidable asset.
Targeted Share Repurchase or Buyback
This strategy is really one in which the target management uses up a part of the assets of the company
on the one hand to increase its holding and on the other it disposes of some of the assets that make the
target company unattractive to the raider. The strategy therefore involves a creative use of buyback of
shares to reinforce its control and detract a prospective raider. But buyback the world over is used
when the excess money with the company neither gives it adequate returns on reinvestment in
production or capital nor does it allow the company to redistribute it to shareholders without negative
spin offs.
An example that demonstrates this contention is the distribution of high dividends in a particular year if
not followed in the next sends the share prices spiraling down. Also the offer once made cannot be
withdrawn unlike a public offer under the Takeover Regulations. This means that if the raider withdraws
its public offer it would imply that the target company would still have to go through with the buyback.
This is an expensive proposition if the only motivation to go for the buyback was to dissuade the raider.
Golden Parachutes
Golden parachutes refer to the separation clauses of an employment contract that compensate
managers who lose their jobs under a change-of-management scenario. The provision usually calls for
a lump-sum payment or payment over a specified period at full and partial rates of normal
compensation. The provisions which would govern a golden parachute employment contract in India
would be Sections 318-320 of the Companies Act, 1956 which govern the provisions compensation for
loss of office. Thus, a perusal of the said provisions would show that payments as compensation for the
loss of office is allowed to be made only to the managing director, a director holding an office of
manager or a whole time director. Therefore, golden parachute contracts with the entire senior
management, as is the practice in the U.S., is of no consequence in India. Moreover, payment of
compensation is expressly disallowed if in the case of a director resigning as a consequence of
reconstruction of the company, or its amalgamation with any other corporate bodies. Furthermore, there
exists a maximum limit as to the quantum of the compensation, subject to the exclusionary categories,
to the total of the remuneration the director would have earned for the unexpired residue of term of
office, or three years, whichever is less.
Anti-takeover amendments or shark repellants
An increasingly used defense mechanism is anti-takeover amendments to the companys constitution or

articles of association, popularly called shark repellants. Thus, as with all amendments of the
charter/articles of association of a company, the anti-takover amendments have to be voted on and
approved by the shareholders. The practice consists of the companies changing the articles,
regulations, bye-laws etc. to be less attractive to the corporate bidder.
Anti takeover amendments generally impose new conditions on the transfer of managerial control of the
firm through a merger, tender offer, or by replacement of the Board of Directors. In India every company
has the clear power to alter its articles of association by a special resolution as provided under Section
31 of the Companies Act. The altered articles will bind the members just in the same way as did the
original articles. But that will not give the altered articles a retrospective effect. The power of alteration
of the articles as conferred by Section 31 is almost absolute. It is subject only to two restrictions. In the
first place, the alteration must not be in contravention of the provisions of the Act, i.e. should not be an
attempt to do something that the Act forbids. Secondly, the power of alteration is subject to the
conditions contained in the memorandum of association i.e. alter only the articles of the company as
relate to the management of the company but not the very nature and constitution of the company. Also
the alteration should not constitute a fraud on the minority.
Types of Anti-Takeover Amendments

There are four major types of anti-takeover amendments.
Supermajority Amendments
These amendments require shareholder approval by at least two thirds vote and sometimes as much as
90% of the voting power of outstanding capital stock for all transactions involving change of control. In
most existing cases, however, the supermajority agreements have a board-out clause which provides the
board with the power to determine when and if the supermajority provisions will be in effect. Pure or
inflexible supermajority provisions would seriously limit the managements scope of options and flexibility
in takeover negotiations.
Fair-Price Amendments
These are supermajority provisions with a board out clause and an additional clause waiving the
supermajority requirement if a fair-price is paid for the purchase of all the shares. The fair price is
normally defined as the highest priced paid by the bidder during a specified period. Thus, fair-price
amendments defend against two-tier tender offers that are not approved by the targets board.
Classified Boards
Another major type of anti-takeover amendments provides for a staggered, or classified, Board of
Directors to delay effective transfer and control in a takeover. The much touted management
rationale in proposing a classified board is to ensure continuity of policy and experience. In the
United States, the legal position of such classified or staggered boards is quite flexible. An ideal
example is when a nine-member board may be divided into 3 classes, with only three members
standing for election to a three year term each, such being the modalities of the retirement by
rotation. Thus, a new majority shareholder would have to wait for at least two annual general
meetings to gain control of the Board of Directors. In the Indian company law regime, the scope for
such amendments is highly restricted. The provision of the Companies Act is designed to eradicate
the mischief caused by perpetual managements. At an AGM only one-third of the directors of the
company, whose offices are determinable by retirement, will retire. Therefore putting the example in
the Indian context, in case of 9 directors, 3 can be made permanent directors by amending the
articles i.e. one-third can be given permanent appointment. Thus the acquirer would have to wait
for atleast three annual general meetings before he gains control of the board. But this is subject to
such conditions which provide that the company may by an ordinary resolution, remove a director
before the expiration of his period of office. Thus any provision in the articles of the company or any
agreement between a director and a company by which the director is rendered irremovable from
office by an ordinary resolution would be void, being contrary to the Act. Therefore, to ensure
domination of the board of the target management, there needs to be strength to defeat an ordinary
resolution.
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Authorization of Preferred Stock
Vide such provisions, the Board of Directors is authorized to create a new class of securities with
special voting rights. This security, typically preferred stock, may be issued to a friendly party in a
control contest. Thus, this device is a defense against hostile takeover bids, although historically it was
used to provide the Board of Directors with flexibility in financing under changing economic conditions.
Refusal to Register Transfer of Shares
Refusal by the Board of Directors to register a transfer is an important strategy to avert a takeover.
Poison Pill Defenses
A controversial but popular defense mechanism against hostile takeover bids is the creation of
securities called poison pills. These pills provide their holders with special rights exercisable only after
a period of time following the occurrence of a triggering event such as a tender offer for the control or
the accumulation of a specified percentage of target shares. These rights take several forms but all are
difficult and costly to acquire control of the issuer, or the target firm. Poison pills are generally adopted
by the Board of Directors without shareholder approval. Usually the rights provided by the poison pill
can be altered quickly by the board or redeemed by the company anytime after they become
exercisable following the occurrence of the triggering event. These provisions force the acquirer to
negotiate directly with the target companys board and allow some takeover bids to go through.
Proponents of the poison pill argue that poison pills do not prohibit all takeovers but enhance the ability
of the Board of Directors to bargain for a fair price.
Legal Issues Concerning Poison Pill Devices
The legality of poison pills has been questioned in courts of law because they alter the relationships
among the principals (shareholders) without their approval by vote. In most poison pills, the agents
(Board of Directors) adopt rights plans which treat shareholders of the same class unequally in situation
involving corporate control. Thus poison pills have been vulnerable to court review especially in the
United States.
Corporate restructuring through the M&A route is here to stay. The defenses mentioned above are only
enumerative of the fast evolving corporate practice in this regard. This kind of corporate synergy
requires that the legal paradigm so adjust itself, that it is in a position to optimize the benefits that
accrue from such restructuring.
Globalization of the Indian economy started changing the landscape of the Indian industry. Following
economic reforms, there was a discernible trend among promoters and established corporate groups
towards consolidation of market share and diversification into new areas, in a limited way through
acquisition of companies, but in a more pronounced manner through mergers and amalgamations.
Perhaps the biggest facilitators for Indian businessmen were the most flexible norms and terms
announced by the Indian government, which had announced that the companies with a proven track
would be allowed to make acquisitions abroad in non-related areas as well as their major fields. In
addition, the government removed the $100 million cap on foreign investment by Indian companies and
raised it to the net worth of the companies. The Reserve Bank of India (RBI), also stipulated that the
local companies could raise external commercial borrowings for overseas direct investments in their
joint ventures and wholly owned subsidiaries, including mergers and acquisitions overseas.
As a direct result of such liberal regulations, Indian companies, including branches of multinational,
became more adventurous in their business forays.
CROSS BORDERS TAKEOVERS

Cross Border Takeover is a much sort after term in recent years. Competitiveness among the domestic
firms forces many businesses to go global. There are various factors which motivate firms to go for
global takeovers. Apart from personal glory, global takeovers are often driven by market consolidation,
expansion or corporate diversification motives. Also, financial, accounting and tax related matters
inspire such takeovers.
The firms engaged in Cross borders takeovers can be of three types:

First, firm incorporated in one country listed in different countries including its own e.g.
ARCELOR.
Second, firm incorporated in one country listed exclusively in a foreign country e.g. TELVENT.
And lastly, firms incorporated in one country listed in more than one foreign country e.g. EADS.
Expansion and diversification are one of the primary reasons to cross the border as the domestic
markets usually do not provide the desired growth opportunities. One has to look outside its
boundaries and play out in the global arena to seek new opportunities and scale new heights. Such
companies have already improved profitability through better cost management and diversification
at the national field.
Another main reason for cross border takeovers is to attain monopoly. Acquirer company is always on
the look out for companies which are financially vulnerable but have untapped resources or intellectual
capital that can be exploited by the purchaser.
Globalization has certainly helped in the recent spurt in cross border takeovers. The key feature of
globalization is that it integrates world economies together. Many nations have opened their economies
and made laws and regulations that attract new companies to come into the country.
What are the legal implications to a cross border merger and takeover? International law prescribes that in
a cross-border merger, the target firm becomes a national of the country of the acquirer. Among other
effects, the change in nationality implies a change in investor protection, because the law that is
applicable to the newly merged firm changes as well. More generally, the newly created firm shares
features of the corporate governance systems of the two merging firms. Therefore, Cross-border mergers
provide a natural experiment to analyse the effects of changes-both improvements and deteriorations, in
corporate governance on firm value.
There are various benefits of cross border takeovers. Firstly, they provide newer and better technology.
It also provides employment opportunities as the firm is bigger than before and more employees are to
be inducted in the merged company. It generally enhances the market capitalization of the combined
entity.
Global takeovers are complex processes. Despite some harmonized rules, taxation issues are mainly
dealt within national rules, and are not always fully clear or exhaustive to ascertain the tax impact of a
cross-border merger or acquisition. This uncertainty on tax arrangements sometimes require seeking of
special agreements or arrangements from the tax authorities on an ad hoc basis, whereas in the case
of a domestic deal the process is much more deterministic.
Gross-border takeover bids are complex transactions that may involve the handling of a significant
number of legal entities, listed or not, and which are often governed by local rules (company law,
176 PP-CRVI
market regulations, self regulations, etc.). Not only a foreign bidder might be hindered by a potential
lack of information, but also some legal complexities might appear in the merger process resulting in a
deadlock, even though the bid would be friendly. This legal uncertainty may result in a significant
execution risk and act as a major hurdle to cross-border consolidation.
There are various challenges to cross border takeovers. Global takeovers may result into a
skyrocketing share prices because merger and acquisition have a substantial effect on the whole
economy. Management also faces a big challenge as there is explosion of new services, new products,
new industries and new markets and new technological innovations as well.
But the biggest challenge to a cross border merger and takeover are the cultural issues. According to
KPMG study, 83% of all the mergers and acquisitions failed to produce any benefit for the
shareholders and over half actually destroyed value. Interviews of over 100 senior executives involved
in these 700 deals over a two year period revealed that the overwhelming cause of failure is the people
and the cultural differences. So, the cultural issues are to be aptly dealt with.
It is expected that the cross borders takeovers will increase in the near future. The companies will have
to keep in mind that global takeovers are not only business proposals but also a corporate bonding for
which both the entities have to sit and arrive at a meaningful and deep understanding of all the issues
as mentioned above. It will also help them to get meaningful solutions.
There has been a substantial increase in the quantum of funds flowing across nations in search of
takeover candidates. The UK has been the most important foreign investor in the USA in recent years,
with British companies making large acquisitions. With the advent of the Single Market, the European
Union now represents the largest single market in the world. European as well as Japanese and
American companies have sought to increase their market presence by acquisitions.
Many cross-border deals have been in the limelight. The biggest were those of Daimler Benz-Chrysler,
BP-Amoco, Texas Utilities-Energy Group, Universal Studios-Polygram, Northern Telecom-Bay
Networks and Deutsche Bank-Bankers Trust. Nearly 80 per cent of the transactions were settled in
stock rather than through cash.
The going global is rapidly becoming Indian Companys mantra of choice. Indian companies are now
looking forward to drive costs lower, innovate speedily, and increase their International presence.
Companies are discovering that a global presence can help insulate them from the vagaries of domestic
market and is one of the best ways to spread the risks. Indian Corporate sector has witnessed several
strategical acquisitions. Tata Motors acquisition of Daewoo Commercial Vehicle Company, Tata Steel
acquisition of Singapores NatSteel, Reliances acquisition of Flag is the culmination of Indian
Companys efforts to establish a presence outside India.
LESSON ROUND UP
Takeover is a corporate device whereby one company acquires control over another company, usually by
purchasing all or a majority of its shares.
Takeovers may be classified as friendly takeover, hostile takeover and bail out takeover.
Takeover bids may be mandatory, partial or competitive bids.
Consideration for takeover could be in the form of cash or in the form of shares.
When a company intends to take over another company through acquisition of 90% or more in value of the
shares of that company, the procedure laid down under Section 395 of the Act could be beneficially utilised.
Transferor and transferee companies are required to take care of the check points as specified in the
chapter.
Takeover of companies whose securities are listed or one or more stock exchanges is regulated by the
provisions of listed agreements and SEBI (Substantial Acquisition of Shares and Takeovers) Regulation,
2011.
Financial, accounting, taxation and legal aspects are vital in planning a takeover and hence covered in detail
in the chapter.
An increasingly used defense mechanism is anti takeover amendments, which is called Shark Repellants.
SELF TEST QUESTIONS

1. What do you mean by the term Takeover? What are the objectives which takeover seeks to
achieve?
2. Explain the meaning of and different types of takeover bids.
3. Can unlisted companies affect takeovers? If so, how?
4. SEBI has formulated a comprehensive code for takeover of listed companies Do you agree?
5. What are the general obligations of Acquirer and Merchant Banker as under SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011?
6. What does the term offer price and persons acting in concert mean under SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011?
178 PP-CRVI
Lesson 10
Funding of Mergers and Takeovers
At the end of lesson, you should be able to Financing of mergers and takeovers involve payment
understand: of consideration money to the acquire shares for
acquiring the undertaking or assets or controlling
Financial alternatives
power of the shareholders as per valuation done and
Considerations for the selection of financial exchange ratio between shares of acquiring and
package merging company arrived at. Payment of
Process of funding consideration by the acquiree company to the
acquirer company amounts to be the investment
Funding through
which is done on commercial basis with an aim to
Equity shares optimize return and to keep the cost of investment
minimum. Care should be taken to select an optimum
Preference shares
mix of the available modes of payment of purchase
Options and securities with differential rights consideration such that the financial package chosen
Swaps suits the financial structures of both the acquirer and
acquiree companies, and also provide a desirable
Employees stock option scheme gearing level thereby proving economical to the
External commercial borrowings (ECBs) acquirer. After reading this lesson you will be able to
understand the various funding alternatives available
Financial institutions and banks
for mergers.
Rehabilitation finance
Leveraged buyouts
180 PP-CRVI
FINANCIAL ALTERNATIVES
Selection of financial package shall depend upon many factors as mentioned below:
(i) It should suit to the financial structures of both the acquirer and the acquiree companies.
(ii) It should provide a desirable gearing level which may suit to the financial structure of the
acquirer.
(iii) The package should be found acceptable by the vendors.
(iv) The package should also prove economical to the acquirer.
Financial Package
The acquirer can select a suitable financial package to make payment of consideration to acquiree from
the following alternatives:
(i) Payment of cash or by issue of securities.
(ii) Financial package of loans etc. involving financial institutions and banks.
(iii) Rehabilitation finance.
(iv) Leveraged buy-outs.
PROCESS OF FUNDING
Mergers and takeovers may be funded by a company (i) out of its own funds, comprising increase in paid
up equity and preference share capital, for which shareholders are issued equity and preference shares or
(ii) out of borrowed funds, which may be raised by issuing various financial instruments. (iii) A company
may borrow funds through the issue of debentures, bonds, deposits from its directors, their relatives,
business associates, shareholders and from public in the form of fixed deposits, (iv) external commercial
borrowings, issue of securities, loans from Central or State financial institutions, banks, (v) rehabilitation
finance.
Form of payment may be selected out of any of the modes available such as (a) cash payment, (b)
issue of equity shares, (c) mix of equity and cash, (d) debt or loan stock, (e) preference shares,
convertible securities, junk bonds etc.
Well-managed companies make sufficient profits and retain them in the form of free reserves, and as
and when their Board of Director propose any form of restructuring, it is financed from reserves, i.e.
internal accruals.
Where available funds are inadequate, the acquirer may resort any one or more of the options available
for the purpose of raising the required resources. The most prominent routes are the borrowing and
issue of securities. The required funds could be raised from banks and financial institutions or from
public by issue of debentures or by issue of shares depending upon the quantum and urgency of their
requirements.
Generally a cash rich company uses their surplus funds for taking over the control of other companies,
often in the same line of business, to widen their product range and to increase market share.
Lesson 10 Funding of Mergers and Takeovers 181
FUNDING THROUGH VARIOUS TYPES OF FINANCIAL INSTRUMENTS
A. FUNDING THROUGH EQUITY SHARES

Equity share capital can be considered as the permanent capital of a company. Equity needs no
servicing as a company is not required to pay to its equity shareholders any fixed amount return in the
form of interest which would be the case if the company were to borrow issue of bonds or other debt
instruments. In issue of shares, the commitment will be to declare dividends consistently if profits
permit. Raising moneys from the public by issue of shares to them is a time consuming and costly
exercise. The process of issuing equity shares or bonds/debentures by the company takes a lot of time.
It would require several things to be in place and several rounds of discussion would take place
between the directors, and key promoters having the controlling stake, between the Board of Directors
and consultants, analysts, experts, company secretaries, chartered accountants and lawyers. Moreover
it requires several legal compliances. Therefore planning an acquisition by raising funds through a
public issue may be complicated and a long drawn process. One cannot think of raising moneys
through public issue without identifying the company to be acquired.
B. PREFERENTIAL ALLOTMENT
Private placement in the form of a preferential allotment of shares is possible and such issues could be
organized in a much easier way rather than an issue of shares to public. The provisions of preferential
allotment are laid down in Section 62(1)(c) of the Companies Act, 2013 read with Rule 13 of the
Companies (Share capital and Debenture) Rules, 2014. Further, listed companies have to comply with
provisions of Chapter VII of the SEBI (Issue of capital and Disclosure requirements) Regulations, 2009
for preferential allotment. As preferential allotment of equity shares also amounts to private placement,
necessary provisions of Section 42 of the Act read with Rule 14 of the Companies (Prospectus and
allotment of securities) Rules, 2014 is also required to be followed by the Company.
Listed companies may also raise funds by way of qualified institutional placement under Chapter VIII of
the SEBI (Issue of capital and Disclosure requirements) Regulations, 2009. Qualified institutional
placement is a special type of preferential allotment made only to qualified institutional buyers.
C. FUNDING THROUGH PREFERENCE SHARES

Another source of funding a merger or a takeover may be through the issue of preference shares, but
unlike equity capital, issue of preference share capital as purchase consideration to shareholder of
merging company involves the payment of fixed preference dividend (like interest on debentures or
bonds or) at a fixed rate. Therefore, before deciding to raise funds for this purpose, by issue of
preference shares, the Board of directors of a company has to make sure that the merged company or
the target company would be able to yield sufficient profits for covering discharging the additional
liability in respect of payment of preference dividend.
Burden of preference dividend
A company funding its merger or takeover proposal through the issue of preference shares is required
to pay dividend to such shareholders as per the agreed terms. While raising funds through this mode,
the management of the company has to take into consideration the preference dividend burden, which
the profits of the company should be able to service.
D. FUNDING THROUGH OPTIONS OR SECURITIES WITH DIFFERENTIAL RIGHTS

Companies can restructure its capital through derivatives and options as a means of raising corporate
182 PP-CRVI
funds. Indian companies are allowed to issue derivatives or options as well as shares and quasi-equity
instruments with differential rights as to dividend and/or voting.
Companies may also issue non-voting shares or shares with differential voting rights to the
shareholders of transferor company. Such issue gives the companies an additional source of fund
without interest cost and without an obligation to repay, as these are other forms of equity capital. The
promoters of companies may be interested in this form of consideration as it does not impose any
obligation and there is no loss of control in the case of non-voting shares.
E. FUNDING THROUGH SWAPS OR STOCK TO STOCK MERGERS

In stock swap mergers, or stock-for-stock mergers, the holders of the target companys stock receive
shares of the acquiring companys stock. The majority of mergers during the past few years have been
stock-for-stock deals. A merger arbitrage specialist will sell the acquiring companys 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 shares prices 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 the deals failing.
F. FUNDING THROUGH EXTERNAL COMMERCIAL BORROWINGS (ECBs)

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 standalong 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.
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.
Form of ECBs: The ECB Framework enables permitted resident entities to borrow from recognised non-
resident entities in the following forms.
1. Loans including bank loans
2. Securitised instruments (floating rate notes and fixed rate bonds, non-convertible, optionally
convertible preference shares/debentures)
3. Buyers credit
4. Suppliers credit
5. Foreign Currency Convertible Bonds(FCCBs)

6. Financial Lease and
7. Foreign Currency Exchangeable Bonds(FCEBs)
However, ECB framework is not applicable in respect to the investment in non-convertible debentures
in India by Registered Foreign Portfolio Investors.
While the first six forms of borrowing, mentioned above, can be raised both under the automatic and
approval routes, FCEBs can be issued only under the approval route.
ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route.
ECB for investment in real sector-industrial sector, infrastructure sector and specified service sectors in
India as indicated under para I (A) (i) (a) are under the Automatic Route, i.e. do not require
Reserve Bank/Government of India approval. In case of doubt as regards eligibility to access the
Automatic Route, applicants may take recourse to the Approval Route. It is clarified that eligibility for an
ECB in respect of eligible borrowers, recognised lenders, end-uses, etc. have to be read in conjunction
and not in isolation.
The master Direction on External Commercial Borrowings and Trade Credits was issued and updated
upto March 30, 2016 which is available at www.rbi.org.
G. DEPOSITORY RECEIPTS (DRs)
A DR is a foreign currency denominated instrument tradeable on a stock exchange generally in Europe

or U.S.A. The major benefit that accrues to an investor from DRs is 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.
The other benefits accruing to an investor from GDR issue are firstly, that 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. Secondly, investor reserves the right to exercise his option to convert the
GDR and hold the equity shares instead.
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. 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.
H. FUNDING THROUGH FINANCIAL INSTITUTIONS AND BANKS
Funding of a merger or takeover with the help of loans from financial institutions, banks etc, has its own
merits and demerits. Takeover of a company could be achieved in several ways and while deciding the
takeover of a going concern, there are matters such as the capital gains tax, stamp duty on immovable
properties and the facility for carrying forward of accumulated losses. With parameters playing a critical
role, the takeover should be organized in such a way that best suits the facts and circumstances of the
specific case and also it should meet the immediate needs and objectives of the management. While
discussing modes of acquisition, certainly there would be a planning for organizing the necessary
funding for the acquisition. If borrowings from domestic banks and financial institutions have been
184 PP-CRVI
identified as the inevitable choice, all the financial and managerial information must be placed before
the banks and financial institutions for the purpose of getting the necessary resources.
The advantage of funding is that the period of such funds is definite which is fixed at the time of taking
such loans. Therefore, the Board of the company is assured about continued availability of such funds
for the pre-determined period. On the negative side, the interest burden on such loans, is quite high
which must be kept in mind by the Board while deciding to use borrowed funds from financial institution.
Such funding should be thought of and resorted to only when the Board is sure that the merged
company or the target company will, give adequate returns i.e., timely payment of periodical interest on
such loans and re-payment of the loans at the end of the term for which such loans have been taken.
However, in the developed markets, funding of merger or takeover is not a critical issue. There are
various sources of finance available to an acquirer. In the Indian market, it was not easy to obtain
takeover finance from financial institutions and banks because they are not forthcoming to finance
securities business. Takeover involves greater risk. There is no other organised sector to provide
finance for takeover by a company.
Justice P.N. Bhagwati Committee on takeovers in its report of May 2002 has recommended that
Banks/Financial Institutions are to be encouraged to consider financial takeovers.
There are two aspects in it. (i) The first one relates to cost of acquiring ownership over the assets. If it is
a going concern, the shares of the company could be purchased. In that process, the acquired entity
might become a wholly owned subsidiary. Funding the acquisition would mean the funds required for
paying up the consideration payable to the sellers of those shares. This will be worked on the basis of
the net worth of the acquired entity. In addition to the said cost, there might be a huge requirement for
funding the operations, modernization, upgradation, installing balancing equipments, removal of
bottlenecks and a host of other requirements. Hence the borrowings would be required for meeting
such cost also.
The acquisition may also require a rehabilitation or restructuring scheme implying a meeting with
existing secured creditors and major unsecured creditors. As a whole, borrowing would be a major
exercise involving a lot of study of the actual financial support needed. Care must be taken to ensure
that the existing revenue streams are not affected due to the proposed acquisition. The combined net
worth, combined financial projections and revenue streams might also be needed for persuading the
banks and financial institutions to pick up a stake in the acquisition.
I. FUNDING THROUGH REHABILITATION FINANCE
Sick industries get merged with healthy units with financial package to the acquirer from the financial
institutions and banks having financial stakes in the acquiree company to ensure rehabilitation and
recovery of dues from the acquirer.
Merger or takeover may be provided for as a part of insolvency resolution plan under the Insolvency
and Bankruptcy Code, 2016.
The Insolvency and Bankruptcy Code, 2016 provides for reference to the NCLT in case of default by
any Corporate borrower.. Once a reference is made, NCLT will cause an enquiry, appoint an insolvency
professional and provide moratorium. Thereafter, with certain further formalities, insolvency resolution
plan may be approved by the NCLT. There is no provision in the code guiding as to what such
insolvency resolution plan may contain. However, in case corporate default is due to lack of sufficient
funds in respect of profitable and viable business, necessary provisions may be made rehabilitation
financne, takeover, corporate restructuring etc. in the insolvency resolution plan.
The insolvency resolution plan is prepared by the insolvency resolution applicant and submitted to the
insolvency professionals who seeks the consent of the committee of creditors. Thereafter, the same is
placed for approval of the NCLT. The insolvency resolution plan after the same is sanctioned by NCLT
becomes operative and binding on all the concerned parties including the company, its employees,
shareholders, creditors and other stakeholders who are party to such insolvency resolution process.
J. FUNDING THROUGH LEVERAGED BUYOUTS

A leveraged buyout (LBO), is the acquisition of a company or division of another company, financed
with a substantial portion of borrowed funds. The acquirer resorts to a combination of a small
investment and a large loan to fund the acquisition. Typically, the loan capital is availed through a
combination of repayable bank facilities and/or public or privately placed bonds, which may be classified
as high-yield debt. The debt will appear on the acquiring companys balance sheet and the acquired
companys free cash flow will be used to repay the debt. Otherwise, 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.
If the LBO is a direct merger, the seller receives cash for stock and the lender will make loan to the
buyer against securities.
A Diagramic Representation of Leveraged Buy-out
Acquiring Company Target Company
Loan
Proceeds
Lending Institution Dividend

&
Purchase
Price
Asset Pledge
Target Share holder
Loan Repayment
186 PP-CRVI
LESSON ROUND UP
Mode of payment for mergers and acquisition to be selected from an optimum mix of available modes of
payment of consideration.
Selection of financial package depend on many considerations such as: to suit the financial structure of
acquirer and acquiree, to provide a desirable gearing level, to be acceptable to vendors. Further it should
prove economic to acquirer.
Funding through preference share capital, unlike equity share capital, involves the payment of fixed
preference dividend like interest on debentures or bonds or a fixed rate of dividend.
Funding through shares with differential voting rights gives the companies an additional source of fund
without interest cost and without an obligation to repay, as these are other form of equity capital.
Funding can also be done through swaps and employees stock option scheme. The share capital that may
be raised through the scheme of employees stock option can only be a fraction of the entire issue.
External commercial borrowings are permitted by the Government as a source of finance for Indian
corporates for expansion of existing capacity as well as for fresh investment.
The other modes of funding are through financial institutions and banks, rehabilitation finance and
management and leveraged buy outs. All these have got its own merits and demerits.
SELF TEST QUESTIONS

1. Financing of mergers and acquisitions is a crucial exercise requiring utmost care. Elaborate.
2. Discuss funding through Rehabilitation Finance as a source of finance for mergers/takeovers.
3. Describe a takeover that has opted for leveraged buy out for the funding.
4. Describe Depository Receipts as a funding options for merger..
Lesson 11
Financial Restructuring
Financial restructuring of a company involves
Need for Financial Restructuring
rearrangement of its financial structure so as to make
Reorganisation of capital the companys finances more balanced., ie the
Reduction of share capital company should be neither overcapitalized nor
undercapitalized. Reduction of Capital,
Buyback of shares Concept and objects
reorganization of capital through consolidation, sub-
Provisions of Buy Back under Companies Act, division, buy back of shares, further issue of shares
2013 read with Companies (Share Capital and etc., are various forms of financial restructuring.
Debentures) Rules, 2014.
The Provisions relating to alteration of Share Capital,
SEBI (Buy back of Securities) Regulations,
buy-back of Shares, Reduction of share capital has
1998
already been notified under Companies Act, 2013.
The lesson covers provisions of Companies Act,
2013 relating to buy-back of shares and reduction of
capital.

understand the legal and procedural aspects relating
to reduction and re organization of capital, buy-back
of shares by listed and unlisted companies including
aspects as to quantum, sources, restrictions etc.
188 PP-CRVI
Note: The Provisions relating to alteration of Share Capital and buy-back of Shares have been
notified under Companies Act, 2013 w.e.f. 01-04-2014. However, the provisions relating to
reduction of capital are notified w.e.f. 15-12-2016 as it involves approval of National Company
Law Tribunal. The lesson covers all the provisions of Companies Act 2013 along with relevant
rules relating to buy-back of shares and reduction of capital.
INTRODUCTION
Companies have access to a range of sources from which they finance business. These funds are called
Capital. The sources of capital can be divided into two categories; internally generated funds and funds
provided by third parties. Whichever form of capital is used, it will fall into one of the two categories debt or
equity.
Determination of the proportion of own funds and borrowed funds
Internally generated funds are an important component of a companys capital structure but it would be
unusual for a company to grow at a fast pace only through internal generation of funds. The deficit between
the funds which a company requires to fund its growth and the funds which are generated internally, is
funded by provision of capital from third parties.
Cost of various types of capital
Equity capital is the permanent capital of the company, which does not require any servicing in the form of
interest. However, the return to the equity capital is in the form of dividend paid to the equity shareholders
out of the profits earned by the company. The ideal capital structure would be to raise money through the
issue of equity capital.
Debt is essentially an obligation, the terms of which are, inter alia, the repayment of the principal sum within
a specific time together with periodic interest payments. Perhaps the easiest form of capital for a company to
raise is, a loan from a bank. This form of loan capital may be comparatively expensive than equity.
However, as regards servicing of capital there are advantages of issuing debt instruments. Dividend is not a
deductible expense when calculating a companys taxable profit; it is on the contrary an appropriation of
profits. On the other hand, interest paid by a company on debt finance is an allowable expense when
calculating a companys tax, thereby reducing its taxable profit.
Broadly speaking, the financial structure of a company comprises its

(i) paid up equity and preference share capital;
(ii) various reserves;
(iii) all borrowings in the form of
(a) long-term loans from financial institutions;
(b) working capital from banks including loans through commercial papers;
(c) debentures;
(d) bonds;
Lesson 11 Financial Restructuring 189
(e) credits from suppliers;

(f) trade deposits;
(g) public deposits;
(h) deposits/loans from directors, their relatives and business associates;
(i) deposits from shareholders;
(j) Global Depository Receipts, American Depository Receipts and Foreign Currency Convertible
Bonds;
(k) funds raised through any other loan instrument.
A company may require any one or more of the above keeping in view its financial requirements at a
particular point of time. A dynamic Board should constantly review the financial structure of the company and
effect financial restructuring and reorganisation whenever the need arises.
NEED FOR FINANCIAL RESTRUCTURING
A company is required to balance between its debt and equity in its capital structure and the funding of the
resulting deficit. The targets a company sets in striking this balance are influenced by business conditions,
which seldom remain constant.
When, during the life time of a company, any of the following situations arise, the Board of Directors of a
company is compelled to think and decide on the companys restructuring:
(i) necessity for injecting more working capital to meet the market demand for the companys products
or services;
(ii) when the company is unable to meet its current commitments;
(iii) when the company is unable to obtain further credit from suppliers of raw materials, consumable
stores, bought-out components etc. and from other parties like those doing job work for the
company.
(iv) when the company is unable to utilise its full production capacity for lack of liquid funds.
Financial restructuring of a company involves rearrangement of its financial structure so as to make the
companys finances more balanced.
Let us understand the meaning of over capitalization and under capitalization
A company is said to be over-capitalized, if its earnings are not sufficient to justify a fair return on the
amount of share capital and debentures that have been issued. Otherwise, it is said to be over capitalized
when total of owned and borrowed capital exceeds its fixed and current assets i.e. when it shows
accumulated losses on the assets side of the balance sheet.
If the owned capital of the business is much less than the total borrowed capital than it is said to be under
capitalization. We may say that the owned capital of the company is disproportionate to the scale of its
operation and the business is dependent more upon borrowed capital.
Let us remember
Under capitalization may be the result of excess volume of trading and over capitalization may be due to
insufficient volume of trading.
190 PP-CRVI
Restructuring of under-capitalized Company

An under-capitalized company may restructure its capital by taking one or more of the following corrective
steps:
(i) injecting more capital whenever required either by resorting to rights issue/preferential issue or
additional public issue.
(ii) resorting to additional borrowings from financial institutions, banks, other companies etc.
(iii) issuing debentures, bonds, etc. or
(iv) inviting and accepting fixed deposits from directors, their relatives, business associates and public.
Restructuring of over-capitalized company
If a company is over-capitalized, its capital also requires restructuring by taking following corrective
measures:
(i) Buy-back of own shares.
(ii) Paying back surplus share capital to shareholders.
(iii) Repaying loans to financial institutions, banks, etc.
(iv) Repaying fixed deposits to public, etc.
(v) Redeeming its debentures, bonds, etc.
State whether the following statement is true or false.
A over capitalized company can resort to buy- back of shares.
Ans: True
ALTERATION OF CAPITAL
Power of limited company to alter its share capital (Section 61)

According to section 61 of the Companies Act, 2013 a limited company having a share capital derives its
power to alter its share capital through its articles of association. As per the section the company may alter
its memorandum in its general meeting to
(a) increase its authorised share capital by such amount as it thinks expedient;
(b) consolidate and divide all or any of its share capital into shares of a larger amount than its existing
shares.
The proviso to Section 61(1)(b) clarifies that No consolidation and division which results in changes
in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an
application made in the prescribed manner. (This Proviso notified w.e.f. 01-06-2016)
(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up
shares of any denomination;
(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that in the sub-division the proportion between the amount paid and the
amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share
from which the reduced share is derived;
(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken
or agreed to be taken by any person, and diminish the amount of its share capital by the amount of
the shares so cancelled. The cancellation of shares shall not be deemed to be a reduction of share
capital.
REORGANISATION OF CAPITAL
In accordance with Section 390(b) Companies Act 1956, the expression arrangement includes a re-
organisation of the share capital of the Company by the consolidation of shares of different classes or by
division of shares of one class into shares of different classes or by both these methods.
Accordingly, as per Section 390(b), the reorganization of share capital of a company may take place
(1) by the consolidation of shares of different classes, or
(2) by the division of shares of one class into shares of different classes, or
(3) by both these methods [Section 390(b)].
Besides, a company may reorganize its capital in different ways, such as (a) reduction of paid-up share
capital; (b) conversion of one type of shares into another etc.,
REDUCTION OF SHARE CAPITAL

Reduction of capital means reduction of issued, subscribed and paid-up capital of the company.
Special Resolution
Reduction of capital requires Authorisation in Articles
Confirmation of Tribunal (NCLT)
The need for reduction of capital may arise in various circumstances such as
trading losses
heavy capital expenses and assets of reduced or doubtful value.
As a result, the original capital may either have become lost or a company may find that it has more
resources than it can profitably employ. In either case, the need may arise to adjust the relation between
capital and assets [Indian National Press (Indore) Ltd., In re. (1989) 66 Com Cases 387, 392 (MP)].
Do you know?
Section 66 Companies Act 2013 is applicable to a company limited by shares or a company limited by
192 PP-CRVI
guarantee and having share capital. An unlimited company can reduce the share capital in the manner
specified in the Articles and Memorandum of the company, as Section 66 Companies Act 2013 is not
applicable.
MODES OF REDUCTION
The mode of reduction is as follows:
A company limited by shares or a company limited by guarantee and having a share capital may, if
authorised by its articles, by special resolution, and subject to its confirmation by the tribunal on petition,
reduce its share capital in any way and in particular:
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its
memorandum by reducing the amount of its share capital and of its shares accordingly:
Case Laws on Reduction of Capital
1. Can appeal against order of Single Judge allowing reduction, by a sole public shareholder, be
allowed, when there is no fault in reasoning of Single Judge?
Where a company, reducing its share capital by cancelling and extinguishing some equity shares held by its
subsidiary and some shares held by the public, passes the requisite resolution approving the reduction by a
special majority in an extraordinary general meeting called for in this regard, and there is no fault in the
reasoning given by the Single Judge approving the same, and also the valuation of shares, the appeal by a
sole shareholder objecting to the said reduction is liable to be dismissed.
(Chander Bhan Gandhi v. Reckitt Benckiser (India) Ltd. [2012] 107 CLA 511 (Del.))
2. Whether the role of the court, while approving scheme of reduction of capital is limited to the
extent of ensuring that the scheme is not unconscionable or illegal or unfair or unjust?
The role of the court, while approving scheme of reduction of capital, is limited to the extent of ensuring that
the scheme is not unconscionable or illegal or unfair or unjust. Merely because the determination of the
share exchange ratio or the valuation of shares is done by a different method which might result in a different
conclusion would not justify interference of the court, unless found to be unfair. The court does not have the
expertise nor the jurisdiction to delve into the deep commercial wisdom exercised by the creditors and
members of the company who have approved the scheme by the requisite majority. Thus, where the valuer
has used widely accepted methodologies, i.e., the discounted cash flow methodology and the comparable
companies methodology which inter alia include the P/E multiple analysis for valuation of shares, there is no
reason why the valuation report of the valuer, which is fair, reasonable and based on cogent reasoning, and
which has also been accepted by a majority of the non-promoter shareholders of the company, should not be
accepted by the court.
Rejecting the objections of the interveners/objectors that the fair value of shares arrived at by the valuer is
not in the interest of the promoter shareholders, the High Court approved the valuation of shares and allowed
the petition confirming reduction of share capital.
Wartsila India Ltd.v. Janak Mathuradas and Others[2010] 99 CLA 463 (Bom.)
3. Can the share premium account be utilized for reducing share capital?
The capital was proposed to be reduced by utilization of the Securities Premium Account and General
Reserve. There was to be no dimunition of liabilities or repayment of paid up capital. No reduction of issued,
subscribed or paid up capital was involved. The Court said that the proposed reduction not being prejudicial
in any manner was, therefore to be allowed.
(Alembic Ltd., Re (2008) 144 Com Cases 105 :(2009)89 SCL 19(Guj)
4. Can the reduction result in extinguishment of class of shares?
A scheme of amalgamation and arrangement involved reduction of share capital by extinguishment of shares
of a particular class. The reduction was approved by majority of shareholders and creditors of transferee
company. The court approved the reduction and extinguishment of portion of shares was held to be
permissible as no one was prejudicially affected.
Siel Ltd., Re (2008) 144 Com Cases 469 :(2009)89 SCL 434(Del)
Reduction of share capital without sanction of the Tribunal

The following are cases which amount to reduction of share capital but where no confirmation by the Tribunal
is necessary:
(a) Surrender of shares Surrender of shares means the surrender of shares already issued to the
company by the registered holder of shares. Where shares are surrendered to the company,
whether by way of settlement of a dispute or for any other reason, it will have the same effect as a
transfer in favour of the company and amount to a reduction of capital. But if, under any
arrangement, such shares, instead of being surrendered to the company, are transferred to a
nominee of the company then there will be no reduction of capital [Collector of Moradabad v. Equity
Insurance Co. Ltd., (1948) 18 Com Cases 309: AIR 1948 Oudh 197]. Surrender may be accepted
by the company under the same circumstances where forfeiture is justified. It has the effect of
releasing the shareholder whose surrender is accepted for further liability on shares.
The Companies Act contains no provision for surrender of shares. Thus surrender of shares is valid
only when Articles of Association provide for the same and:
(i) where forfeiture of such shares is justified; or
(ii) when shares are surrendered in exchange for new shares of same nominal value.
Both forfeiture and surrender lead to termination of membership. However, in the case of forfeiture,
it is at the initiative of company and in the case of surrender it is at the initiative of member or
shareholder.
(b) Forfeiture of shares A company may if authorised by its articles, forfeit shares for non-payment of
calls and the same will not require confirmation of the Court.
(c) Diminution of capital Where the company cancels shares which have not been taken or agreed to
be taken by any person .
(d) Redemption of redeemable preference shares.

194 PP-CRVI
(e) Buy-back of its own shares.
Does buy back of shares requires Tribunals confirmation as prescribed under Section 66?
Ans : No
Equal Reduction of Shares of One Class

Where there is only one class of shares, prima facie, the same percentage should be paid off or cancelled or
reduced in respect of each share, but where different amounts are paid-up on shares of the same class, the
reduction can be effected by equalizing the amount so paid-up. [Marwari Stores Ltd. v. Gouri Shanker
Goenka (1936) 6 Com Cases 285]. The same principle is to be followed where there are different classes of
shares.
It is, however, not necessary that extinguishment of shares in all cases should necessarily result in reduction
of share capital. Accordingly, where reduction is not involved, Section 100 would not be attracted. [Asian
Investment Ltd. Re. (1992) 73 Com Cases 517, 523 (Mad)].
Restructuring of Debts and reduction of capital-
The petitioner-company was referred to the corporate debt restructuring (CDR) forum for re-scheduling and
restructuring its debt. As per restructuring package, as approved by CDR forum, for every 10 equity shares
the company would cancel 4 equity shares and in lieu of such cancellation, 4 non-cumulative preference
shares would be allotted and the existing equity shareholders would continue to hold remaining 6 shares
without any alteration of rights. When the petitioner-company moved to the High Court for confirmation of its
restricting package, the objector opposed the scheme on the ground that it would suffer financial loss. Taking
an overall view and considering the proposed scheme of reduction of share capital in larger perspective, the
High Court found no reason not to confirm the proposed action of the company to reduce its share capital.
The High Court observed that the proposal is likely to improve the financial resources of the company, and to
increase the share of profit available for expansion and growth of the company. Moreover, the proposal does
not involve diminution of any liability in respect of unpaid capital or the payment to any shareholder of any
paid-up capital.
Essar Steel Ltd Re(2005)59SCL 457:(2006) 130 Com cases 123(Guj)
Creditors Right to Object to Reduction

After passing the special resolution for the reduction of capital, the company is required to apply to the
Tribunal by way of petition for the confirmation of the resolution under Section 66 Companies Act 2013.
Where the proposed reduction of share capital involves either (i) diminution of liability in respect of unpaid
share capital, or (ii) the payment to any shareholder of any paid-up share capital, or (iii) in any other case, if
the tribunal so directs, the following provisions shall have effect:
The creditors having a debt or claim admissible in winding up are entitled to object. To enable them to do so,
the tribunal will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the
proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in
deciding whether or not to confirm the reduction will take into consideration the minority shareholders and
creditors.
The Tribunal shall give notice of every application made to it under sub-section (1) to the Central
Government, Registrar and to the Securities and Exchange Board, in the case of listed companies, and the
creditors of the company and shall take into consideration the representations , if any, made to it by that
Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months
from the date of receipt of the notice:
Provided that where no representation has been received from the Central Government, Registrar, the
Securities and Exchange Board or the creditors within the said period, it shall be presumed that they have no
objection to the reduction.
There is no limitation on the power of the Court to confirm the reduction except that it must first be satisfied
that all the creditors entitled to object to the reduction have either consented or been paid or secured [British
and American Trustee and Finance Corpn. v. Couper, (1894) AC 399, 403: (1991-4) All ER Rep 667].
When exercising its discretion, the Court must ensure that the reduction is fair and equitable. In short, the
Court shall consider the following, while sanctioning the reduction:
(i) The interests of creditors are safeguarded;
(ii) The interests of shareholders are considered; and
(iii) Lastly, the public interest is taken care of.
Confirmation and Registration
Section 66(3) of the Companies Act 2013 states that if the Court is satisfied that either the creditors entitled
to object have consented to the reduction, or that their debts have been determined, discharged, paid or
secured, it may confirm the reduction of share capital on such terms and conditions as it deems fit:
Section 66(4) of the Companies Act 2013 states that the order of confirmation of the reduction of share
capital by the Tribunal under sub-section (3) shall be published by the company in such manner as the
Tribunal may direct.
Section 66(5) of the Companies Act 2013 states that the Tribunal order confirming the reduction together
with the minutes giving the details of the companys
(a) the amount of share capital;
(b) the number of shares into which it is to be divided;
(c) the amount of each share; and
(d) the amount, if any, at the date of registration deemed to be paid-up on each share,
should be delivered to the Registrar within 30 days of receipt of the order of tribunal who will register them.
The reduction takes effect only on registration of the order and minutes, and not before. The Registrar will
then issue a certificate of registration which will be a conclusive evidence that the requirements of the Act
have been complied with and that the share capital is now as set out in the minutes. The Memorandum has
to be altered accordingly.
Conclusiveness of certificate for reduction of capital
Where the Registrar had issued his certificate confirming the reduction, the same was held to be conclusive
although it was discovered later that the company had no authority under its articles to reduce capital [Re
Walkar & Smith Ltd., (1903) 88 LT 792 (Ch D)]. Similarly, in a case where the special resolution for reduction
was an invalid one, but the company had gone through with the reduction, the reduction was not allowed to
be upset [Ladiess Dress Assn. v. Pulbrook, (1900) 2 QB 376].
Let us remember!!!!
196 PP-CRVI
The effective date of reduction of capital is the date on which the Registrar of Companies registers
the order of the court and the minutes approved by the court.
Liability of Members in respect of Reduced Share Capital
On the reduction of share capital, A member of the company, past or present, shall not be liable to any call or
contribution in respect of any share held by him exceeding the amount of difference, if any, between the
amount paid on the share, or reduced amount, if any, which is to be deemed to have been paid thereon, as
the case may be, and the amount of the share as fixed by the order of reduction.
If, however the name of any creditor entitled to object to the reduction of share capital under this section is,
by reason of his ignorance of the proceedings for reduction or of their nature and effect with respect to his
debt or claim, not entered on the list of creditors, and after such reduction, the company commits a default,
within the meaning of section 6 of the Insolvency and Bankruptcy Code, 2016, in respect of the amount of his
debt or claim,
(a) every person, who was a member of the company on the date of the registration of the order for
reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an
amount not exceeding the amount which he would have been liable to contribute if the company
had commenced winding up on the day immediately before the said date; and
(b) if the company is wound up, the Tribunal may, on the application of any such creditor and proof of
his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make
and enforce calls and orders on the contributories settled on the list, as if they were ordinary
contributories in a winding up.
If any officer of the company

(a) knowingly conceals the name of any creditor entitled to object to the reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
(c) abets or is privy to any such concealment or misrepresentation as aforesaid,
he shall be liable under section 447.
Reduction of Share Capital And Scheme Of Compromise Or Arrangement
Arrangement includes a reorganisation of share capital of the company and reorganisation can involve
reduction of share capital. However, as part of the scheme of compromise or arrangement, distinct
formalities as prescribed under section 100 do not have to be observed [Maneckchowk and Ahmedabad Mfg.
Co.Ltd., Re (1970) 2 Comp LJ 300 (Guj); also Vasant Investment Corporation Ltd. v. Official Liquidator
(1981) 51 Comp Cas 20 (Bom); Mcleod & Co.Ltd. v. S.K. Ganguly (1975) 45 Comp Cas 563 (Cal)]. It may
however be noted that, in all such cases involving reduction of share capital in the scheme of compromise or
arrangement, the petition seeking confirmation of the court with respect to the scheme must also expressly
mention that the company is also seeking, at the same time, the confirmation of the court with respect to the
reduction of share capital, and that, while seeking the consent of the members to the scheme, the consent of
the members with respect to the reduction of share capital had also been obtained.
The power of court to give to creditors an opportunity of raising objections to the reduction of capital is
discretionary. In an appropriate case, for example, where the interests of creditors are duly and fully
protected, the court may exercise its discretion against calling upon the creditors to raise objections.
Procedure for reduction of capital a Flow Chart
Check Articles of
Association whether it If no alter the
authorizes reduction of Articles
capital.
Convene Board Meeting and General Meeting to pass Comply with procedural aspects as to
necessary special resolution aspects like issue of notice,
intimation/filings to stock exchanges
if securities are listed etc
Pass special resolution and file e-form MGT-14 with
Registrar of Companies
Apply to the concerned Tribunal (NCLT) by way of Refer to NCLT (Procedure for
application in form RSC-1 for confirmation of the Reduction of Share Capital of
reduction Company) Rules,2016 for format and
details.Petition to be accompanied by
Certified copy of Memorandum and
Articles of Association, special
File with the tribunal a list of creditors which is made resolution, Balance Sheet & P&L
as on a date not earlier than fifteen days prior to the account, Minutes of the meeting at
date of filing of an application which special resolution is passed,
requisite court fee.
a certificate from the auditor of the company to the
effect that the list of creditors is correct a certificate
by the auditor and declaration by a director of the
company is not, as on the date of filing of the
application, in arrears in the repayment of the
application, in arrears in the repayment of the
deposits or the interest thereon.
Submission of the application, give
a certificate by the companys auditor to the effect notice, or direct that notice to be
that the accounting treatment proposed by the given to Central Government,
company for the reduction of share capital is in Registrar of Companies, SEBI and
conformity with the accounting standards specified Creditors of the Comapny
in section 133 or any other provisions of the Act.
Send application to Creditors within

Advertisement of application in newspaper in Form RSC-5 seven days of the direction given
within 7 days of direction of Tribunal. by tribunal
The company shall submit to the Tribunal, within seven

days of expiry of period upto which representations or File form INC-28 with registrar of companies
objections were sought, the representations or objections with respect to Tribunal order sanctioning the
reduction.
so received along with the responses of the company
thereto
198 PP-CRVI
BUY BACK OF SHARE
According to Section 68(1) of the Companies Act, 2013 a company whether public or private, may purchase
its own shares or other specified securities (hereinafter referred to as buy-back) out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities.
However, no buy-back of any kind of shares or other specified securities can be made out of the proceeds of
an earlier issue of the same kind of shares or same kind of other specified securities.
Thus, the company must have at the time of buy-back, sufficient balance in any one or more of these
accounts to accommodate the total value of the buy-back.
Specified securities as referred to in the explanation to the section includes employees stock option or
other securities as may be notified by the Central Government from time to time.
Free reserves as referred to in the explanation includes securities premium account.
Authorisation
The primary requirement is that the articles of association of the company should authorise buyback. In case,
such a provision is not available, it would be necessary to alter the articles of association to authorise buy-
back. Buy-back can be made with the approval of the Board of directors at a meeting and/or by a special
resolution passed by shareholders in a general meeting, depending on the quantum of buy back. In case of a
listed company, approval of shareholders shall be obtained only by postal ballot.
Quantum of Buyback
(a) Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free
reserves of the company and such buy back has to be authorized by the board by means of a
resolution passed at the meeting.
(b) Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital
and free reserves of the company. In respect of any financial year, the shareholders can approve by
special resolution upto 25% of total equity capital in that year.
Post buy-back debt-equity ratio
The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more
than twice the paid-up capital and its free reserves i.e the ratio shall not exceed 2:1. However, the Central
Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes
of companies;
All the shares or other specified securities for buy-back are to be fully paid-up.
Buyback by listed/unlisted companies
The buy-back of the shares or other specified securities listed on any recognised stock exchange is
in accordance with the regulations made by the Securities and Exchange Board in this behalf; and
The buy-back in respect of shares or other specified securities other than listed securities in is in
accordance with such rules made under Chapter IV of the Companies Act, 2013.
Time gap
No offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date
of the closure of the preceding offer of buy-back, if any.
Explanatory statement
The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by
an explanatory statement stating
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of shares or securities intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back.
(Rule 17 of Companies (Share Capital and Debentures) Rules 2014 (hereinafter called the rules)
Additionally the Rules provide for following disclosures in explanatory statement with respect to private
companies and unlisted public companies:
(a) the date of the board meeting at which the proposal for buyback was approved by the board of
directors of the company;
(b) the objective of the buy-back;
(c) the class of shares or other securities intended to be purchased under the buy-back;
(d) the number of securities that the company proposes to buyback;
(e) the method to be adopted for the buy-back;
(f) the price at which the buy-back of shares or other securities shall be made;
(g) the basis of arriving at the buy-back price;
(h) the maximum amount to be paid for the buy-back and the sources of funds from which the buy-back
would be financed;
(i) the time-limit for the completion of buy-back;
(j) (i) the aggregate shareholding of the promoters and of the directors of the promoter, where the
promoter is a company and of the directors and key managerial personnel as on the date of the
notice convening the general meeting;
(ii) the aggregate number of equity shares purchased or sold by persons mentioned in sub-clause
(i) during a period of twelve months preceding the date of the board meeting at which the buy-
back was approved and from that date till the date of notice convening the general meeting;
(iii) the maximum and minimum price at which purchases and sales referred to in sub-clause (ii)
were made along with the relevant date;
200 PP-CRVI
(k) if the persons mentioned in sub-clause (i) of clause (j) intend to tender their shares for buy-back
(i) the quantum of shares proposed to be tendered;
(ii) the details of their transactions and their holdings for the last twelve months prior to the date of the
board meeting at which the buy-back was approved including information of number of shares
acquired, the price and the date of acquisition;
(l) a confirmation that there are no defaults subsisting in repayment of deposits, interest payment
thereon, redemption of debentures or payment of interest thereon or redemption of preference
shares or payment of dividend due to any shareholder, or repayment of any term loans or interest
payable thereon to any financial institution or banking company;
(m) a confirmation that the Board of directors have made a full enquiry into the affairs and prospects of
the company and that they have formed the opinion-
(i) that immediately following the date on which the general meeting is convened there shall be no
grounds on which the company could be found unable to pay its debts;
(ii) as regards its prospects for the year immediately following that date, that, having regard to their
intentions with respect to the management of the companys business during that year and to
the amount and character of the financial resources which will in their view be available to the
company during that year, the company shall be able to meet its liabilities as and when they fall
due and shall not be rendered insolvent within a period of one year from that date; and
(iii) the directors have taken into account the liabilities(including prospective and contingent
liabilities), as if the company were being wound up under the provisions of the Companies Act,
2013
(n) a report addressed to the Board of directors by the companys auditors stating that-
(i) they have inquired into the companys state of affairs;
(ii) the amount of the permissible capital payment for the securities in question is in their view
properly determined;
(iii) that the audited accounts on the basis of which calculation with reference to buy back is done is
not more than six months old from the date of offer document; and
(iv) the Board of directors have formed the opinion as specified in clause (m) on reasonable
grounds and that the company, having regard to its state of affairs, shall not be rendered
insolvent within a period of one year from that date.
Procedure
According to Rule 17(2) the company which has been authorized by a special resolution shall, before the
buy-back of shares, file with the Registrar of Companies a letter of offer in Form No.SH-8, along with the fee
as prescribed. Such letter of offer shall be dated and signed on behalf of the Board of directors of the
company by not less than two directors of the company, one of whom shall be the managing director, where
there is one.
Filing Declaration of Solvency with SEBI/ROC [Rule 17(3)]
When a company proposes to buy-back its own shares or other specified securities under this section in
pursuance of a special resolution or board resolution as the case may be , it shall, before making such buy-
back, file with the Registrar and the Securities and Exchange Board(in case of listed companies), a
declaration of solvency in Form SH-9 signed by at least two directors of the company, one of whom shall be
the managing director, if any, in such form as may be prescribed and verified by an affidavit as specified in
said form.
Dispatch of letter of Offer [Rule 17(4)]

The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the
same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of
Companies.
The letter of offer shall contain true, factual and material information and shall not contain any misleading
information and must state that the directors of the company accept the responsibility for the information
contained in such document; [Rule 17(1)]
Validity [Rule 17(5)]

The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days
from the date of dispatch of the letter of offer.
Acceptance on proportional basis [Rule 17(6)]

In case the number of shares or other specified securities offered by the shareholders or security holders is
more than the total number of shares or securities to be bought back by the company, the acceptance per
shareholder shall be on proportionate basis out of the total shares offered for being bought back.
Time limit for verification: [Rule 17(7)]

The company shall complete the verifications of the offers received within 15 days from the date of closure of
the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication
of rejection is made within 21 days from the date of closure of the offer.
Payment of consideration/returning of share certificates

The company shall within seven days of the time limit of verification:
(a) make payment of consideration in cash to those shareholders or security holders whose securities
have been accepted, or
(b) return the share certificates to the shareholders or security holders whose securities have not been
accepted at all or the balance of securities in case of part acceptance .
Separate Account [Rule 17(8)]

The company shall immediately after the date of closure of the offer, open a separate bank account and
deposit therein, such sum, as would make up the entire sum due and payable as consideration for the
shares tendered for buy-back.
The company shall confirm in its offer the opening of a separate bank account adequately funded for this
purpose and to pay the consideration only by way of cash. [Rule 17(10)]
Other conditions [Rule 17(10)]

The rules further provide that the company shall ensure that
(a) the company shall not withdraw the offer once it has announced the offer to the shareholders;
202 PP-CRVI
(b) the company shall not utilize any money borrowed from banks or financial institutions for the
purpose of buying back its shares; and
(c) the company shall not utilize the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities for the buy-back.
Time limit for completion of buyback [Section 68(4)]
Every buy-back shall be completed within a period of one year from the date of passing of the special
resolution, or as the case may be, the resolution passed by the Board.
Methods of buy-back [Section 68(5)]
The buy-back may be
(a) from the existing shareholders or security holders on a proportionate basis;
(b) from the open market;
(c) by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.
Extinguishment of securities bought back [Section 68(7)]
When a company buys back its own shares or other specified securities, it shall extinguish and physically
destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
Prohibition of further issue of shares or securities [Section 68(8)]
When a company completes a buy-back of its shares or other specified securities it shall not make a further
issue of the same kind of shares or other securities including allotment of new shares under clause (a) of
sub-section (1) of section 62 or other specified securities within a period of six months except by way of a
bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option
schemes, sweat equity or conversion of Preference shares or debentures into equity shares.
Register of buy-back [Section 68(9)]
When a company buys back its shares or other specified securities , it shall maintain a register of the shares
or securities so bought, the consideration paid for the shares or securities bought back, the date of
cancellation of shares or securities, the date of extinguishing and physically destroying the shares or
securities and such other particulars as may be prescribed.
According to the rules the register of shares or securities bought back shall be maintained in Form SH-10, at
the registered office of the company and shall be kept in the custody of the secretary of the company or any
other person authorized by the board in this behalf. Entries in the register shall be authenticated by the
secretary of the company or by any other person authorized by the Board for the purpose. [Rule 17(12)(a)]
Return of buyback [Section 68(10)]
A company shall, after the completion of the buy-back under this section, file with the Registrar and the
Securities and Exchange Board (in case of listed companies) a return containing such particulars relating to
the buy-back within thirty days of such completion, as may be prescribed.
The company shall file with the Registrar, and in case of a listed company with the Registrar and the SEBI, a
return in the Form No. SH-11 along with the fee. There shall be annexed to the return filed with the
Registrar in Form No. SH-11, a certificate in Form No. SH- 15 signed by two directors of the company
including the managing director, if any, certifying that the buy-back of securities has been made in
compliance with the provisions of the Act and rules made thereunder. [Rule 17(13) and Rule 17(14)]
Penal Provisions [Section 68(11)]
If a company makes any default in complying with the provisions of this section or any regulation made by
the Securities and Exchange Board, in case of listed companies, the company shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to three lakh rupees and every officer of
the company who is in default shall be punishable with imprisonment for a term which may extend to three
years or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or
with both.
Transfer to and application of Capital Redemption Reserve Account: (Section 69)
When a company purchases its own shares out of free reserves or securities premium account, a sum equal
to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve
account and details of such transfer shall be disclosed in the balance sheet. The capital redemption reserve
account may be applied by the company, in paying up unissued shares of the company to be issued to
members of the company as fully paid bonus shares.
Circumstances prohibits buy-back
Under Section 70 of the Companies Act, 2013, no company shall directly or indirectly purchase its own
shares or other specified securities
through any subsidiary company including its own subsidiary companies;
through any investment company or group of investment companies; or
if a default, is made by the company, in the repayment of deposits accepted either before or after the
commencement of this Act, interest payment thereon, redemption of debentures or preference
shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable
thereon to any financial institution or banking company: However, the buy-back is not prohibited, if
the default is remedied and a period of three years has lapsed after such default ceased to subsist.
No company shall, directly or indirectly, purchase its own shares or other specified securities in case
such company has not complied with the provisions of sections 92(Annual Return), 123(Declaration
of Dividend), 127(punishment for failure to distribute dividend) and section 129 (Financial
Statement).
INCOME TAX ASPECTS
Section 46A of the Income Tax Act, 1961 provides that any consideration received by a security holder from
any company on buy back shall be chargeable to tax on the difference between the cost of acquisition and
the value of consideration received by the security holder as capital gains.
The computation of capital gains shall be in accordance with the provisions of Section 48 of the Income Tax
Act, 1961.
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In respect of Foreign Institutional Investors (FIIs), as per the provisions of Section 196D(2) of the Income Tax
Act, 1961 no deduction of tax at source shall be made before remitting the consideration for equity shares
tendered under the offer by FIIs as defined under Section 115AD of the Income Tax Act, 1961. NRIs, OCBs
and other non-resident shareholders (excluding FIIs) will be required to submit a No Objection Certificate
(NOC) or tax clearance certificate obtained from the Income Tax authorities under the Income Tax Act. In
case the aforesaid NOC or tax clearance certificate is not submitted, the company should deduct tax at the
maximum marginal rate as may be applicable to the category of shareholders on the entire consideration
amount payable to such shareholders.
BUY-BACK PROCEDURE FOR LISTED SECURITIES

All the listed companies are required to comply with SEBI (Buy Back of Securities) Regulations 1998 and as
amended from time to time, in addition to the provisions of the companies Act. These regulations broadly
cover the following aspects.
1. Special Resolution and its additional disclosure requirements
2. Methods of buy back including buy back through reverse book building , from existing shareholders
through tender offer etc.,
3. Filing of offer documents, public announcement requirements.
4. offer procedure/opening of escrow account etc.,
5. General obligations of company, merchant banker etc
Special Resolution and its additional disclosure requirements (Regulation 5)

Sub-regulation (1) of Regulation 5 of the Regulations, lays down that for the purposes of passing a special
resolution the explanatory statement to be annexed to the notice for the general meeting shall contain
disclosures as specified in Schedule II Part A to the Regulations.
Sub-regulation (2) provides that a copy of the above resolution shall be filed with SEBI and the stock
exchanges where the shares or other specified securities of the company are listed, within seven days from
the date of passing of the resolution.
In case of Board approval

As per, Regulation 5A of the Regulations, provides a company, authorized by a resolution passed by the
Board of Directors at its meeting to buy back its shares or other specified securities, shall file a copy of the
resolution, with the SEBI and the stock exchanges, where the shares or other specified securities of the
company are listed, within two working days of the date of the passing of the resolution.
Disclosures under Schedule II Part A

An explanatory statement containing full and complete disclosure of all the material facts and the following
disclosures prescribed in Schedule II Part A of the Regulations should be annexed to the notice where the
buy-back is pursuant to shareholders approval.
(i) Date of the Board meeting at which the proposal for buy back was approved by the Board of
Directors of the company;
(ii) Necessity for the buy back;
(iii) Maximum amount required under the buy back and its percentage of the total paid up capital and
free reserves;
(iv) Maximum price at which the shares or other specified securities are proposed be bought back and
the basis of arriving at the buyback price;
(v) Maximum number of securities that the company proposes to buy back;
(vi) Method to be adopted for buyback as referred in sub-regulation (1) of regulation 4;
(vii) (a) the aggregate shareholding of the promoter and of the directors of the promoters, where the
promoter is a company and of persons who are in control of the company as on the date of the
notice convening the General Meeting or the Meeting of the Board of Directors;
(b) aggregate number of shares or other specified securities purchased or sold by persons
including persons mentioned in (a) above from a period of six months preceding the date of the
Board Meeting at which the buyback was approved till the date of notice convening the general
meeting;
(c) the maximum and minimum price at which purchases and sales referred to in (b) above were
made along with the relevant dates;
(viii) Intention of the promoters and persons in control of the company to tender shares or other specified
securities for buy-back indicating the number of shares or other specified securities ,details of
acquisition with dates and price;
(ix) A confirmation that there are no defaults subsisting in repayment of deposits, redemption of
debentures or preference shares or repayment of term loans to any financial institutions or banks;
(x) A confirmation that the Board of Directors has made a full enquiry into the affairs and prospects of
the company and that they have formed the opinion-
(a) that immediately following the date on which the General Meeting or the meeting of the Board of
Directors is convened there will be no grounds on which the company could be found unable to
pay its debts;
(b) as regards its prospects for the year immediately following that date that, having regard to their
intentions with respect to the management of the companys business during that year and to
the amount and character of the financial resources which will in their view be available to the
company during that year, the company will be able to meet its liabilities as and when they fall
due and will not be rendered insolvent within a period of one year from that date; and
(c) in forming their opinion for the above purposes, the directors shall take into account the
liabilities as if the company were being wound up under the provisions of the Companies Act,
1956 (including prospective and contingent liabilities);
(xi) A report addressed to the Board of Directors by the companys auditors stating that-
(i) they have inquired into the companys state of affairs;
(ii) the amount of the permissible capital payment for the securities in question is in their view
properly determined; and
(iii) the Board of Directors have formed the opinion as specified in clause (x) on reasonable grounds
and that the company will not, having regard to its state of affairs, will not be rendered insolvent
within a period of one year from that date.
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METHODS OF BUY-BACK
According to Regulation 4 of the Regulations, a company may buy back its own shares or other specified
securities by any one of the following methods:
(a) from the existing security-holders on a proportionate basis through the tender offer;
(b) from the open market through:
(i) book-building process,
(ii) stock exchange
(c) from odd-lot holders.
It may be noted that no offer of buy back for 15% or more of paid up capital and free reserves, shall be
made from the open market.
In terms of Regulation 4(4) a company shall not make any offer of buy-back within a period of one year
reckoned from the date of closure of the preceding offer of buy-back, if any.
Can a company buy back its shares or any specified securities through negotiated deal on or of
the stock exchange?
No, Regulation 4(2) does not permit buy back through negotiated deals(of and on stock exchange), private
arrangement, spot transactions.
Buy-back from existing security-holders through tender offer

According to Regulation 6 of the Regulations, a company may buy back its securities from its existing
security-holders on a proportionate basis in accordance with the provisions of the Regulations. It may be
noted that fifteen percent of the number of securities which the company proposes to buy back or number of
securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders.
Additional Disclosures.
In addition to disclosure required under Schedule II Part A, regulation 7 requires the following disclosures to
be made to the explanatory statement.
(a) the maximum price at which the buy-back of shares or other specified securities shall be made and
whether the Board of Directors of the company are being authorised at the general meeting to
determine subsequently the specific price at which the buy-back may be made at the appropriate
time;
(b) if the promoter intends to offer their shares or other specified securities,
(i) the quantum of shares or other specified securities proposed to be tendered, and
(ii) the details of their transactions and their holdings for the last six months prior to the passing of
the special resolution for buy-back including information of number of shares or other specified
securities acquired, the price and the date of acquisition.
Public announcement and Filing of offer documents (Regulation 8)
The company which has been authorised by a special resolution or a resolution passed by the Board of
Directors at its meeting shall make a public announcement within two working days from the date of
resolution in at least one English National Daily, one Hindi National Daily and a Regional language daily all
with wide circulation at the place where the Registered office of the company is situated and shall contain all
the material information as specified in Schedule II, Part A.
A copy of the public announcement along with the soft copy, shall also be submitted to the Board
simultaneously through a merchant banker.
The company shall within five working days of the public announcement file with the Board a draft-letter of
offer, along with soft copy, containing disclosures as specified in Schedule III through a merchant banker
who is not associated with the company.
The Board may give its comments on the draft letter of offer not later than seven working days of the receipt
of the draft letter of offer. In the event the Board has sought clarifications or additional information from the
merchant banker to the buyback offer, the period of issuance of comments shall be extended to the seventh
working day from the date of receipt of satisfactory reply to the clarification or additional information sought.
In the event the Board specifies any changes, the merchant banker to the buyback offer and the company
shall carryout such changes in the letter of offer before it is dispatched to the shareholders.
The company shall file along with the draft letter of offer, a declaration of solvency in the prescribed form and
in a manner prescribed in the Companies Act.
Offer procedure (Regulation 9)
(1) A company making a buyback offer shall announce a record date for the purpose of determining the
entitlement and the names of the security holders, who are eligible to participate in the proposed
buyback offer.
(2) The letter of offer along with the tender form shall be dispatched to the security holders who are
eligible to participate in the buyback offer, not later than five working days from the receipt of
communication of comments from the Board.
(3) The date of the opening of the offer shall be not later than five working days from the date of
dispatch of letter of offer.
(3A) The acquirer or promoter shall facilitate tendering of shares by the shareholders and settlement of
the same, through the stock exchange mechanism as specified by the Board.
(4) The offer for buy back shall remain open for a period of ten working days.
(5) The company shall accept shares or other specified securities from the security holders on the basis
of their entitlement as on record date.
(6) The shares proposed to be bought back shall be divided in to two categories; (a) reserved category
for small shareholders and (b) the general category for other shareholders, and the entitlement of a
shareholder in each category shall be calculated accordingly.
(7) After accepting the shares or other specified securities tendered on the basis of entitlement, shares
or other specified securities left to be bought back, if any in one category shall first be accepted, in
proportion to the shares or other specified securities tendered over and above their entitlement in
the offer by security holders in that category and thereafter from security holders who have tendered
over and above their entitlement in other category.
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Escrow account
Regulation 10 of the SEBI Regulations provides that-
1. the company should as and by way of security for performance of its obligations under the
Regulations, on or before the opening of the offer, deposit in an escrow account the sum as
specified in Sub-regulation (2).
2. the escrow amount is payable in the following manner:
(i) if the consideration payable does not exceed Rs 100 crores25 per cent of the consideration
payable;
(ii) if the consideration payable exceeds Rs 100 crores25 per cent upto Rs 100 crores and 10
per cent thereafter;
3. the escrow account referred to above shall consist of:

(a) cash deposited with a scheduled commercial bank, or
(b) bank guarantee in favour of the merchant banker, or
(c) deposit of acceptable securities with appropriate margin, with the merchant banker, or
(d) a combination of (a), (b) and (c) above;
4. where the escrow account consists of deposit with a scheduled commercial bank, the company
while opening the account, should empower the merchant banker to instruct the bank to issue a
bankers cheque or demand draft for the amount lying to the credit of the escrow account, as
provided in the Regulations;
5. where the escrow account consists of bank guarantee, such bank guarantee shall be in favour of
the merchant banker and valid until thirty days after the closure of the offer;
6. where the escrow account consists of securities, the company should empower the merchant
banker to realise the value of such escrow account by sale or otherwise. If there is any deficit on
realisation of the value of the securities, the merchant banker shall be liable to make good any such
deficit;
7. in case the escrow account consists of bank guarantee or approved securities, these shall not be
returned by the merchant banker till the completion of all obligations under the Regulations;
8. where the escrow account consists of bank guarantee or deposit of approved securities, the
company is also required to deposit with the bank in cash, a sum of at least one per cent of the total
consideration payable, as and by way of security for fulfilment of the obligations under the
Regulations by the company;
9. on payment of consideration to all the security-holders who have accepted the offer and after
completion of all the formalities of buy-back, the amount, guarantee and securities in the escrow, if
any, should be released to the company;
10. SEBI, in the interest of the security-holders, may, in case of non-fulfillment of obligations under the
Regulations by the company forfeit the escrow account either in full or in part;
11. the amount so forfeited may be distributed pro rata amongst the security-holders who accepted the
offer and the balance, if any, shall be utilised for investor protection.
Payment to the Security holders
Regulation 11 of the Regulations lays down that
1. The company should immediately after the date of closure of the offer, open a special account with
a SEBI registered banker to an issue and deposit therein, such sum as would, together with the
amount lying in the escrow account make up the entire sum due and payable as consideration for
the buy-back and for this purpose, may transfer the funds from the escrow account.
2. The company shall complete the verifications of offers received and make payment of consideration
to those security holders whose offer has been accepted or return the shares or other specified
securities to the security holders within seven working days of the closure of the offer.
Extinguishing of bought-back securities (Regulation 12)
The company shall extinguish and physically destroy the security certificates so bought back in the presence
of a Registrar to issue or the Merchant Banker and the Statutory Auditor within fifteen days of the date of
acceptance of the shares or other specified securities. The company shall also ensure that all the securities
bought-back are extinguished within seven days of the last date of completion of buyback.
The shares or other specified securities offered for buy-back if already dematerialised shall be extinguished
and destroyed in the manner specified under the Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996, and the bye-laws framed thereunder.
The company shall, furnish a certificate to the Board certifying compliance as specified above and duly
certified and verified by -
(i) the registrar and whenever there is no registrar by the merchant banker;
(ii) two directors of the company one of whom shall be a managing director where there is one;
(iii) the statutory auditor of the company,
The certificate shall be furnished to the Board on a monthly basis by the seventh day of the month
succeeding the month in which the securities certificates are extinguished and destroyed.
The company shall furnish, the particulars of the security certificates extinguished and destroyed, to the
stock exchanges where the shares of the company are listed on a monthly basis by the seventh day of the
month succeeding the month in which the securities certificates are extinguished and destroyed. The
company shall also maintain a record of security certificates which have been cancelled and destroyed as
prescribed in the Companies Act.
Odd-lot Buy-back
Regulation 13 states that the provisions pertaining to buy-back through tender offer as specified shall be
applicable mutatis mutandis to odd-lot shares or other specified securities.
Buy-back from Open Market
Regulation 14 of the Regulations lays down that a buy-back of shares or other specified securities from the
open market may be in any one of the following methods:
210 PP-CRVI
(i) Through stock exchange.
(ii) Book-building process.
The company shall ensure that atleast 50% of the amount earmarked for buy back, as specified in
resolutions (Board/special resolution) is utilized for buying back shares and other specified
securities
Buy-back through the stock exchange (Regulation 15)
Regulation 15 of the Regulations provides that a company should buy-back its specified securities through
the stock exchange as provided hereunder:
the special resolution/ board resolution as under Regulation 5 and 5A respectively, should specify
the maximum price at which the buy-back will be made;
the buy-back of securities should not be from the promoters or persons in control of the company;
the company should appoint a merchant banker and make a public announcement as referred to in
Regulation 8 within seven days from the date of passing the resolution under Regulation 5 and 5A;
the public announcement shall be made within 7 working days from the date of passing special
resolution;
simultaneously with the issue of such public announcement, the company shall file a copy of the
public announcement with the Board.
the company shall submit the information regarding the shares or other specified securities bought-
back, to the stock exchange on a daily basis in such form as may be specified by the Board and the
stock exchange shall upload the same on its official website immediately;
the company shall upload the information regarding the shares or other specified securities bought-
back on its website on a daily basis;
the buy-back offer shall open not later than seven working days from the date of public
announcement and shall close within six months from the date of opening of the offer."
the buy-back should be made only on stock exchanges having Nationwide Trading Terminal facility
and only through the order matching mechanism except all or none order matching system;
the company shall submit information regarding the shares or other specified securities bought
back, to the stock exchange on daily basis in such form as may be specified by the board;
the identity of the company as a purchaser would appear on the electronic screen when the order is
placed.
The company shall upload the information regarding the shares or other specified securities bought
back, on its website on daily basis.
Buy Back of physical shares or other specified securities (Regulation 15 B)
A company shall buy-back its shares or other specified securities in physical form through open market
method as provided hereunder:
(a) a separate window shall be created by the stock exchange, which shall remain open during the buy-back
period, for buy-back of shares or other specified securities in physical form.
(b) the company shall buy-back shares or other specified securities from eligible shareholders holding
physical shares through the separate windows specified in clause (a), only after verification of the identity
proof and address proof by the broker.
(c) the price at which the shares or other specified securities are bought back shall be the volume weighted
average price of the shares or other specified securities bought-back, other than in the physical form, during
the calendar week in which such shares or other specified securities were received by the broker:
Provided that the price of shares or other specified securities tendered during the first calendar week of the
buy-back shall be the volume weighted average market price of the shares or other specified securities of the
company during the preceding calendar week.
Explanation: In case no shares or other specified securities were bought back in the normal market during
calendar week, the preceding week when the company has last bought back the shares or other specified
securities may be considered.
Escrow account (Regulation 15 B)
(1) The Company shall, before opening of the offer, create an escrow account towards security for
performance of its obligations under these regulations, and deposit in escrow account 25 per cent of the
amount earmarked for the buy-back as specified in the resolutions.
(2) The escrow account referred to in sub-regulation (1) may be in the form of,
(a) cash deposited with any scheduled commercial bank; or
(b) bank guarantee issued in favour of the merchant banker by any scheduled commercial bank.
(3) For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial
bank, the company shall while opening the account, empower the merchant banker to instruct the bank to
make payment of the amounts lying to the credit of the escrow account, to meet the obligations arising out of
the buy-back.
(4) For such part of the escrow account as is in the form of a bank guarantee:
(a) the same shall be in favour of the merchant banker and shall be kept valid for a period of thirty days
after the closure of the offer or till the completion of all obligations under these regulations,
whichever is later.
(b) the same shall not be returned by the merchant banker till completion of all obligations under the
regulations.
(5) Where part of the escrow account is in the form of a bank guarantee, the company shall deposit with a
scheduled commercial bank, in cash, a sum of at least 2.5 per cent of the total amount earmarked for buy-
back as specified in the resolutions referred to in regulation 5 or regulation 5A. as and by way of security for
fulfillment of the obligations under the regulations by the company.
(6) The escrow amount may be released for making payment to the shareholders subject to atleast 2.5% of
the amount earmarked for buy-back as specified in the resolutions referred to in regulation 5 or regulation 5A
remaining in the escrow account at all points of time.
212 PP-CRVI
(7) On fulfilling the obligation specified at sub regulation (3) of Regulation 14, the amount and the guarantee
remaining in the escrow account, if any, shall be released to the company.
(8) In the event of non-compliance with sub-regulation (3) of regulation 14, except in cases where,-
a. volume weighted average market price (VWAMP) of the shares or other specified securities of the
company during the buy-back period was higher than the buy-back price as certified by the
Merchant banker based on the inputs provided by the Stock Exchanges.
b. inadequate sell orders despite the buy orders placed by the company as certified by the Merchant
banker based on the inputs provided by the Stock Exchanges.
c. such circumstances which were beyond the control of the company and in the opinion of the Board
merit consideration, the Board may direct the merchant banker to forfeit the escrow account, subject
to a maximum of 2.5 per cent of the amount earmarked for buy-back as specified in the resolutions.
(9) In the event of forfeiture for non-fulfillment of obligations specified in sub regulation (8), the amount
forfeited shall be deposited in the Investor Protection and Education Fund of Securities and Exchange Board
of India.
Extinguishment of certificates (Regulation 16)

Subject to the provisions of sub-regulation (2) and sub regulation (3), the provisions of regulation 12
pertaining to extinguishment of certificates shall be applicable mutatis mutandis.
(2) The company shall complete the verification of acceptances within fifteen days of the payout.
(3) The company shall extinguish and physically destroy the security certificates so bought back during the
month in the presence of a Merchant Banker and the Statutory Auditor, on or before the fifteenth day of the
succeeding month:
Provided that the company shall ensure that all the securities bought-back are extinguished within seven
days of the last date of completion of buyback.
Buy-back through book-building (Regulation 17)

A company can buy-back its securities through the book-building process as provided hereunder:
1. (a) The special regulation as in Regulation 5 or 5A, should specify the maximum price at which the
buy-back will be made.
(b) The company should appoint a merchant banker.
(c) A public announcement as referred to in Regulation 8 shall be made at least seven days prior to
the commencement of the buy-back.
(d) Subject to the provisions of Sub-clauses (i) and (ii), the provisions of Regulation 10 regarding
escrow account are applicable:
(i) The deposit in the escrow account should be made before the date of the public
announcement.
(ii) The amount to be deposited in the escrow account should be determined with reference to
the maximum price as specified in the public announcement containing detailed
methodology of the book-building process, manner of acceptance, format of acceptance to
be sent by the security-holders pursuant to public announcement and details of bidding

centres.
(e) A copy of the public announcement must be filed with SEBI within two days of the
announcement along with the fees as specified in Schedule IV to the Regulations. The Public
announcement shall also contain the detailed methodology of the book building process, the
manner of acceptance, the format of acceptance to be sent by the security holders pursuant to
the public announcement and the details of bidding centres.
(f) The book-building process should be made through an electronically linked transparent facility.
(g) The number of bidding centres should not be less than thirty and there should be at least one
electronically linked computer terminal at all the bidding centres.
(h) The offer for buy-back should be kept open to the security-holders for a period of not less than
fifteen days and not exceeding thirty days.
(i) The merchant banker and the company should determine the buy-back price based on the
acceptances received and the final buy-back price, which should be the highest price accepted
should be paid to all holders whose securities have been accepted for the buy-back.
(2) The provisions of sub-regulation (2) of regulation 11, pertaining to verification of acceptances and the
provisions of regulation 11 pertaining to opening of special account and payment of consideration shall be
applicable mutatis mutandis.
Extinguishment of certificates (Regulation 18)

The provisions of regulation 12 pertaining to extinguishment of certificates shall be applicable mutatis
mutandis.
Obligations of the company

According to Regulation 19 of the Regulations,
The company shall ensure that:
(a) the letter of offer, the public announcement of the offer or any other advertisement, circular,
brochure, publicity material contains true, factual and material information and does not contain any
misleading information and must state that the directors of the company accept the responsibility for
the information contained in such documents;
(b) the company shall not issue any specified securities including by way of bonus till the date of
closure of the offer is made under these Regulations;
(c) the company shall pay consideration only by cash;
(d) the company shall not withdraw the offer to buy-back after the draft letter of offer is filed with the
SEBI or public announcement of the offer to buy-back is made;
(e) the promoter or the person shall not deal in the specified securities of the company in the stock
exchange or off market, including inter-se transfer of shares among the promotersduring the period
from the date of passing the resolution under regulation 5 or regulation 5A till the closing of the
offer.
214 PP-CRVI
(f) the company shall not raise further capital for a period of one year from the closure of buy-back
offer, except in discharge of its subsisting obligations.
No public announcement of buy-back shall be made during the pendency of any scheme of amalgamation or
compromise or arrangement pursuant to the provisions of the Companies Act.
The company should nominate a compliance officer and investors service centre for compliance with the
buy-back regulations and to redress the grievances of the investors [Sub-regulation (3)].
The particulars of the said security certificates extinguished and destroyed should be furnished by the
company to the stock exchanges where the securities of the company are listed, within seven days of
extinguishment and destruction of the certificates [Sub-regulation (4)].
The company should not buy-back the locked-in securities and non-transferable securities till the pendency
of the lock-in or till the securities become transferable [Sub-regulation (5)].
The company should issue, within two days of the completion of buy-back, a public advertisement in a
national daily, inter alia, disclosing the following:
(i) number of securities bought;
(ii) price at which the securities were bought;
(iii) total amount invested in the buy-back;
(iv) details of the security-holders from whom securities exceeding one per cent of the total securities
were bought-back; and
(v) the consequent changes in the capital structure and the shareholding pattern after and before the
buy-back.
Obligations of the merchant banker

Regulation 20 provides that the merchant banker should ensure that:
(a) the company is able to implement the offer;
(b) the provision relating to escrow account has been made;
(c) firm arrangements for monies for payment to fulfil the obligations under the offer are in place;
(d) the public announcement of buy-back is made and the letter of offer has been filed in terms of the
Regulations;
(e) the merchant banker should furnish to SEBI, a due diligence certificate which should accompany
the draft letter of offer;
(f) the merchant banker should ensure that the contents of the public announcement of offer as well as
the letter of offer are true, fair and adequate and quoting the source wherever necessary.
(g) the merchant banker should ensure compliance of Section 77A and Section 77B of the Companies
Act, and any other applicable laws or rules in this regard;
(h) upon fulfillment of all obligations by the company under the Regulations, the merchant banker
should inform the bank with whom the escrow or special amount has been deposited to release the
balance amount to the company and send a final report to SEBI in the specified form, within 15
days from the date of closure of the buy-back offer.
LESSON ROUND UP
According to section 61 of the Companies Act 2013 a limited company having a share capital derives its
power to alter its share capital through its articles of association.
A company limited by shares or a company limited by guarantee and having a share capital may, if
authorised by its articles, by special resolution, and subject to its confirmation by the Tribunal on petition,
reduce its share capital.
Surrender of shares means the surrender of shares already issued to the company by the registered
holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute
or for any other reason, it will have the same effect as a transfer in favour of the company and amount to a
reduction of capital.
Diminution of capital, the company cancels shares which have not been taken or agreed to be taken by any
person.
According to Section 68(1) of the Companies Act, 2013 a company whether public or private, may purchase
its own shares or other specified securities out of:(i) its free reserves; or(ii) the securities premium account;
or (iii) the proceeds of any shares or other specified securities.
When a company buys back its shares or other specified securities , it shall maintain a register of the shares
or securities so bought, the consideration paid for the shares or securities bought back, the date of
cancellation of shares or securities, the date of extinguishing and physically destroying the shares or
securities and such other particulars as may be prescribed.
Section 46A of the Income Tax Act, 1961 provides that any consideration received by a security holder from
any company on buy back shall be chargeable to tax on the difference between the cost of acquisition and
the value of consideration received by the security holder as capital gains.
All the listed companies are required to comply with SEBI (Buy Back of Securities) Regulations 1998 and as
amended from time to time, in addition to the provisions of the Companies Act, 2013.
SELF TEST QUESTIONS

(These are meant for recapitulation only. Answers to these questions are not required to be submitted
for evaluation).
1. Briefly explain the need of financial restructuring and highlight reasons in the context of over
capitalised and under capitalised companies.
2. What do you mean by buy-back of shares or specified securities as under the Companies Act,
2013? Explain the relevant provisions of the Act.
3. What are the different alternatives available to a public company for buy-back?
4. Enumerate the provisions relating to Escrow account and offer procedure as under SEBI (Buy-
back of Securities) Regulations, 1998.
5. Discuss the obligation of Merchant Banker under SEBI (Buy-back of Securities) Regulations,
1998.
216 PP-CRVI
Lesson 12
Post Merger Re-Organisation
Corporate restructuring leads to significant changes
Factors in Post Merger Reorganization. in the organization touching various tangible as well
Impact of post merger reorganisation as intangible aspects. Apart from various
considerations involved in any restructuring and the
Integration of business and operation.
benefits sought to be achieved there from, it is
Post Merger Success and Valuation. important that each concerned is aware of post facto
Human and Cultural factors actions that need to be completed to ensure smooth
working of the organization post restructure.
Cultural Factors and post merger examples
Measuring Post-Merger Efficiency. The actions that need attention in the post
restructure scenario find their roots somewhere in the
beginning of the whole process. It is imperative that
the team involved in the restructure understands the
logical ends to each of the steps and sub-steps at the
time when an organization is planning for the
restructuring. Certain decisions taken in terms of the
overall structuring plan, methodology adopted for
specific actions forming part of the restructure could
be irreversible or may have very little scope to make
changes and therefore, it is essential to keep the end
objective in mind while planning for the restructure.
After reading this lesson you would be able to
understand the issues and challenges involved
generally after merger, which are to be carried out in
conjunction with the strategic planning of merger,
measuring post merger efficiency etc.,
218 PP-CRVI
INTRODUCTION
Post-merger reorganisation is a wide term which encompasses the reorganisation of each and every
aspect of the companys functional areas to achieve the objectives planned and aimed at. The
parameters of post merger reorganisation are to be established by the management team of every
amalgamating company differently depending upon its requirements, objectives of merger and
management corporate policy.
A merger can join two cultures, two sets of procedures and protocols, two sets of policies and change
the employment environment and prospects of several hundreds of employees, who have been the bed
rock of past successes and the key to future value. Timely integration of systems, applications and data
provide the corporate information needed to achieve the post-merger objectives.
The relevance of Post-merger organisation and integration cannot be overstated. Continuous appraisal
and improvement are the basic elements in the success of a merger or an acquisition. Due to the
complexity of numerous activities and occurrence of many unanticipated events, it is quite possible that
the process gets off the track and results are not realized.
In fact the main reason, why so many mergers either fail or fall short of expectations is a lack of
adequate efforts to integrate the purchased company into the buyers existing operations. It should be
realised that once the deal is put through, the real work has only begun. Often, the buying company
underestimates as to how long it will take to get the two companies to act as one. Therefore, where
importance is placed on whether it is a good idea to purchase a company and figure out the right price,
it is equally essential to understand the target company with an eye to post-merger efforts.
FACTORS IN THE POST MERGER REORGANISATION
It would not be inappropriate to divide all actions in the restructuring process in three stages viz. before,
during and after, to ensure all actions are covered and put in right buckets to ensure proper planning for
each of these actions. Post-restructure actions envisage actions required to be taken after the approval
from the Court is obtained in case of a merger of two or more companies. In other words, these are the
actions put in the third and final bucket where all prior actions before and during the restructure would
flow down.
Restructure could be in the nature of merger, amalgamation, acquisition, de-merger, internal

organizational restructuring, financial restructuring, realignment of business segments etc. The points
stated below would at best apply to a merger/ amalgamation scenario. Some of these points may apply
to other scenarios also. One will need to give a thought about the applicability of the points stated below
to the relevant type of business restructuring.
1. Change of name and logo
If the restructure is going to result in change of name or where the Board of Directors decide to change
the name of the entity post restructuring, the company will need to plan implementation of change of
name on all name boards, letterheads, all branches/ locations where name of the Company has been
posted/displayed, including company's website/internet. Similarly, actions need to be taken to modify
the corporate logo, if the same is going to change as well.
Lesson 12 Post Merger Re-Organisation 219
If the company proposes to adopt a new branding strategy to impress its new logo in the minds of
people, it will need to undertake suitable advertisement campaign for the same.
2. Revised organization chart
The company will need to work on updating its organization chart at all levels. It will need to reflect the
new vision/mission, new thinking post restructure. In case of takeover, the organization chart may not
change significantly; however the acquired entity may need to align its organization structure with the
acquiring entity. Also, changes may be necessitated by vertical/ horizontal structures in the
organization.
3. Communication
The company should provide proper and timely communication about the restructuring in the
organization to all its employees, which would provide updated status, bring clarity on what's happening
at the organizational level and avoid miscommunication.
Also, it would be useful to send a communication regarding changes in company policies as well. The
company should also consider sending appropriate communication to bankers, auditors, advisors, etc.
upon formal completion of the restructuring activity.
4. Employee compensation, benefits and welfare activities
Companies need to be sensitive with regard to terms and conditions of employment. Usually, courts
would uphold terms of employment to be no less favorable than existing terms and conditions. Post
acquisition, the parent company may want the acquired company to adopt compensation structure of
the parent entity. It would result in re-aligning the structure as well as pay scales of existing employees.
The company will have to carefully handle such sensitive areas to ensure employee satisfaction and
comfort, which pays in the long run in building an image apart from preventing or reducing low
employee turnout. Additionally, company would need to consider any prevailing fringe benefits and
amenities provided to employees and the feasibility of continuing the same in the new set up (post
restructure). For example - The company may re-negotiate insurance premium for employee related
insurance policies (life, accident, medical as applicable) depending on the conditions of existing policy
or the preferred insurance vendor recommended by acquiring entity.
5. Aligning company policies
The company would need to align/ amend its internal policies to reflect the organization in the post
restructure scenario. This may not apply in all types of restructuring. Particularly in case of takeover, the
acquiring entity is likely to insist all its policies on the acquired entity to bring consistency in the groups'
policies. Specific changes to group policies may be needed depending on nature and size of business,
location, applicability of relevant State laws. The challenge continues further in terms of implementing
changes in the policies e.g. if acquired company has a policy to use laptops/ computers manufactured by
DELL. If the acquiring company uses laptops/ computers manufactured by HP, the company would need
to take decision to implement the group policy or make an exception till the time the existing laptops/
computers consume expected life and new ones are due for procurement. Similarly, it would be
appropriate to revisit policies with respect to employee uniforms, mobile phones provided by the company,
tie up with insurance agents to provide cover as per the terms and conditions acceptable to the parent
company, HR-policies that impact office timings, leaves and so on.
6. Aligning accounting and internal database management systems
Besides passing appropriate accounting entries to capture the merger/ acquisition/ financial structure,
the company may need to adopt accounting policies, practices based on those followed by its new
220 PP-CRVI
parent organization post acquisition. The company needs to understand any reporting and database
requirements of acquiring company or merged entity to provide relevant data to the new management
and to align existing systems with those of the parent/ merged entity. This may involve providing
suitable training to concerned personnel and understanding issues, if any, to avoid incorrect reporting.
7. Re-visiting internal processes

The company which is subjected to restructuring will need to align its internal processes with that of the
merged entity/ acquired entity e.g. domestic travel process, reimbursement of expenses process.
Company's current process may involve issue of cheques to employees against expenses claimed;
whereas merged/ acquiring entity credits its employee claims to a bank account maintained for the
purpose. Accordingly, the company will need to open bank account (expense reimbursement account)
for all its employees. Company will also need to create e-mail ids for employees of merging entity and
ensure access to their previous data as well. In case of an acquisition, acquiring company may insist on
changing the mail ids of acquired entity to ensure consistency with its internal requirements.
8. Re-allocation of people
Restructuring typically would entail re-allocation of persons operating on various positions/ grades in
similar functions. At times, allocation in support functions becomes a challenge as now two persons
handle the similar profile e.g. personnel in HR, finance, administration etc. This would require re-
allocation of responsibilities or re-defining the responsibilities to specific geography/ line of business/
business units. In addition, a situation may arise where new positions get created to fit into the new
organization structure post restructure. A careful planning is needed to avoid overlapping,
underutilization of staff and to take care of career progression.
9. Engagement with statutory authorities

This is one of the important areas that deals with legal requirements and is close to the company
secretary. It is essential to identify government authorities that need to be intimated formally about the
merger/ amalgamation/takeover e.g. SEBI, Stock Exchange.etc.
Restructuring is also likely to require reflection of the changes to various government permissions,
licenses, approvals granted in the past e.g. under labour and industrial laws, sales tax and service tax
registrations, permissions under SEZ/STPI requirements where a unit of a merging entity now becomes
part of the merged entity. Appropriate steps need to be carried out for updating registration of vehicles
owned by merging entity prior to merger.
10. Record keeping

Maintenance of records of merging entity and making suitable entries in the records (e.g. registers
under Companies Act reflecting changes in shareholding, directors etc. as applicable) of merged entity
is a must. One will need to dive deep to ensure maintenance of all past records including statutory and
non-statutory registers, original copies of various forms, returns, certificates, approvals, litigation and
property records. Company may need to relocate the records to centralized storage maintained by the
merged/new entity.
11. Immoveable Property

A restructuring may cause changes in property records e.g. consequent to merger if merging entity
ceases to exist, merged entity would need to take steps to ensure that property records are updated to
reflect the name of the merged (new) entity.
If a company is occupying leased premises, one should check conditions under the lease agreement
and complete necessary formalities such as intimation to landlord or the like.
If a company has borrowed money against mortgage of property, the company will need to inform bank
about the restructure and check if any formalities need to be completed as per bank's policies. While
the order of the Hon'ble Court is sufficient to bring legal effect to a merger/ amalgamation, the bank may
require formal intimation in the prescribed form within 7 days or so.
12. Expansion of existing teams to support larger organization

A restructuring is likely to put pressure on support staff, which was supporting employee strength before
amalgamation e.g. in-house training department was probably handling technical training for 2000
employees. Post amalgamation with another company, the training function needs to cater to training
requirements for 5000 employees. It is further likely that the amalgamating entity had an independent
training department or had a sophisticated training module to conduct on-line trainings, which the
amalgamated entity may not have; which would require further deliberations to implement better practices in the
new organization.
13. Revised ISO certification and similar other certifications

Restructuring could lead to changes in existing certifications such as ISO or similar other certifications.
With the addition to locations or changes in organization structure, suitable changes need to be
reflected to the certifications obtained e.g. post acquisition, the acquiring company may decide to close
down a branch of acquired company located in Bangalore, since acquiring company may have a large
set up in Bangalore; which would require intimation to concerned bodies and completing necessary
formalities to ensure all locations/ Functions in new set up are certified.
14. Re-visiting past decisions/government approvals/ compliances

Restructuring is not always about future decisions or actions. One would need to take a look at past
decisions or approvals which were conditional and insist for re-visiting earlier decisions e.g. assuming
that the Board of Directors of a company had passed a resolution for not paying any remuneration to
nonexecutive directors. However, acquiring entity pays certain percentage of its profits to non-executive
directors. Post acquisition and to fit into group policy, company would need to pass another resolution
for payment of remuneration to non-executive directors. Take another example, where a company had
obtained permission from Reserve Bank of India stating a condition that the permission is subject to
condition that foreign shareholding in the company does not exceed X%. If post acquisition, the
percentage of foreign shareholding passes stipulated percentage, the company would need to refer the
matter to RBI and seek appropriate sanction. There would be a few issues which are disputable where
the order of Court would operate and no formal process needs to be followed. However, it is
recommended that a company should take appropriate steps to avoid multiple interpretation or possible
non-compliance in such cases. Additionally, a company may be subjected to compliance with
Operational Challenges Post Corporate Restructuring certain laws of requirements as a result of restructure
e.g. a non-listed company acquires a listed company to make the listed company as its subsidiary. Certain
provisions of listing agreement/ SEBI regulations would apply which apply to a holding company of a listed
company, which was so far not applicable to such a non-listed company. Or where a merging entity had a unit in
SEZ; now the merged entity would need to ensure compliances under regulations applicable to SEZ unit.
Assume a company has obtained 100 software licenses required as a part of internal system used for a
particular project. Post merger, if the size of such team increases to 150 members, company would
need to procure additional licenses.
222 PP-CRVI
15. Contracts
It is an onerous exercise to check provisions in the existing contracts having connection to any form of
restructuring. While order of the Hon'ble Court would prevail and shall ensure that the contracts entered
by the merging entity shall continue to be transferred in the name of merged entity as if merged entity
was the signing party from the relevant date, provisions contained in a contract with third party may
require company to inform about such merger or may give rise to the other party to terminate the
contract.
A lease agreement having committed period clause (providing for minimum period of lease during which
the lease contract is not terminable by the landlord) may release the landlord from such restriction in the
event of a restructure of the lessee entity. Likewise, the company may lose the benefits/ concessions
under existing contract, unless company is able to re-negotiate those terms to its favor. Or a contract
may provide for lifting the restrictions around fixed fees say for a period of three years, consequent to
restructure. It is now imperative for the merged entity to check all such provisions triggering from a
restructure rather than criticizing how badly the contract was negotiated by merging entity.
Further, the merged entity would need to check various rights and obligations spelt out in the contracts
with third parties and should allocate teams to identify and ensure compliance of those requirements. A
loan agreement may insist on the borrower company to obtain prior permission from the Bank.
Restructuring is likely to trigger termination rights for other party to the contract, which could turn out to
be dangerous from business continuity perspective.
16. Miscellaneous
A restructure would require changes to data displayed on the website of the company/ new entity as the
case may be. It would require bringing appropriate changes in company's branding strategy, marketing
material, employee visiting cards, employee identity cards, changes to any power of attorneys issued by
the erstwhile entity, consolidation of existing bank accounts with the same bank, any action related to
existing bank guarantees and other miscellaneous items such as crockery bearing company's logo, etc.
There could be many more aspects to a restructure beyond those stated above, depending on the
peculiarities of restructuring by a company. A company should plan for a restructure and try to cover as
many aspects as possible to ensure smooth transition and taking necessary actions to complete the
restructuring process to its logical end.
IMPACT OF POST MERGER REORGANISATION

1. GAIN OR LOSS TO STAKEHOLDERS
In mergers and acquisitions it largely depends upon the terms and conditions of the merger and the
track record of the transferee or acquirer company. Based on the cardinal principle, every buyer, in
other words transferee or acquirer has to pay more than the book value of the transferor or target
company. However, the terms and conditions of the transaction depend upon their present operations
and past historical records. Some instances of the effect of acquisitions to small shareholders worth
mentioning are as under:
1. On the announcement of merger of ICICI Ltd. with ICICI Bank, share prices jumped from
`47.70 and `77.00 on 25.9.2001 to `56.10 and `98.00 on 24.10.2001 respectively.
2. AV Birla group open offer for 25.5% shares in Indian Aluminium Ltd. (Indal) at `120/- per share
opened on 14.10.2002 did not receive favourable response in view of Sterlites offer at `221/-
per share made in 1998 against which the shareholders tendered their shares. There was a
good chance for upward revision in the offer price or a strategic deal between Sterlite and AV
Birla group.
3. The takeover by Mr. Arun Bajoria for Bombay Dyeing provided a golden opportunity to the
small shareholders to exit at ` 110/- per share against the market price ruling between ` 60-75
per share.
4. The takeover bid by Mr. Abhishek Dalmia for the Gesco Corporation resulted in upward
revision in offer price to ` 45/- after acquiring 45% shares at `27/- per share. The Dalmias
sold their entire 10.5% stake at ` 54 per share to Sheth Mahiaha combine.
5. The takeover bids for Ahmedabad Electricity Company (AEC) by Gujarat Torrent group and the
Bombay Dyeing resulted in increasing the offer price from ` 65/- per share to ` 132/- per share
and at this price Gujarat Torrent Group acquired AEC; undoubtedly, the small shareholders
were benefited prior to acquisition of AEC.
6. Similarly, the takeover bid of Mr. Arun Bajoria for Ballarpur Industries resulted in a surge of the
scrip price from around ` 50/- to ` 68/- when it was made public.
From the above it is evidently clear that such acquisition attempts cause an increase in share price,
which benefits the share holders of the target company. For the post acquisition or merger
achievements, reorganisational efforts of the acquirer or merged company are very important.
Improving the acquisition integration process is one of the most compelling challenge facing businesses
today. The results are dependent on the actions suggested by the consultants and merchant bankers
and the actions taken by the finance executives, operational heads, HRD head and legal advisors.
2. IMPLEMENTATION OF OBJECTIVES
We have so far discussed various objectives, motives, reasons and purposes which are to be achieved
and accomplished by implementing them after completion of merger, amalgamation or acquisition.
Much of the senior managements attention must be focused on developing a post-transaction strategy
and integration plan that will generate the revenue enhancements and cost savings that initially
prompted the merger or acquisition. After merger or acquisition, the resources of two or more
companies should be put together for producing better results through savings in operating costs
because of combined management of production, marketing, purchasing, resources etc. These
economies are known as synergistic operative economies. Synergy is also possible in the areas of
Research and Development function of the combined company for optimum utilization of technological
development, which could not be taken up by the separate companies for want of resources.
A key challenge in mergers and acquisitions is their effective implementation as there are chances that
mergers and acquisitions may fail because of slow integration. The key is to formulate in advance
integration plans that can effectively accomplish the goals of the M&A processes. Since time is money
and competitors do not stand still, integration must not only be done well but also done expeditiously.
To implement the objectives of mergers or acquisitions, there are various factors, which are required to
be reorganized in the post merged or acquired company. Such factors can be grouped in the followed
heads:
(i) Legal Requirements

Fulfilment of legal requirements in post-merger reorganisation of any amalgamating company becomes
essential for an effective and successful venture. The quantum of such obligations will depend upon the
224 PP-CRVI
size of company, debt structure and profile of its creditors, compliances under the corporate laws,
controlling regulations, distribution channels and dealers network, suppliers relations, labour etc. In all
or in some of these cases legal documentation would be involved. If foreign collaborators are involved,
their existing agreements would need a mandatory documentation to protect their interests if their terms
and conditions so require. Secured debenture holders and unsecured creditors would also seek legal
protection to their rights with new or changed management of the amalgamating company. Regulatory
bodies like the RBI, Stock Exchanges, the SEBI, etc. would also ensure adherence to their respective
guidelines, regulations or directives. In this way, the legal counsel of the amalgamating company or its
consultant would have to ensure that the company meets its legal obligations in all related and requisite
areas. Issuing shares and other securities to the shareholders of the transferor company and
preservation of the books and papers of that company are also the functions required to be carried out
after merger.
(ii) Combination of operations

The amalgamating company has to consolidate the operations of the transferor companys operations
with its own. This covers not only the production process, adoption of new technology and engineering
requirements in the production process but also covers the entire technical aspects like technical know-
how, project engineering, plant layout, schedule of implementation, product designs, plant and
equipment, manpower requirements, work schedule, pollution control measures, etc. in the process
leading to the final product.
Integrating two different technological systems for complex business entities while continuing to run the
business can be a massive challenge. It requires proper planning for phased transitions, extensive
preparation and intensive testing. It is necessary to define workable implementation plans as to what
needs to be integrated, when it should happen and how it can be done successfully.
(iii) Top Management Changes

The takeover or merger of one company with another affects the senior managerial personnel. A
cohesive team is required both at the board level as well as at senior executive level. The
reorganisation would involve induction of the directors of the transferor company on the Board of the
amalgamating company, or induction of reputed and influential persons from outside who have
expertise in directing and policy planning to broad base the Board for public image as well as smooth
functioning of the company. Selection of directors, finalising their term of holding the office as directors,
managerial compensation and other payments or reimbursements of expenses etc. are issues to be
sorted out.
At the senior executive level also, changes are required particularly in respect of compensation
depending upon the terms and conditions of merger, amalgamation or takeover and to adjust in suitable
positions the top executives of the amalgamated company to create a congenial environment and
cohesive group leadership within the organisation. Understanding different cultures and where and how
to integrate them properly is vital to the success of an acquisition or a merger. Important factors to be
taken note of would include the mechanism of corporate control particularly encompassing delegation of
power and power of control, responsibility towards accounting, management information system, to and
fro communication channels, interdivisional and intra-divisional harmony and achieving optimum results
through changes and motivation.
(iv) Management of financial resources

Takeover, merger, amalgamation or demergers facilitate the attainment of the main objectives of
achieving growth of the companys operations. Growth is dependent upon the expansion, modernization
or renovation or restructuring. Generally, the management plans in advance about the financial
resources which would be available to the company to finance its post-merger plans. Such preplanning
is based on certain assumptions which might change post-merger depending upon the volatility of a
variety of factors involved. Therefore, it is important to revamp the financial resources of the company to
ensure optimum utilisation of the financial resources available and the liquidity requirements. Better
debtors realisation is also important as it improves financial resources and reduces finance costs.
Even in those cases where merger is arranged by the BIFR for revival of a sick unit, the scheme would
spell out the financing plans, terms of loans from financial institutions and banks, promoters
contribution, etc. but sometimes on happening of certain uncontrollable events these financing plans
have got to be verified, reviewed and changed depending upon the change in pre-planned technology
adaptation, acceptance or deletion of foreign collaboration or participation, eliminating borrowings from
institutions by going public for raising equity and vice-versa etc.
(v) Financial Restructuring
Financial restructuring becomes essential in post merger reorganisation. Financial restructuring is
characterised by liquidity crisis, abnormal balance sheets and negative equity. The clean-up must
happen fast. Replacement of costlier fundings by cheaper borrowings on a long and short term basis as
per requirement is one of the several ways and means of financial restructuring for a company. This
being an important aspect concerns most of the top management, creditors, bankers, shareholders,
regulatory bodies like stock exchange, SEBI as well as the government where provisions of corporate
laws are attracted and their permissions or approvals for planned changes are required. Generally,
financial restructuring is done as per the scheme of arrangement, merger or amalgamation approved by
the shareholders and creditors but in those cases where takeover or acquisition of an undertaking is
made by one company of the other through acquiring financial stake by way of acquisition of shares,
e.g. IPCL by RIL, reorganisation of financial structure would be a post-merger event which might
compel the company to change its capital base, revalue its assets and reallocate reserves. Decisions
have to be made regarding raising owners funds or resorting to borrowed funds as per debt bearing
capacity of the company or going in for leasing options. These steps are taken in consultation with the
financial consultant and auditors of the company.
(vi) Rationalisation of Labour Cost
Post merger reorganisation needs rationalisation of labour cost as it forms the primary factor of prime
cost of any product and service. The combined labour force available to the transferee company is to be
reviewed in accordance with the requirements of the combined operational functions. With technological
upgradation, reduction in labour costs through providing on the job training, motivation, and labour cut
by way of voluntary retirement schemes or otherwise forms part of post merger function. This will help
in better productivity and higher return on capital employed. The judgement of the Supreme Court of
India announced on 30th August, 2002 on the petition of Steel Authority of India Limited (SAIL) has
cleared a major hurdle to several Public Sector Undertakings (PSUs) which were not employing
contract labour due to the fear of having to absorb them in regular jobs. The five judges Bench has
relaxed contract labour laws for PSUs by quashing a 1976 notification and held that there will not be
automatic absorption of contract labour.
(vii) Production and marketing management
With regard to the size of the company and its operational scale, its product mix should be adjusted
during post-merger period. Management has to choose from various alternatives like adding or
dropping out products. Decisions are taken on the basis of feasibility studies done by experts covering
226 PP-CRVI
technoeconomic aspect, cost-benefit analysis of production process, identification of market, customers

and their preferences, fixing price of product with targeted mark-up, required rate of return and
competitive strength. Decisions are generally taken on the recommendations covering economic
analysis based on incremental reasoning, fine-perspective, opportunity cost, etc. Another aspect closely
related to production is to improve productivity and cost-reduction without affecting product quality. This
demands attention to the following aspects:
1. Efficiency of management
2. Degree of technological adaptation
3. Size of plant
4. Rate of output and utilisation of existing capacity of fixed assets
5. Productivity and quality of input factors including manpower and material management.
The important economic tools which are used for cost reduction includes the following:
(1) Short-run and long-run cost analysis techniques.
(2) Break-even chart is also a tool which is used for adjusting fixed and variable cost to profit
volume for desired cost reductions.
(3) Inventory analysis.
(4) Linear programming, a recent technique, used in cost reduction by taking into consideration the
opportunity cost factor.
(5) Reviewing input materials in view of substitutes made available and other options.
(6) Technological improvements.
To tone up production, it is also necessary that available resources are properly allocated for prudent
and planned programme for utilisation of scarce and limited resources available to an enterprise so as
to direct the production process to result into optimal production and operational efficiency. Resource
allocation can be accomplished by a company using the following techniques:
(a) Production function analysis with one or two or more variables;
(b) Input output analysis;
(c) Linear programming when there are more than two variables in the production activity;
(d) Examining the available options, substitutes and alternative processes.
Revamping of marketing strategy becomes essential, which is accomplished on the basis of market
surveys, and recommendation of marketing experts. Marketing surveys may cover both established as
well as new products. Pricing policy also deserves attention for gaining competitive strength in the
different market segments. Reorganisation of marketing network and rationalisation of marketing
strategy is equally important.
(viii) Corporate planning and control

Corporate planning to a large extent is governed by the corporate policy. The managements attitude
and promoters inclinations are amply reflected in the expressions directed towards achievement of
corporate goals. Corporate policy prescribes guidelines that govern the decision making process and
regulates the implementation of the decisions. Corporate planning is to be done in consonance with the
corporate policy which might prescribe the broader frame within which activity is to be restricted,
minimum returns to be obtained, optimal utilisation of financial, human and material resources is to be
made, delegation and de-centralisation of authority is effected, corporate plan made and implemented,
and plans and policies formulated prior to the merger or acquisition reviewed.
Other factors to be considered may, inter alia, include the existing and prospective market segments,
the product and production activity and the nature of demand. All these factors indicate the future of the
concern and the commitments to be fulfilled.
The company planning is associated with the management control so that deviations in the planned
targets and achievements are recorded and their causes are traced out for remedial measures. In other
words, control, as an activity of management, involves comparison of performance with predetermined
standards, ascertaining causes for deviations and prescribing corrective action to reinforce the planned
programme. In each area of corporate activities whether it is personnel management, material
management, real estate management or financial management, planning is associated with control.
Control techniques which are used by the corporate units would require changes from traditional to
modern control techniques.
The traditional control techniques include (1) Budgeting control; (2) Standard costing; (3) Financial
ratios; (4) Internal audit, whereas the modern control techniques are: (1) Performance budgeting; (2)
Zero Base Budgeting; (3) Programme Planning & Budgeting System (PPBS); (4) Programme
Evaluation and Review Technique (PERT) and (5) Critical Path Method (CPM). All these techniques are
now computer based for which softwares are easily available.
Review of the control techniques could be better done if responsibility centres are defined. In an
organisation there may be four responsibility centres viz. Revenue centres, expense centres, profit
centres and investment centres. In revenue centres, the output is measured in monetary terms. These
centres relate to marketing activities and sales budget focuses main attention on control systems. In
expenses centres, inputs are measured in monetary and quality terms. Profit centres which measure
both input and output in terms of expenses and revenue respectively, are created when manufacturing
and marketing is done by the same organisation.
These decisions about management structure, key roles, reporting relationships, restructuring, etc.
should be made, announced and implemented as soon as possible after the deal is signed. Creeping
changes, uncertainty and anxiety that last for months are debilitating and start to drain value from an
acquisition.
It would be relevant to mention some of the leading common mistakes, made by the corporates, leading
to pitfalls in mergers and acquisition:
1. Ego problems on both sides buyer and seller rear up very frequently and resulting clashes
make bad situations worse. Trying to have two chiefs is a formula for disaster.
2. Attempt to hasten the integration between both the parties raises the likelihood of making
serious errors. Sudden and radical changes such as relocating the companys entire
production operations should be carefully considered before implementation.
3. Many buyers assert their ownership by moving quickly to convert the acquired company. This
does not always work in the right direction.
4. A cautious approach should be applied to competitor end runs. While the company is focussed
on integration, it furnishes an ideal time for competitors to make a run on the market.
5. Unless the acquired business is in the exact same field, different dynamics might apply.
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6. One of the most common and damaging mistakes is to lay off crucial employees from the
acquired company. This is a very complicated, delicate matter and even the seller might not
have an accurate idea as job titles can be misleading.
3. INTEGRATION OF BUSINESSES AND OPERATIONS

Recognizing the importance of mergers in the success of a company, it is important to discuss some
critical aspects that should be taken into account in the integration stage of a M&A deal:
Focus on people and their incentives:
Innovation is not a mechanical process but depends on key employees and the incentive
structure to which they are subject. These, which are perhaps the most important assets of the
firm, are nonetheless not automatically part of the deal but need to be co-opted into it. Just
maintaining the R&D budget will not necessarily do the trick. Subtle changes in the vision,
leadership or organization of the newly-formed firm can have important effects on how potential
innovators perceive the relevant costs and benefits.
Integrate selectively:
It may make sense to integrate the distribution operations of two employees. It hardly makes
sense to integrate their creative units. Competition has to be maintained in the areas where
innovation is more important and intense. The areas where the processes are more
standardized and less human capital-intensive are in general more amenable to integration.
Do not delay decisions and communicate clearly the new rules:
As any other economic activity, the efforts put into innovation critically depend on the expected
rewards. Delaying or ineffectively communicating the new rules of the game unnecessarily
brings additional uncertainty into the process. Highly mobile human capital may well not be
very patient.
Suppressing competition with coordination and control may not be a win-win proposition after all.
Constant innovation and adaptation is critical for the long-term survival of an organization. Without
competition- the fear to fall behind there is not much rationale for constant re-invention. This fact
must be taken into account in the way that the various parts of the new organization are integrated.
4. POST MERGER SUCCESS AND VALUATION
Every merger is not successful. The factors which are required to measure the success of any merger
are briefly discussed below.
1. The earning performance of the merged company can be measured by return on total assets
and return on net worth. It has been found that the probability of success or failure in economic
benefits was very high among concentric mergers. Simple vertical and horizontal mergers were
found successful whereas the performance of concentric mergers was in between these two
extremes i.e. failure and success.
2. Whether the merged company yields larger net profit than before, or a higher return on total
funds employed or the merged company is able to sustain the increase in earnings.
3. The capitalisation of the merged company determines its success or failure. Similarly, dividend
rate and payouts also determines its success or failure.
4. Whether merged company is creating a larger business organisation which survives and
provides a basis for growth.

5. Comparison of the performance of the merged company with the performance of similar sized
company in the same business in respect of (I) Sales, (ii) assets, (iii) net profit, (iv) earning per
share and (v) market price of share.
In general, growth in profit, dividend payouts, companys history, increase in size provides base
for future growth and are also the factors which help in determining the success or failure of a
merged company.
6. Fair market value is one of the valuation criteria for measuring the success of post merger
company. Fair market value is understood as the value in the hands between a willing buyer
and willing seller, each having reasonable knowledge of all pertinent facts and neither being
under pressure or compulsion to buy or sell. Such valuation is generally made in pre merger
cases.
7. In valuing the whole enterprise, one must seek financial data of comparable companies in
order to determine ratios that can be used to give an indication of the company position. The
data is analyzed to estimate reasonable future earnings for the subject company.
The following information must be made available and analyzed for post-merger valuation:
(i) All year-end balance sheets and income statements, preferably audited, for a period of five
years and the remaining period upto the valuation date.
(ii) All accounting control information relating to the inventory, sales, cost, and profit
contribution by product line or other segment; property cost and depreciation records;
executives and managerial compensation; and corporate structure.
(iii) All records of patents, trademarks, contracts, or other agreements.
(iv) A history of the company, including all subsidiaries.
Analysis of these items provides data upon which forecasts of earnings, cash flow, etc. can be
made.
8. Gains to shareholders have so far been measured in terms of increase or decrease in share
prices of the merged company. However, share prices are influenced by many factors other
than the performance results of a company. Hence, this cannot be taken in isolation as a single
factor to measure the success or failure of a merged company.
9. In some mergers there is not only increase in the size of the merged or amalgamated company
in regard to capital base and market segments but also in its sources and resources which
enable it to optimize its end earnings.
10. In addition to the above factors, a more specific consideration is required to be given to factors
like improved debtors realisation, reduction in non-performing assets, improvement due to
economies of large scale production and application of superior management in sources and
resources available relating to finance, labour and materials.
5. HUMAN AND CULTURAL ASPECTS

The merger is a period of great uncertainty for the employees of the merging organizations. The
uncertainty relates to job security and status within the company leading to fear and hence low morale
among the employees. It is natural for employees to fear the loss of their revenue or change in their
status within the company after a merger since many of these employees literally invest their whole
lives in their jobs. Hence the possibility of a change in their position is likely to be viewed with fear and
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resentment. The possibility of a change in compensation and benefits also creates a feeling of
insecurity and unease. The influx of new employees into the organisation can create a sense of
invasion at times and ultimately leads to resentment. Further, the general chaos which follows any
merger results in disorientation amongst employees due to ill defined role and responsibilities. This
further leads to frustrations resulting into poor performance and low productivity since strategic and
financial advantage is generally a motive for any merger. Top executives very often fail to give attention
to the human aspects of mergers by neglecting to manage the partnership in human terms. By failing to
give attention to the problems faced by their employees, they fail to fully develop their companies
collaborative advantage.
In such cases what is normally forgotten is the centrality of cultural integration. The issues of cultural
integration and the issues of human behaviour need to be addressed simultaneously if not well before
the issues of financial and legal integration are considered. Implementation of structural nature may be
financially and legally successful. But if cultural issues are ignored, the success may only be transient.
Culture of an organisation means the sum total of things the people do and the things the people do not
do. Behavioral patterns get set because of the culture. These patterns create mental blocks for the
people in the organization. Pre-merger survey and summarization of varying cultures of different
companies merging, needs to be carried out. People belonging to the each defined culture need to be
acquainted with other cultures of other merging companies. They need to be mentally prepared to adopt
the good points of other cultures and shed the blockades of their own cultures. Such an open approach
will make the fusion of cultures and ethos easy and effective.
The successful merger demands that strategic planners are sensitive to the human issues of the
organizations. For the purpose, following checks have to be made constantly to ensure that:
sensitive areas of the company are pinpointed and personnel in these sections carefully
monitored;
serious efforts are made to retain key people;
a replacement policy is ready to cope with inevitable personnel loss;
records are kept of everyone who leaves, when, why and to where;
employees are informed of what is going on, even bad news is systematically delivered.
Uncertainty is more dangerous than the clear, logical presentation of unpleasant facts;
training department is fully geared to provide short, medium and long term training strategy for
both production and managerial staff;
likely union reaction be assessed in advance;
estimate cost of redundancy payments, early pensions and the like assets;
comprehensive policies and procedures be maintained up for employee related issues such as
office procedures, new reporting, compensation, recruitment and selection, performance,
termination, disciplinary action etc.;
new policies to be clearly communicated to the employees specially employees at the level of
managers, supervisors and line manager to be briefed about the new responsibilities of those
reporting to them;
family gatherings and picnics be organized for the employees and their families of merging
companies during the transition period to allow them to get off their inhibitions and breed
familiarity.
Cultural Factors and post merger examples
1. Acquisition of Wellcome group by Glaxo.
The classic examples of effective human resource management is the acquisition of Wellcome group by
Glaxo.
Wellcome and Glaxo were profoundly different companies, both structurally as well as culturally.
Wellcome was more of an academic culture and Glaxo more of a commercial, business driven culture.
Everything was different between the companies, from finance to information technology, the structure
of sales representatives to legal side. Less diplomatic Glaxo staff saw Wellcome as an over-centralised
organisation with employees who were unrealistic in their expectations for the businesss financial
success. Academia-like penny-pinching officials had saddled Wellcome with out-of-date information
technology.
Wellcome staff, in contrast, saw Glaxo as overly commercial mercenaries assaulting their worthy
enterprise and driven by cash. They argued, in its enthusiasm for the latest high-tech research gadgetry
the Glaxo officials refused to study tropical diseases where sufferers could not afford western prices.
To try to combat such sentiments, management declared that both old companies were history and
decreed that a new company was to be built in its place. But, the most difficult aspect of merger was to
lay off staff both on account of closing down of certain manufacturing units as well as to cut down on
excess costs. To overcome the difficulties, management offered a very lucrative package. The solution
was expensive but unavoidable, given that Glaxo management was trying not to give the impression
that it was steamrolling Wellcome.
In France, the company established an organisation called Competence Plus, comprising employees
who had been made redundant. They were guaranteed up to 15 months on full salary and given training
courses on everything from networking to new skills. They were also the first to be interviewed for any
vacancies that arose within the new group during that period. Employees hired by other companies for
trial periods had their salaries paid by Glaxo-Wellcome. For those who remained, there were
improvements too. Glaxo staff worked a 39-hour week, whereas Wellcome did 37 hours. Now Glaxo-
Wellcome people work 37 hours. We were concerned not to make mistakes in the social sphere, said
Mangeot, the Chairman of Glaxo-Wellcome, France.
2. Hindustan Lever Ltd. (HLL) and Tomco merger
In Hindustan Lever Ltd. (HLL) and Tomco merger case, HLL had been known for its result oriented,
systems driven work environment, where a strong emphasis is placed on performance. Accordingly, it
always has/had and strives for a team of high performing and high profile executives, carefully selected
from the best management institutes. Discussing product profitability and target achievement is the only
language that its managers understand. The work culture is very demanding and only the best survive.
In fact, about 100 managers at that time for Unilever group companies had quit their jobs, as they were
unable to cope with the demanding work culture.
It was felt that the more difficult part would be the management of the two very different work cultures
and ethos, after the merger. In TOMCO the employee productivity was only 60% of HLL. It was opined
that HLL would have to rationalize TOMCOs work force. HLL itself had launched a voluntary retirement
package, in order to get rid of about 500 workers, however only a few resigned. However TOMCO
employees had been assured that their employment conditions were to be protected and service
conditions would be honoured. All the employees of TOMCO were to be absorbed as HLL employees.
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It is probably not an exaggeration to assert that most cross-border deals run into difficulties because of
failures in the integration process. What is acquisition integration? First and foremost, it is the process
of realizing the strategic benefits of a merger. In other words, it is everything merging companies must
do to achieve synergies and position the new firm for growth. It requires effective interaction and
coordination between merging firms to realize the strategic potential of the deal at the same time that it
necessitates special attention to human resource concerns. Stated in this way, it is a tall order, and
indeed seems absolutely critical to M&A success.
Differences among management and workers can sometimes spiral into broader community and
political problems. Such was the case in the 1988 acquisition of Rowntree, headquartered in York,
England by Nestle, the Swiss foods giant. Concerns about the future of Rowntree workers, facilities,
and even the town of York itself created uproar in the UK, involving Members of Parliament, political
parties, and the Archbishop of York. In the end, Nestle was forced to make several concessions to
public opinion in its integration of Rowntree, including retaining York facilities and making certain
guarantees with respect to the job security of Rowntree workers.
6. MEASURING POST-MERGER EFFICIENCY

The criterion to judge a successful merger differs in different conditions. Different factors may be
considered for making value judgements such as growth in profit, dividend, companys history, increase
in size, base for growth etc. Several studies suggest different parameters to assess the success of
mergers:
(i) Successful merger creates a larger industrial organization than before, and provides a basis for
growth [Edith Perirose].
(ii) In Arthur Dewings study, three criteria were considered viz. (a) merger should give a larger net
profit than before (b) merger should provide a higher return on total funds (c) there should be a
sustained increase in earnings.
(iii) Earnings on capitalization and dividend records determine the success of merger [Shaw L.].
During the studies in late 1960s, two types of efficiency improvements were expected to result from
mergers: (1) improvements due to economies of large scale production (2) application of superior
management skills to a larger organisation. Some other researches in the seventies and eighties,
measure efficiency based on stock market measures, labour productivity or total factor productivity
etc. These improvements pointed towards market dominance, but for gauging efficiency, resultant
profitability was accepted as a benchmark. In order to ensure progress, a conscious and concerted
effort to keep track of several key elements is required, alongwith answers to the following
questions:
1. What impact is the integration (merger/acquisition) having on key indicators of business

performance? Whether synergies which were hypothesized during the valuation are being
realized?
2. Are the activities and milestones developed with the integration process on target?
3. What are the major issues emerging during the integration, requiring considerable attention?
4. What important facts have emerged during the merger or acquisition that can be used to
improve subsequent mergers or acquisition?
7. MEASURING KEY INDICATORS

The main purpose of a merger or acquisition is to deliver the expected financial results namely
earnings and cash flow. However, there are certain other measures that serve as key indicators and
they also need to be measured. The indicators may be grouped as:
(i) Financial outcomes.
(ii) Component measures of these outcomes namely revenues, costs, net working capital and
capital investments.
(iii) Organisational indicators such as customers, employees and operations.
All the areas being integrated and both the acquirer and target, or in a merger, both partners, should be
brought within the ambit of continuous appraisal. Also, the appraisal should be based on benchmarks to
ensure that merger or acquisition are yielding the financial and strategic objective so intended and are
not resulting in value leakage.
There are broadly four possible reasons for business growth and expansion which is to be achieved by
the merged company. These are (1) Operating economies, (2) Financial economies, (3) Growth and
diversification, and (4) Managerial effectiveness. These are explained in detail below:
1. Operating Economies
Whenever two or more firms combine, certain economies are likely to be realised as a result of larger
volume of operations resulting in economies of scale. These economies may arise due to better
utilisation of production capacities, distribution network, engineering services, research and
development facilities and so on. The operating economies (economies of scale) would be the
maximum in the case of horizontal mergers where intensive utilisation of production capacities will
result in benefits for the merged firm.
On the other hand, in the case of vertical mergers, the benefits would accrue from better co-ordination
of facilities, both backward and forward, reduction in inventory levels and higher market power of the
combined firms. Operating economies in the form of reduction or elimination of certain overhead
expenses may also arise even in the case of conglomerate mergers. The net result of realising
economies of scale would be a decrease in the cost of production. But if the scale of operations or size
of the merged firm becomes too large and unwieldy, then dis-economies of scale may also arise and
the unit cost of production would show a rising trend.
2. Financial Economies
Merger of two or more firms brings about the following financial advantages for the merged firm:
(a) Relief under the Income Tax Act
Under Section 72A of the Income Tax Act, 1961 carry forward and setting off of accumulated losses
and unabsorbed depreciation of the amalgamating company is allowed against the future profits of the
amalgamated company in order to encourage revival of sick units.
(b) Higher Debt Capacity
The merged firm would enjoy higher debt capacity because the combination of two or more firms
provide greater stability to the earnings level. This is an important consideration for the lenders since
the possibility of default in repayment of loan and interest is reduced to a great extent. A higher debt
capacity if utilised, would mean greater tax advantage for the merged firm leading to higher value of the
firm.
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(c) Reduction in Floatation Costs

Whenever the merged firm raises funds from the market through public issue of shares or debentures, it
can reduce the floatation costs as compared to the similar amount being raised independently by the
merging firms. Such reduction in the floatation costs represents a real benefit to the merged firm.
Apart from the above, earnings and cash flows are primary financial outcomes that need to be tracked
since valuation are built on them. Particular attention should be given to the components of these
measures, namely, revenue, costs, investments and net working capital. The extent to which these
components show progress will determine whether value is being created or not.
3. Growth and Diversification

As stated earlier, merger/amalgamation of two or more firms has been used as a dominant business
strategy to seek rapid growth and diversification. The merger improves the competitive position of the
merged firm as it can command an increased market share. It also offers a special advantage because it
enables the merged firm to leap several stages in the process of expansion. In a saturated market,
simultaneous expansion and replacement through merger/takeover is more desirable than creating
additional capacities through expansion. A merger proposal has a very high growth appeal, and its
desirability should always be judged in the ultimate analysis in terms of its contribution to the market price
of the shares of the merged firm.
The merged firm can also seek reduction in the risk levels through diversification of the business
operations. The extent to which risk is reduced, however, depends on the correlation between the
earning of the merging (combining) firms. A negative correlation between the combining firms is less
risky whereas a positive correlation is more risky.
The business firm may pursue the objective of diversification with maximum advantage under the
following circumstances:
(1) If a firm is saddled with problems which can lead to bankruptcy or jeopardise its very existence,
then its merger with another firm can save it from such undesirable consequences. Indian
industrial sector is faced with the problems of the creation of splintered capacities. As a result,
many firms with minimum economic size, such as manufacturers of light commercial vehicles,
mini steel plants, mini paper plants, mini dry cell battery plants, mini sponge iron plants, mini
cement plants, etc. were created. Many of these units have either closed down or are incurring
substantial losses. A few of them, though earning profits today, may fall sick in future due to the
increasing competition. In such a situation mergers and takeovers can bring about
consolidation of capacities, lead to the revival of sick units and also prevent the occurrence of
sickness.
(2) If the shares of one of the combining firms are not traded at the stock exchange then creative
diversification would be the only feasible route to reduce the level of risk for the investment in
these firms.
4. Managerial Effectiveness
It has been pointed out by various studies that incompetency of management has been the most
important reason for firms becoming sick. If a sick firm is merged with another well managed company,
it will lead to better co-ordination of human resources of both the companies. Managerial effectiveness
can also bring substantial gains to the merging firms if two well managed firms combine together to take
advantage of valuable human resources.
Customer Reactions
It is necessary to ensure that customers are not adversely affected during a merger or acquisition as
losing either profitable customers or a percentage of their business may have a negative impact on
earnings and cash flows, especially if the customer represents a large percentage of companys
revenues and profits. Several indicators may be deployed such as customer satisfaction, retention,
acquisition, market share etc. Keeping track of market value and sales volume of each segment is also
useful. Often during mergers and acquisitions competitors attempt to disrupt the relationship between
an acquirer and its customers. This implies that a company needs to do more than just maintain
customer relationships. It has to make an extra effort to ensure that its business does not erode.
Employee Reactions
Employees are capable of having an impact on productivity and customer satisfaction, especially in
service business. Employee assessments made at multiple times and with relevant measures may
allow better changes to take place. It should be analysed whether employees understand the expected
contribution to be made to new organization; the view of employees towards various aspects of
organisation and leadership; commitment to the newly formed organization; performance and
productivity expected etc.
Successfully integrating two or more organizations after a merger requires many things, but above all, it
requires strong effective leadership, a plan, and a commitment to ongoing evaluation and adaptation. It
must be ensured that both the integration process and the programmatic work of the organization
continue to move forward in tandem.
An integration plan is also essential. Leaders with experience in integrating two or more organizations
emphasise the need for a plan than almost any other factor for success in integration. It was concluded
in a series of interviews conducted with leaders who had been through a merger that a integration plan
was a key factor for success.
Lastly, an organization and its leadership must be proactive in evaluating progress throughout the
integration process. Its desired outcomes and outcome targets must be regularly revisited and progress
against them must be measured. A thoughtful leader will be responsive to such ongoing evaluation, and
adapt both the integration plan and the organizations course of action accordingly.
A successful integration moulds not only the various tehcnical aspects of the businesses but also the
different cultures. The best way to do so is to get people working together quickly to solve business
problems and accomplish results that could not have been achieved before.
Thus, the aspect of post-merger reorganisation is not exhaustive and the parameters of the same would
have to be established by the management of the companies, depending upon the organisational
requirements, corporate policies and plans and the objectives of the merger etc. sought to be met.
LESSON ROUND UP
Post-merger reorganization is a wide term which encompasses the reorganization of each and every
aspect of the companys functional areas to achieve the objectives planned and aimed at.
There are certain parameters to measure post merger efficiency. Some of them are - successful merger
creates a larger organization than before, net profit is more, there is sustained increase in earnings, continuous
dividend distribution etc.
There are broadly four possible reasons for business growth and expansion which is to be achieved by the
236 PP-CRVI
merged company. These are (1) Operating economies, (2) Financial economies, (3) Growth and
diversification, and (4) Managerial effectiveness.
There is a spurt of mergers and acquisitions in the last two to three years as is evident from the recent
acquisition of Anglo Dutch steel company Corus by India based Tata Steel. Other recent examples are
suitably discussed under the chapter.
To implement the objectives of mergers or acquisitions, some factors are required to be considered for post
merger integration legal requirements, combination of operations, top management changes, management
of financial resources, rationalization of labour cost, production and marketing management and corporate
planning and control.
Human and cultural integration is central to the success of any merger.
Fair market value is one of the valuation criteria for measuring the success of post merger company. In
valuing the whole enterprise, one must seek financial data of comparable companies in order to determine
ratios that can be used to give an indication of the companys position.
The earning performance of the merged company can be measured by return on total assets and return on
net worth.
In general, growth in profit, dividend payouts, companys history and increase in size provides the base for
future growth and are also the factors which help in determining the success or failure of a merged company.
SELF TEST QUESTIONS
for evaluation).
1. Enumerate the main objectives which companies seek to attain, from mergers.
2. What are the factors to be kept in mind for a post merger reorganisation?
3. How can post merger efficiency be measured? Enumerate the main parameters involved.
4. Briefly explain the factors relevant for post-merger evaluation and analyse its success.
Lesson 13
Case Studies
Restructuring may make in various forms depending
Demerger L&T upon various factors like profitability, availability of
Overseas Acquisition Tata Corus deal resources, management of competition and such
forms may be acquisition, merger, takeovers,
Merger of ICICI with ICICI Bank
leveraged buy outs, slump sale, overseas
Slump sale Piramal to abbott acquisition etc., The case studies discussed in this
Dr Reddy Laboratories- Multiple restructuring lesson would enable the students to understand the
strategies. purpose, issues, operational mechanism in general
of different types of restructuring strategies that
Leveraged buyout Bharti-Zain
would ultimately results in better conceptual
Overseas Acquisition Daiichi RanBoxy understanding of different strategies, benefits,
Acquisition Patni by IGate purpose its synergies etc.
Spice Jet The case studies provided in this chapter are based
on the provisions of the Companies Act, 1956.
238 PP-CRVI
CASE STUDIES
1. DEMERGER - LARSEN &TOUBRO LIMITED
Introduction
L&T was established in 1942. Within a span of fifty years L&T became a leading manufacturer and engineer
in turnkey projects having diversified activities in electrical and electronics; construction projects; cement
manufacturing; medical equipment; shipping; earthmoving equipment; heavy engineering and information
technology. From the year 2000, the company was planning to restructure some of its business divisions
through demerger and consolidation in order to concentrate more on infrastructure and turnkey businesses.
Why demerger?
Grasim Industries Ltd. (GIL) a flagship company of Aditya Birla Group was trying to take over control in L&T
management by purchasing shares of L&T from the open market. The company first acquired 15 percent
stake in L&T and also made an open offer to L&T shareholders to increase its stake which does not succeed.
In the year 2004, shareholders approved the demerger of L&T's cement division with a resulting entity
named UltraTech CemCo Ltd. (UCL).
Demerger: The Three phases
First Phase
It was decided that in the first phase L&T would spin off the cement business into a new company, UltraTech
CemCo Ltd. (UCL), where L&T would hold 20 percent and the balance of 80 percent would be held by
existing shareholders of L&T.
Second Phase
In the second phase, GIL would buy 8.5 percent of UCL from L&T @ ` 342.60 per share and make an open
offer to other shareholders of another 30 percent at the same price. It would take GIL's stake to 51 percent in
UCL, if this offer was fully subscribed, and on the sale of its stake in UCL, L&T would realize ` 3.62 billion.
Third Phase
In the third phase, L&T Employee Welfare Foundation would acquire the GILs 15.3 percent stake in the
residual engineering company.
Hence, after the demerger, GIL gave an open offer to UCL shareholders and purchased the shares to cover
a 51 percent hold in UCL. Immediately after the acquisition, GIL finally changed the name from UltraTech
CemCo Ltd. to UltraTech Cement Ltd.
The demerger ratio
As per the demerger ratio, for every 2 shares (of face value ` 10) held in L&T, the shareholder was given 1
share (face value ` 2) in the New L&T.
At the same time for every 5 shares held in L&T, the shareholder was given 2 shares in the demerged
cement company Ultra Tech CemCo.
Lesson 13 Case Studies 239
Benefits of Demerger to L&T

Lead to immediate realization of value from cement business;
Create two distinct listed entities for (a) engineering and (b) cement;
Enable L&T to become focussed Engineering, Construction and Technology Company
Benefits of Demerger to Grasim

Economies of scale and overall competitiveness
Multi-functional synergies in the areas of procurement, marketing, logistics and cost reductions
Combined resource pool
Cross leverage financial strengths to access domestic and international markets
Increased Capacity.
2. OVERSEAS ACQUISITION TATA - CORUS DEAL

This acquisition of Corus Group Plc by Tata Steel Limited (TSL), was the biggest overseas acquisition by an
Indian company. TSL emerged as the fifth largest steel producer in the world after the acquisition. The
acquisition gave Tata Steel access to Corus strong distribution network in Europe.
Tata Steel had first offered to pay 455 pence per share of Corus, to close the deal at US$ 7.6 billion on
October 17, 2006. CSN then counter offered 475 pence per share of Corus on November 17, 2006. Within
hours of Tata Steel increasing its original bid for Corus to 500 pence per share, Brazils CSN made its formal
counter bid for Corus at 515 pence per share in cash, 3% more than Tata Steels Offer.
Finally, an auction was initiated on January 31, 2007, and after nine rounds of bidding, TSL could finally
clinch the deal with its final bid 608 pence per share, almost 34% higher than the first bid of 455 pence per
share of Corus. The deal (between Tata & Corus) was officially announced on April 2nd, 2007 at a price of
608 pence per ordinary share in cash.
Indian Steel Giant Tata Steel Limited (TSL) finally acquired the Corus Group Plc (Corus), European steel
giant for US$ 13.70 billion. The merged entity, Tata-Corus, employed 84,000 people across 45 countries in
the world. It had the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel
producer in the world as of early 2007.
Tata Corus Deal Synergy

1. Tata was one of the lowest cost steel producers in the world and had self sufficiency in raw material.
Corus was fighting to keep its productions costs under control and was on the look out for sources
of iron ore.
2. Tata had a strong retail and distribution network in India and South East Asia and was a major
supplier to the Indian auto industry and hence there would be a powerful combination of high quality
developed and low cost high growth markets.
3. Technology transfer and enhanced R&D capabilities between the two companies that specializes in
different areas of the value chain.
4. There was a strong culture fit between the two organizations both of which highly emphasized on
continuous improvement and ethics, i.e. The Corus Way with the core values and code of ethics,
integrity, creating value in steel, customer focus, selective growth and respect for people etc. were
strong synergies.
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BANKING SECTOR MERGER
3. MERGER OF ICICI WITH ICICI BANK
ICICI Limited
ICICI Limited was basically a Development Financial Institution providing medium-term or long-term project
finance to industries in India. It was formed in 1955 at the initiative of the World Bank, the Government of
India and representatives of Indian industry. Initially it focused on project finance, and providing long-term
funds to a variety of industrial projects. Subsequently, it diversified into venture capital financing, commercial
banking asset management and management of mutual funds brokering and marketing, internet stock
trading, housing finance etc.
ICICI Bank
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its
wholly-owned subsidiary. ICICIs shareholding in ICICI Bank was reduced to 46% through a public offering of
shares in India in fiscal 1998, and an equity offering in the form of ADRs listed on the NYSE in fiscal 2000,
RBI Announcement
The RBI announced in April, 2001 that it would consider proposals from Development Financial Institutions
wishing to transform themselves into banks.
The Merger
After consideration of various corporate structuring alternatives in the context of the emerging competitive
scenario in the Indian banking industry, and the move towards universal banking, the managements of ICICI
and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be the optimal strategic
alternative for both entities, and would create the optimal legal structure for the ICICI groups universal
banking strategy. The merger would enhance value for ICICI shareholders through the merged entitys
access to low-cost deposits, greater opportunities for earning fee-based income and the ability to participate
in the payments system and provide transaction-banking services. The merger would enhance value for
ICICI Bank shareholders through a large capital base and scale of operations, seamless access to ICICIs
strong corporate relationships built up over five decades, entry into new business segments, higher market
share in various business segments, particularly fee-based services, and access to the vast talent pool of
ICICI and its subsidiaries
In October 2001, the Board of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its
wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited, with ICICI Bank.
The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of
Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank
of India in April 2002.
Consequent to the merger, the ICICI groups financing and banking operations, both wholesale and retail,
have been integrated in a single entity.
4. SLUMP SALE (BUSINESS TRANSFER) BY PIRAMAL TO ABBOTT

Slump sale means the transfer of one or more undertakings as a result of the sale, for a lump sum
consideration, without values being assigned to the individual assets and liabilities.
The acquisition of the domestic formulations business by Abbott Healthcare Private Limited (AHPL), an
Indian subsidiary of Abbott Laboratories, USA (Abbott Lab), from Piramal Healthcare Limited (PHL).
During May 2010 PHL declared the execution of definitive agreements with Abbott Lab for the sale of its
Formulation Business to AHPL by way of a business transfer as a going concern. The acquisition of the
Formulation Business was done for a total consideration of USD 3.72 billion. The assets transferred include
PHLs manufacturing facilities at Baddi, Himachal Pradesh and rights to approximately 350 brands and
trademarks.
The transaction for sale of the Formulation Business was structured as a slump sale/Business Transfer
under Section 293(1)(a) of the Companies Act pursuant to a Business Transfer Agreement dated May 21,
2010 entered into between PHL and AHPL. The said Business Transfer involves the transfer of all the
assets and liabilities of the Formulation Business excluding cash and cash equivalents and any liability
relating to indebtedness of the Company, taxes, employee and other claims, environmental matters and any
actual or potential litigation.
The Business Transfer has been undertaken for an all cash consideration of USD 3.72 billion. Out of the said
amount USD 2.12 billion would be payable by AHPL to Piramal Healthcare on closing of the sale and a
further USD 400 million payable upon each of the subsequent four anniversaries of the closing commencing
in 2011.
Business Transfer requires approval of the shareholders only and not the high court
Section 293(1)(a) of the Companies Act mandates every company to obtain prior approval of its
shareholders to undertake a sale of whole or substantial part of its undertaking. Such an approval has to be
obtained by way of an ordinary resolution (simple majority). Besides, the Companies (Passing of the
Resolution by Postal Ballot) Rules, 2001, makes it mandatory for all listed companies to obtain such approval
of shareholders by way of a postal ballot and not in any ordinary meeting of shareholders. Further Transfer
of business undertaking need not be approved by the High Courts. Accordingly, pursuant to the approval of
the board of directors of the Company on May 21, 2010, necessary steps were taken to seek the approval of
equity shareholders of Piramal Healthcare vide postal ballot. The results of the said postal ballot were
announced on June 25, 2010 and both the resolutions mentioned above were approved by the shareholders
of Piramal Healthcare by an overwhelming majority.
Non-Compete clause
The business transfer agreement has a Non-Compete clause which prohibits Piramal Enterprises, Piramal
Healthcare and their respective associates from engaging in any business that competes with the
Formulation Business either in India or in the emerging markets for a period of eight years from the date of
closing of the Business Transfer.
Slump sale Tax liability is more
In comparison to demerger, slump sale is not generally tax efficient as the transfer of assets could be subject
to capital gains tax in the hands of the transferor. Where the undertaking being transferred was held for more
than 3 years prior to the date of the slump sale, the gains from such a sale would qualify as long-term capital
gains, and the effective rate of tax would be 20%. If the undertaking had been held for 3 years or any period
lesser than that, prior to the date of slump sale, then the income would be taxable as short-term capital
gains, the effective rate of which is currently 30%. Also, any distribution by the company to its shareholders
could attract dividend distribution tax.
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5. MULTIPLE CORPORATE RESTRUCTURING REDDY LABORATORIES LIMITED
Introduction
Established in 1984, Dr. Reddys Laboratories (NYSE: RDY) is an emerging global pharmaceutical company.
As a fully integrated pharmaceutical company, the purpose is to provide affordable and innovative medicines
through three core businesses:
Pharmaceutical Services and Active Ingredients, comprising Active Pharmaceuticals and Custom
Pharmaceuticals businesses;
Global Generics, which includes branded and unbranded generics; and
Proprietary Products, which includes New Chemical Entities (NCEs), Differentiated Formulations,
and Generic Biopharmaceuticals.
The products are marketed globally, with a focus on India, US, Europe and Russia.
Its strong portfolio of businesses, geographies and products gives it an edge in an increasingly competitive
global market and allows to provide affordable medication to people across the world, regardless of
geographic and socio-economic barriers. Its Restructuring process over a period of decade has resulted in
financial and geographic expansion, market leadership etc.
The following table provides the chronology of growth through various restructuring
Strategies.
Event Year
1 Incorporation 1984
2 Became Public Limited Company 1985
3 IPO 1986
4 Acquires Benzex Laboratories Pvt. Limited to expand its Bulk Actives business 1988
5 Makes a GDR issue of USD 48 million 1994
6 Acquisition of Controlling Stakes at American Remedies Limited 1999
7 Listing on NewYork Stock Exchange 2001
8 First overseas acquisition-Meridian Healthcare 2002
9 Acquires Trigenesis gives access to drug delivery technology platforms 2004
10 Key acquisition: Falcon (Mexico) 2005
11 Key acquisition: betapharm (Germany) 2006
12 Acquisition of Dowpharmas Small Molecules business associated at Mirfield 2008
and Cambridge sites in UK
13 Acquisition of BASFs facility at Shreveport, US 2008
14 Announces strategic alliance with GlaxoSmithKline plc to develop and market 2009
select products across emerging markets outside India.
15 Reorganizes Drug Discovery Operations to merge into Aurigene, a wholly 2009
owned independent subsidiary of Dr. Reddy's
The analysis of above chronology of restructuring events reveals that the restructuring has taken in the
following forms.
Domestic Acquisitions
Overseas acquisitions
Domestic and overseas Listing
Internal reorganization etc.
6. LEVERAGED BUY-OUT BHARTI - ZAIN DEAL

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 started its telecom services business by launching mobile services in Delhi (India) in 1995. Since then
there has been no looking back and Bharti Airtel, the groups flagship company, has emerged as one of top
telecom companies in the world and is amongst the top five wireless operators in the world. Through its
global telecom operations Bharti group has presence in 21 countries across Asia, Africa and Europe Over
the past few years, the group has diversified into emerging business areas in the fast expanding Indian
economy.
Zain was established in 1983 in Kuwait as the region's first mobile operator. It is a public company engaged,
together with its subsidiaries, in the provision of mobile telecommunication and data services, including
operation, purchase, delivery, installation, management and maintenance of mobile telephones and paging
systems in Kuwait and 21 other countries in the Middle East and North Africa. Its wholly owned subsidiaries
include; Mobile Telecommunications Company Lebanon (MTC) SARL, Lebanon, and Sudanese Mobile
Telephone (Zain) Company Limited, Sudan. Wholly owned subsidiary of Zain, incorporated in Netherlands
and held the African operations of Zain. The company was originally named Celtel which was acquired by
Zain in 2005 and renamed as Zain International BV. The same has been acquired by Bharti Airtel now
through Bharti Airtel Netherlands BV.
During the first quarter of 2010, Bharti Airtel announced that it had entered into exclusive agreement with
Mobile Telecommunications Company KSC (Zain) for the acquisition of Zain Africa International BV (Zain
Africa) and thereby the entire African operations of Zain, excluding the operations in Sudan and Morocco.
The deal makes Bharti Airtel the seventh largest mobile group in the world by subscriber connections and the
second-largest African operator, behind MTN for an offer of USD 10.7 billion. In the Indian telecom space,
the deal is the second largest after the USD 11.2 billion (approximately) Vodafone Hutchison transaction in
2007.
Funding through Special Purpose Vehicles

The acquisition deal was structured as a leveraged buyout and the loan for financing the transaction has been
availed by the two Special Purpose Vehicles created in Netherlands and Singapore for this purposes. These
SPVs, whose dealings will be guaranteed by Bharti, will own the African assets of Kuwaits Zain. SPVs, which
244 PP-CRVI
mostly feature in large acquisitions, are often used to convey the impression to investors that companies are not
taking huge dollops of debt. In this instance, the SPV has to repay the debt from the cashflows of the African
business. But Bharti will have to step in case of a default. Thus, Bharti Airtel has structured the acquisition
strategically and routed it through the SPVs keeping Bharti Airtels standalone financials intact. However, that
does not absolve Bharti Airtel from overall responsibility of a borrower since it has provided a guarantee to
bankers for the loan that will be in the SPVs books.
7. OVERSEAS ACQUISITION DAIICHI - RANBAXY
Ranbaxy Laboratories Limited., Indias largest pharmaceutical company, is an integrated, research based,
international pharmaceutical company producing a wide range of quality, affordable generic medicines,
trusted by healthcare professionals and patients across geographies. Ranbaxys continued focus on R&D
has resulted in several approvals in developed markets and significant progress in New Drug Discovery
Research. The Companys foray into Novel Drug Delivery Systems has led to proprietary Platform
technologies resulting in a number of products under development. The Company is serving its customers in
over 125 countries and has an expanding international portfolio of affiliates, joint ventures and alliances,
ground operations in 49 countries and manufacturing operations in 11 countries.
Daiichi Sankyo Company was established in 2005 through the merger of two leading Japanese pharma
companies. This integration created a more robust organization that allows for continuous development of
novel drugs that enrich the quality of life for patients around the world. A central focus of Daiichi Sankyo s
research and development are thrombotic disorders, diabetes, hypertension etc.
Ranbaxy and the Singh family, the largest and controlling shareholders of Ranbaxy (the Sellers), entered
into a binding Share Purchase and Share Subscription Agreement (the SPSSA) with Daiichi Sankyo,
pursuant to which, Daiichi Sankyo to acquire the entire shareholding of the Sellers in Ranbaxy and further
seek to acquire the majority of the voting capital of Ranbaxy at a price of Rs 737 per share with the total
transaction value expected to be between US$3.4 bn to US$4.6 bn. On the post closing basis, the
transaction would value Ranbaxy at US$8.5 bn.
Highlights of the Acquisition

To take the Company to a new orbit and a higher growth trajectory
To catapult the combined entity as the Worlds 15th biggest drug maker
To become the largest generic Company in Japan, the worlds second largest pharma market
Complementary business model Global reach covering mature and emerging markets
Strong growth potential
Cost competitiveness
Acquisition stages
Date Particulars
June 11, 2008 Signing of Agreement by Daiichi with Ranbaxy and its Promoters
June 14, 2008 Public announcement by Daiichi to the shareholders of Ranbaxy to acquire
additional 20% equity shares at `737 per share under the Takeover Code.
June 27, 2008 Submission of draft letter of offer by Daiichi to SEBI for its observations.
July 15, 2008 Approval of preferential allotment of equity shares and warrants to Daiichi by the
shareholders of Ranbaxy.
August 16, 2008 Opening of open offer
September 4, 2008 Closing of open offer
October 15, 2008 Acquisition of 20% equity stake by Daiichi pursuant to open offer
October 20, 2008 Ranbaxy becomes subsidiary of Daiichi upon increase in Daiichis stake to 52.5%
(including preferential allotment and transfer of 1st tranche shares from
Promoters)
November 7, 2008 Daiichi acquires balance 11.42% shares from the Promoters off the stock market
and the deal is concluded. Daiichis equity stake in Ranbaxy reached up to 63.92%
Approvals Obtained
Ministry of Finance mandates prior approval of FIPB, if the foreign investor is already having an existing joint
venture or technology transfer / trademark agreement in the same field, as on January 12, 2005. Since
Daiichi was already holding equity stake in Uni-Sankyo Limited, a company engaged in same business as
Ranbaxy, prior approval of FIPB was obtained. As this foreign investment required prior approval of Cabinet
Committee on Economic Affairs (CCEA), the clearance was received from CCEA by Daiichi in the month of
October, 2008.
Synergies
The Synergies are
1. Their respective presence in the developed and emerging markets. Ranbaxys strengths in the 21
emerging generic drug markets can allow Daiichi Sankyo to tap the potential of the generics
business,
2. Both Daiichi Sankyo and Ranbaxy possess significant competitive advantages, and have profound
strength in striking lucrative alliances with other pharmaceutical companies.
3. R&D perhaps playing the most important role in the success of these two players.
4. The patent perspective of the merger clearly indicates the intentions of both companies in filling the
respective void spaces of the other and emerge as a global leader in the pharmaceutical industry.
According to Ranbaxy newsletter it will provide a new and stronger platform to harness Ranbaxys
capabilities in drug discovery/development, manufacturing and global reach, helping it establish a significant
milestone in the Companys mission of becoming a Research based International Pharmaceutical
Company.
This transaction will create significant long-term value for all stakeholders through:
A complementary business combination that provides sustainable growth by diversification, that
spans the full spectrum of the pharmaceutical business;
An expanded global reach that enables leading market positions in both mature and emerging
markets with proprietary and nonproprietary products;
246 PP-CRVI
Strong growth potential by effectively managing opportunities across the full pharmaceutical life
cycle, cost competitiveness by optimizing usage of R&D and manufacturing facilities of both
companies, especially in India.
Ranbaxy will be able to leverage its extensive front-end presence through a larger product flow and
ascend the pharma value chain by enhancing drug discovery capabilities. It will also widen the scale
and scope of the biosimilars opportunity.
Ranbaxy has also established the Synergy Office in July 2009 which has the task of promoting synergies
and thereby helping maximize the opportunities for Ranbaxy and Daiichi Sankyo to expand their global
operations.
Pharmaceutical companies are working together on a number of areas including drug discovery and
development, marketing and manufacturing. Surely a healthy trend, it will go a long way in addressing the
growing imperative of the global pharmaceutical industry to lower the cost of medicines while addressing
availability challenges around the world.
SPECIFIC ISSUES IN SPECIFIC CASES
A. Whether any person other than the shareholders and creditors have right to intervene in the proceedings
concerning scheme of arrangement / reconstruction?
Mumbai High Court ruled that a person who is neither a shareholder nor a creditor of the company has no
right to appear in the proceeding under Section 391/ 394. The court held that the basic principle underlying in
the provisions under Section 394 is that the scheme has the approval of the prescribed majority of the
companys shareholders and creditors should not also be unfair, contrary to public policy, unconscionable or
against law. Once the court finds that the parameters set out in Section 394 have been met, the court would
have no further jurisdiction to sit in appeal over the commercial wisdom of the class of persons who with their
eyes open have given their approval even if, in the view of the court a better scheme could have been
adopted. The anxiety of the court should be that the scheme is approved by all classes and that the company
is permitted to continue its corporate existence [Shree Niwas Girni Kamagar Kruti Samiti v. Ranganath
Basudev Somani (2005) 68 CLA 351 (Bom)].
B. Can shareholders seek an amendment to the swap ratio in a scheme of merger?
The Mumbai High Court held that the swap ratio forms integral part of a scheme of amalgamation and the
procedural provisions embodied in the Companies (Court) Rules, 1959 give effect to this basic purpose and
object. 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. Hence the chairman of the meeting is
justified in ruling that any amendment to the swap ratio that was proposed at the meeting by a member was
not in order.[Dinesh Veajlal Lakhani v. Parke Davis (India) Ltd. [2005] 66 CLA 91 (Bom)].
8. ACQUISITION OF PATNI BY IGATE
In this acquisition, the acquirers were Pan-Asia iGate Solutions, a company incorporated under the laws of
the Republic of Mauritius and iGate Global Solutions Limited, a company incorporated under the Companies
Act, 1956; Person acting in concert was iGate Corporation, which was incorporated under the laws of
Pennsylvania; The size of this deal was US$ 1.22 billion, which made it the second largest deal in the Indian
IT space. The deal was interesting as Patni was two and half times bigger than iGate and iGate had taken a
debt of around US$ 700 million to finance it.
The following agreements (Share/Securities (American Depository Shares) purchase agreement) triggered
the open offer.
1. As per the share purchase agreement between the promoters of Patni computers ltd and the
acquirer, the acquirers to acquire 6,00,91,202 shares representing 45.64%of current equity capital
of the target company at Rs.503.50 per share from the promoters of patni.
2. As per the securities purchase agreement between PanAsia iGate Solutions and PE investor
General Atlantic Mauritius Limited, a company incorporated under the laws of Mauritius, the
acquirer to acquire 20161867 American Depository shares, representing 1 underlying share
amounting to 15.31% of share capital at Rs.503.50.
3. As per the Share purchase agreement by Panasia iGate Solutions Limited and the General Atlantic
Mauritius Limited, the acquirer to acquire 2752081 equity shares representing to 2.09% of share
capital at Rs. 503.50.
4. Consequent to this, a public announcement for open offer was made on January 11, 2011 in all
national dailies and vernacular language as required, to acquire 2, 70, 85, 565 shares of target
company representing 20.6% of current equity capital at Rs.503.50.
5. Post offer public announcement was made on May 09, 2011 declaring the completion of offer. This
has resulted in
1. share acquired through share/securities purchase agreement 83005150 (i.e61.29%)
2. Shares acquired in the offer 27085565 (ie 20%)
3. total shareholding by the acquirer 110090715 shares (ie 81.29%)
4. Post offer shareholding by public 25337108 (i.e 18.71%)
6. As the public holding has gone below the minimum public holding, the company excercised reverse
book building the the shares of patni computers were delisted with effect from May 21, 2012.
SPICEJET LIMITED BEING TAKEN OVER BY MR AJAY SINGH
CASE STUDY- A BRIEF
The Back ground
SpiceJet is a public limited company listed on the Bombay Stock Exchange and National Stock Exchange. It
is a scheduled passenger airline engaged in providing domestic and international airline services in India.
The Board of Directors of Spicejet Limited (the Company) at its meeting held on January 15, 2015, inter-alia,
took on record the proposal of the principal shareholder and Promoter, Mr. Kalanithi Maran and KAL
Airways Private Limited to transfer the ownership, management and control of the Company to Mr. Ajay
Singh(the Acquirer) pursuant to a Scheme of Reconstruction and Revival for the takeover of ownership,
management and control of SpiceJet Limited, that was to be filed before the Competent Authority, the
Ministry of Civil Aviation, Government of India.1
The Company has informed BSE that in furtherance of the earlier intimation dated January 15, 2015, the
Company has on January 22, 2015 received the approval of the Competent Authority, the Ministry of Civil
1 BSE announcement
248 PP-CRVI
Aviation, Government of India for the Scheme of Reconstruction and Revival for the takeover of ownership,
management and control of SpiceJet Limited by Mr. Ajay Singh in accordance with the application made by
2
the Company.
The Board of Directors of the Company at its meeting held on January 29, 2015 took on record the Share
Sale and Purchase Agreement dated January 29, 2015 between the Company, Mr. Kalanithi Maran, Kal
Airways Private Limited and Mr. Ajay Singh pursuant to which the existing Promoter (i.e. Mr. Kalanithi Maran
and Kal Airways Private Limited) have agreed to sell and transfer their entire shareholding aggregating to
350,428,758 equity shares (58.46%) to Mr. Ajay Singh. The Board has further, inter-alia, transacted on the
following:
1. Increase in Authorised Share Capital of the Company to `20,000,000,000 (Rupees Twenty
Thousand Million) divided into 1,500,000,000 (One Thousand Five Hundred Million) equity shares of
`10 (Rupees Ten) each and 5,000,000 (Five Million) non-convertible Cumulative Redeemable
Preference Shares `1,000 (Rupees One Thousand) each.
2. To create, offer, issue and allot upto 3,750,000 (Three Million Seven Hundred and Fifty Thousand) non-
convertible Cumulative Redeemable Preference Shares of Rs.1,000 (Rupees One Thousand) each to
Mr. Kalanithi Maran and/or Kal Airways Private Limited on preferential basis.
3. To create, issue, offer and allot equity shares/ warrants and/ or any instrument convertible into equity
shares whether optionally or otherwise/ Global Depository Receipts (GDRs)/ American Depository
Receipts (ADRs)/ Foreign Currency Convertible Bonds (FCCBs) (Securities) for an aggregate
amount not exceeding `15,000,000,000 (Rupees Fifteen Thousand Million only) or equivalent
currency(ies) to any person or persons, whether or not shareholder of the Company.
4. Change in the registered office of the Company from State of Tamil Nadu to Delhi.
5. Alteration to the Articles of Association of the Company.
6. To conduct postal ballot exercise in order to obtain shareholders approval, wherever required, for
above purposes in accordance with provisions of the Companies Act, 2013 and other applicable
rules and regulations.
Further, it is to be noted that Mr. Kalanithi Maran, Mrs. Kavery Kalanithi and Mr. S. Natrajhen have resigned
3
from the Board of the Company with immediate effect and the Board has accepted the same .
Approval of Competition Commission of India
On 9th February 2015, the Competition Commission of India (hereinafter referred to as the Commission)
received a notice under sub-section (2) of Section 6 of the Competition Act, 2002 (Act) filed by Mr. Ajay
Singh (Acquirer). The said notice was given to the Commission pursuant to the approval by the Ministry of
Civil Aviation of a scheme of reconstruction and revival for takeover of the ownership, management and
control of SpiceJet Limited (SpiceJet) and execution of the Share Sale and Purchase Agreement between
the Acquirer, SpiceJet and the two promoters of SpiceJet, namely, KAL Airways Private Limited and Mr.
Kalanithi Maran (hereinafter KAL Airways Private Limited and Mr. Kalanithi Maran are collectively referred to
as Sellers), dated 29th January 2015 (SPA).
The proposed combination involves sale and transfer of equity shares aggregating to 58.46 percent of the
share capital of SpiceJet by the Sellers to the Acquirer.
In terms of Regulation 14 of the Competition Commission of India (Procedure in regard to transaction of
2 BSE announcement
3 Copy of spicejet letter to BSE
business relating to combinations) Regulations, 2011 (Combination Regulations), vide letter dated 13th
February 2015, the Acquirer was required to remove defects and provide certain information/document(s).
The Acquirer filed its response on 17th February 2015 after seeking an extension in this regard.
The Acquirer is a first generation entrepreneur. It has been stated that the Acquirer inter-alia has experience
in the businesses of information technology and airline operations.
As stated in the notice, the Acquirer is not associated with the operations or ownership of any other existing
airline. Accordingly, there are no horizontal overlaps or vertical relationship between the SpiceJet and the
Acquirer. As stated above, the proposed combination is a transfer of shares and control in SpiceJet from the
sellers to the Acquirer. The proposed combination is, therefore, not likely to cause any appreciable adverse
effect on competition in India.
Considering the facts on record and the details provided in the notice given under sub-section (2) of Section
6 of the Act and the assessment of the combination after considering the relevant factors mentioned in sub-
section (4) of Section 20 of the Act, the Commission is of the opinion that the proposed combination is not
likely to have appreciable adverse effect on competition in India and therefore, the Commission hereby
approves the proposed combination under sub-section (1) of Section 31 of the Act.
This approval is without prejudice to any other legal/statutory obligations as applicable.4
Scheme of Reconstruction pursuant to Order of competent Authority does not trigger
open offer under SEBI (SAST) Regulations
Regulation 10(1)(d)(ii) of SEBI(SAST) Regulations 2011 states that Acquisition Pursuant to a scheme of
arrangement involving the target company as a transferor company or as a transferee company, or
reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of
a court or a competent authority under any law or regulation, Indian or foreign does not trigger open offer as
required under Regulation 3 or Regulation 4 of SEBI(SAST) Regulations 2011 even if the acquisition crosses
the specified threshold limit for open offer.
Since the Ministry of Civil aviation, a Competent Authority approved the scheme of reconstruction, the
acquirer Mr Ajay Singh did not go through the open offer process as mandated under SEBI(SAST)
Regulations 2011.
Report to SEBI
Regulation 10(6) SEBI (SAST) Regulations 2011 provides that in respect of any acquisition made pursuant
to exemption provided for in SEBI (SAST) Regulations 201, the acquirer should file a report with the stock
exchanges where the shares of the company are listed, in prescribed form not later than 4 working days from
the acquisition and the stock exchange shall forthwith disseminate such information to the public. Mr Ajay
Singh, the acquirer accordingly filed such report on February 27, 2015 in respect of acquisitions made on
February 23, 2015.
The details as stated in the report are as under:
Sl No. Name of the Transferor Details of acquisition
1 Mr Kalanithi Maran 148910753 equity shares
2 KAL Airways Private Limited 201518005 equity shares
Total 350428758 equity shares
4 Order of CCI
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Existing holding by Mr Ajay Singh 11106866 (ie before acquisition)(i.e 1.85% of total capital of the company.
New shares acquired, being 350428758 equity shares the total holding by Mr Ajay Singh would be
361535624 being 60.31% of total capital of target company. The prices were not disclosed.
The sale was through off market deal. The acquirer and the transferors have made disclosures as required
under SEBI (Prohibition of Insider Trading) Regulations, 1992 (being SEBI(Prohibition of Insider Trading)
Regulations 2015 would be applicable from May 15, 2015. Disclosures were also made as required under
SEBI (SAST) Regulations.
LESSON ROUND UP
The study has dealt with various case studies which throw light on the latest trends in mergers, takeovers,
amalgamations etc.
Each case study is itself an experience.
Illustrations enable the students to appreciate and apply various methods and strategies in different kinds of
restructuring process.
SELF TEST QUESTIONS

1. Discuss a case study on Leveraged Buy Out?
2. Discuss a case study on acquisition resulting in delisting.
Lesson 14
Valuation Introduction and Techniques
Introduction There are a number of situations in which a business
Need and purpose of valuation or a share or any other property may be required to
be valued. Valuation is essential for (i) strategic
When valuation is required partnerships, (ii) mergers or acquisitions of shares of
Valuation motives a company and/or acquisition of a business. (iii)
Valuation is also necessary for introducing employee
Factors influencing valuation
stock option plans (ESOPs) and joint ventures. From
General principle the perspective of a valuer, a business owner, or an
Preliminary steps ins valuation interested party, a valuation provides a useful base
to establish a price for the property or the business or
Valuation methods
to help determine ways and means of enhancing the
Assets based value of his firm or enterprise. The main objective in
Earning based carrying out a valuation is to conclude a transaction
in a reasonable manner without any room for any
Market based
doubt or controversy about the value obtained by any
Valuation standards party to the transaction. After reading this lesson you
will be able to understand the meaning, purpose and
methods of valuation.
252 PP-CRVI
INTRODUCTION
Valuation is an exercise to assess the worth of an enterprise or a property. In a merger or
amalgamation or demerger or acquisition, valuation is certainly needed. It is essential to fix the value of
the shares to be exchanged in a merger or the consideration payable for an acquisition.
NEED AND PURPOSE

There are a number of situations in which a business or a share or any other property may be required
to be valued. Valuation is essential for (i) strategic partnerships, (ii) mergers or acquisitions of shares of
a company and/or acquisition of a business. (iii) Valuation is also necessary for introducing employee
stock option plans (ESOPs) and joint ventures. From the perspective of a valuer, a business owner, or
an interested party, a valuation provides a useful base to establish a price for the property or the
business or to help determine ways and means of enhancing the value of his firm or enterprise.
The main objective in carrying out a valuation is to conclude a transaction in a reasonable manner
without any room for any doubt or controversy about the value obtained by any party to the transaction.
Acquisition of Business or Investment in the Equity of an enterprise could be understand by the
following two illustrations in this regard.
A Party who enters into a transaction with another for acquiring a business would like to acquire a
business as a going concern for the purpose of continuing to carry the same business, he might
compute the valuation of the target company on a going concern basis. On the other hand if the
intention of the acquirer is to acquire any property such as land, rights, or brands, the valuation would
be closely connected to the market price for such property or linked to the possible future revenue
generation likely to arise from such acquisition. In every such transaction, therefore the predominant
objective in carrying out a valuation is to put parties to a transaction in a comfortable position so that no
one feels aggrieved.
When is Valuation required?
The following are some of the usual circumstances when valuation of shares or enterprise becomes
essential:
1. When issuing shares to public either through an initial public offer or by offer for sale of shares
of promoters or for further issue of shares to public.
2. When promoters want to invite strategic investors or for pricing a first issue or a further issue,
whether a preferential allotment or rights issue.
3. In making investment in a joint venture by subscription or acquisition of shares or other
securities convertible into shares.
4. For making an open offer for acquisition of shares.
5. When company intends to introduce a buy back or delisting of share.
6. If the scheme of merger or demerger involve issue of shares. In schemes involving
mergers/demergers, share valuation is resorted to in order to determine the consideration for
the purpose of issue of shares or any other consideration to shareholders of transferor or
demerged companies.
7. On directions of Tribunal or Authority or Arbitration Tribunals directs.
Lesson 14 Valuation Introduction and Techniques 253
8. For determining fair price for effecting sale or transfer of shares as per Articles of Association
of the company.
9. As required by the agreements between two parties.
10. To determine purchase price of a block of shares, which may or may not give the holder
thereof a controlling interest in the company.
11. To value the interest of dissenting shareholders under a scheme of amalgamation merger or
reconstruction.
12. Conversion of debt instruments into shares.
13. Advancing a loan against the security of shares of the company by the Bank/Financial
Institution.
14. As required by provisions of law such the Companies Act, 2013 or Foreign Exchange
Management Act, 1999 or Income Tax Act, 1961 or the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011 [the Takeover Code] or SEBI (Employee Stock Option
Scheme and Employee Stock Purchase Scheme) Guidelines, 1999 or SEBI (Buy Back of
Securities) Regulations, 1998 or Delisting Guidelines.
Valuation/Acquisition Motives
An important aspect in the merger/amalgamation/takeover activity is the valuation aspect. The

method of valuation of business, however, depends to a grant extent on the acquisition motives. The
acquisition activity is usually guided by strategic behavioural motives. The reasons could be (a) either
purely financial (taxation, asset-stripping, financial restructuring involving an attempt to augment the
resources base and portfolio-investment) or (b) business related (expansion or diversification). The
(c) behavioural reasons have more to do with the personal ambitions or objectives (desire to grow
big) of the top management. The expansion and diversification objectives are achievable either by
building capacities on ones own or by buying the existing capacities. (Do a make (build) or buy
decision of capital nature.
The decision criteria in such a situation would be the present value of the differential cash flows. These
differential cash flows would, therefore, be the limit on the premium which the acquirer would be willing
to pay. On the other hand, if the acquisition is motivated by financial considerations (specifically taxation
and asset-stripping), the expected financial gains would form the limit on the premium, over and above
the price of physical assets in the company. The cash flow from operations may not be the main
consideration in such situations. Similarly, a merger with financial restructuring as its objective will have
to be valued mainly in terms of financial gains. It would, however, not be easy to determine the level of
financial gains because the financial gains would be a function of the use of which these resources are
put.
The acquisitions are not really the market driven transactions, a set of non-financial considerations will
also affect the price. The price could be affected by the motives of other bidders. The value of a target
gets affected not only by the motive of the acquirer, but also by the target companys own objectives.
FACTORS INFLUENCING VALUATION

Many factors have to be assessed to determine fair valuation for an industry, a sector, or a company.
The key to valuation is finding a common ground between all of the companies for the purpose of a fair
evaluation.
254 PP-CRVI
Determining the value of a business is a complicated and intricate process. Valuing a business requires
the determination of its future earnings potential, the risks inherent to those future earnings, Strictly
speaking, a companys fair market value is the price at which the business would change hands
between a willing buyer and a willing seller when neither are under any compulsion to buy or sell, and
both parties have knowledge of relevant facts.
The question that then arises is How do buyers and sellers arrive at this value?
Arriving at the transaction price requires that a value be placed on the company for sale. The process of
arriving at this value should include a detailed, comprehensive analysis which takes into account a
range of factors including the past, present, and most importantly, the future earnings and prospects of
the company, an analysis of its mix of physical and intangible assets, and the general economic and
industry conditions.
The other salient factors include:
(1) The stock exchange price of the shares of the two companies before the commencement of
negotiations or the announcement of the bid.
(2) Dividends paid on the shares.
(3) Relative growth prospects of the two companies.
(4) In case of equity shares, the relative gearing of the shares of the two companies.
(gearing means ratio of the amount of Issued preference share capital and debenture stock to
the amount of issued ordinary share capital.)
(5) Net assets of the two companies.
(6) Voting strength in the merged (amalgamated) enterprise of the shareholders of the two
companies.
(7) Past history of the prices of shares of the two companies.
Also the following key principles should be kept in mind:
(1) There is no method of valuation which is absolutely correct. Hence a combination of all or
some may be adopted.
(2) If possible, the seller should evaluate his company before contacting potential buyers. In fact, it
would be wiser for companies to evaluate their business on regular basis to keep themselves
aware of its standing in the corresponding industry.
(3) Go for a third party valuation if desirable to avoid over-valuation of the company which is a
common tendency on the sellers part.
(4) Merger and amalgamation deals can take a number of months to complete during which time
valuations can fluctuate substantially. Hence provisions must be made to protect against such
swings.
General Principles of Business valuation

1. Value is determined at a specific point in time.
2. Value is prospective. It is equivalent to the present value, or economic worth, of all future
benefits anticipated to accrue from ownership.
3. The market determines the required rate of return.
4. Value is influenced by liquidity.

5. The higher the underlying net tangible asset value base, the higher the going concern value.
Preliminary Steps in Valuation
A business/corporate valuation involves analytical and logical application/analysis of historical/future

tangible and intangible attributes of business. The preliminary study to valuation involves the following
aspects:
1. Analysis of Business History
2. Profit trends
3. Goodwill/Brand name in the market
4. Identifying economic factors directly affecting business
5. Study of Exchange risk involved
6. Study of Employee morale
7. Study of market capitalization aspects
8. Identification of hidden liabilities through analysis of material contracts.
Strategies Requiring Valuation Examples
Determining the consideration for Acquisition
Determining the swap ratio for Merger/Demerger
Sale/Purchase of Intangible assets including brands, patents, copyrights, trademarks, rights
Determining the Fair value of shares for issuing ESOP
Disinvestment of PSU stocks by the Government
Liquidation /insolvency of company
METHODS OF VALUATION (VALUATION TECHNIQUES)

The most popular methods of valuation amongst other includes
1. Asset based valuation
2. Earnings based valuation
3. Market based valuation
I. Valuation based on assets
This valuation method is based on the simple assumption that adding the value of all the assets of the
company and subtracting the liabilities, leaving a net asset valuation, can best determine the value of a
business. However, for the purposes of the amalgamation the amount of the consideration for the
acquisition of a business may be arrived at either by valuing its individual assets and goodwill or by
valuing the business as a whole by reference to its earning capacity. If this method is employed, the
fixed assets of all the amalgamating companies should preferably be valued by the same professional
256 PP-CRVI
valuer on a going concern basis. The term going concern means that a business is being operated at
not less than normal or reasonable profit and valuer will assume that the business is earning
reasonable profits when appraising the assets. If it is found when all the assets of the business, both
fixed and current, have been valued that the profits represent more than a fair commercial return upon
the capital employed in the business as shown by such valuation the capitalised value of the excess (or
super profits) will be the value of the goodwill, which must be added to the values of the other assets in
arriving at the consideration to be paid for the business. This method may be summarized thus: The
procedure of arriving at the value of a share employed in the equity method is simply to estimate what
the assets less liabilities are worth, that is, the net assets lying for a probable loss or possible profit on
book value, the balance being available for shareholders included in the liabilities may be debentures,
debenture interest, expenses outstanding and possible preference dividends if the articles of
association stipulate for payment of shares in winding up.
However, although a balance sheet usually gives an accurate indication of short-term assets and
liabilities. This is not the case of long-term ones as they may be hidden by techniques such as off
balance sheet financing. Moreover, a balance sheet is a historical record of previous expenditure and
existing liabilities. As a valuation is a forward looking exercise, acquisition purchase prices generally do
not bear any relation to published balance sheet. Nevertheless a companys net book value is still taken
into account as net book values have a tendency to become minimum prices and the greater the
proportion of purchase price is represented by tangible assets, the less risky its acquisition is perceived
to be.
Valuation of a listed and quoted company has to be done on a different footing as compared to an
unlisted company. The real value of the assets may or may not reflect the market price of the shares;
however, in unlisted companies, only the information relating to the profitability of the company as
reflected in the accounts is available and there is no indication of the market price. Using existing public
companies as a benchmark to value similar private companies is a viable valuation methodology.
The comparable public company method involves selecting a group of publicly traded companies that,
on average, are representative of the company that is to be valued. Each comparable companys
financial or operating data (like revenues, EBITDA or book value) is compared to each companys total
market capitalization to obtain a valuation multiple. An average of these multiples is then applied to
derive the companys value.
An asset-based valuation can be further separated into four approaches:
1. Book value
The tangible book value of a company is obtained from the balance sheet by taking the adjusted
historical cost of the companys assets and subtracting the liabilities; intangible assets (like goodwill)
are excluded in the calculation.
Statutes like the Gift Tax Act etc., have in fact adopted book value method for valuation of unquoted
equity shares for companies other than an investment company. Book value of assets does help the
valuer in determining the useful employment of such assets and their state of efficiency. In turn, this
leads the valuer to the determination of rehabilitation requirements with reference to current
replacement values.
In all cases of valuation on assets basis, except book value basis, it is important to arrive at current
replacement and realization value. It is more so in case of assets like patents, trademarks, know-how,
etc. which may posses value, substantially more or less than those shown in the books.
Using book value does not provide a true indication of a companys value, nor does it take into account
the cash flow that can be generated by the companys assets.
2. Replacement cost
Replacement cost reflects the expenditures required to replicate the operations of the company.
Estimating replacement cost is essentially a make or buy decision.
3. Appraised value
The difference between the appraised value of assets, and the appraised value of liabilities is the net
appraised value of the firm.
This approach is most commonly used in a liquidation analysis because it reflects the divestiture of the
underlying assets rather than the ongoing operations of the firm.
4. Excess earnings
In order to obtain a value of the business using the excess earnings method, a premium is added to the
appraised value of net assets. This premium is calculated by comparing the earnings of a business
before a sale and the earnings after the sale, with the difference referred to as excess earnings.
In this approach, it is assumed that the business is run more efficiently after a sale; the total amount of
excess earnings is capitalized (e.g., the difference in earnings is divided by some expected rate of
return) and this result is then added to the appraised value of net assets to derive the value of the
business.
II. Valuation based on earnings

The normal purpose of the contemplated purchase is to provide for the buyer the annuity for his outlay.
He will expect yearly income, return great or small, stable or fluctuating but nevertheless some return
which is commensurate with the price paid therefor. Valuation based on earnings based on the rate of
return on capital employed is a more modern method. From the last earnings declared by a company,
items such as tax, preference dividend, if any, are deducted and net earnings are taken.
An alternate to this method is the use of the price-earning (P/E) ratio instead of the rate of return. The
P/E ratio of a listed company can be calculated by dividing the current price of the share by earning per
share (EPS). Therefore, the reciprocal of P/E ratio is called earnings - price ratio or earning yield.
P
Thus P/E =
EPS
Where P is the current price of the shares
The share price can thus be determined as
P = EPS x P/E ratio
III. MARKET BASED APPROACH TO VALUATION

Market based methods help the strategic buyer estimate the subject business value by comparison to
similar businesses. Where the company is listed, market price method helps in evaluating on the price
on the secondary market. Average of quoted price is considered as indicative of the value perception of
the company by investors operating under free market conditions. To avoid chances of speculative
pressures, it is suggested to adopt the average quotations of sufficiently longer period. The valuer will
have to consider the effect of issue of bonus shares or rights shares during the period chosen for
average.
258 PP-CRVI
(i) Market Price Method is not relevant in the following cases:

Valuation of a division of a company
Where the share are not listed or are thinly traded
In the case of a merger, where the shares of one of the companies under consideration are
not listed on any stock exchange
In case of companies, where there is an intention to liquidate it and to realise the assets
and distribute the net proceeds.
(ii) In case of significant and unusual fluctuations in market price the market price may not be
indicative of the true value of the share. At times, the valuer may also want to ignore this value,
if according to the valuer, the market price is not a fair reflection of the companys underlying
assets or profitability status. The Market Price Method may also be used as a back up for
supporting the value arrived at by using the other methods.
(iii) It is important to note that regulatory bodies have often considered market value as one of the
very important basis for preferential allotment, buyback, open offer price calculation under the
Takeover Code.
(iv) In earlier days due to non-availability of data, while calculating the value under the market price
method, high and low of monthly share prices were considered. Now with the support of
technology, detailed data is available for stock prices. It is now a usual practice to consider
weighted average market price considering volume and value of each transaction reported at
the stock exchange.
(v) If the period for which prices are considered also has impact on account of bonus shares,
rights issue etc., the valuer needs to adjust the market prices for such corporate events.
Following methods are used for valuation under this approach:

(i) Comparable companies multiple approach Market multiples of comparable listed
companies are computed and applied to the company being valued to arrive at a multiple
based valuation.
(ii) Comparable transaction multiples method This technique is mostly used for valuing a
company for M&A, the transaction that have taken place in the industry which are similar to the
transaction under consideration are taken into account.
(iii) Market value approach The market value method is generally the most preferred method in
case of frequently traded shares of companies listed on stock exchanges having nationwide
trading as it is perceived that the market value takes into account the inherent potential of the
company.
MARKET COMPARABLES
This method is generally, applied in case of unlisted entities. This method estimates value by relating
the same to underlying elements of similar companies for past years. It is based on market multiples of
comparable companies. For example
Earnings/Revenue Multiples (Valuation of Pharmaceutical Brands)
Book Value Multiples (Valuation of Financial Institution or Banks)
Industry Specific Multiples (Valuation of cement companies based on Production capacities)
Multiples from recent M&A Transactions.
Though this method is easy to understand and quick to compute, it may not capture the intrinsic value
and may give a distorted picture in case of short term volatility in the markets. There may often be
difficulty in identifying the comparable companies.
This method estimates value by relating the same to underlying elements of similar companies for past
years. It is based on market multiples of comparable companies. Philosophical basis behind the
method is that there is a comparable asset in the market which is already valued, which can form basis
of valuation of an asset. This method of valuation is also known as relative valuation.
Following steps are involved in this method of valuation :

Comparable assets are identified and their market values are obtained
Market values are converted into standardized values, since the absolute price cannot be compared
Standardized value or multiple for the asset being analyzed are compared with the standardized
value of the comparable asset, controlling for any difference between the firms that might affect the
multiple, to judge whether the asset is under or over valued
The following metric can be used as a basis for relative valuation :

Sales EV/Sales
EBITDA EV/EBITDA
EBIT EV/EBIT
Earnings/Net Profit Price-to-Earnings Ratio
Book Value Price to Book
Cash Flow EV/Cash Flow
Industry Specific variable (Price per ton capacity of steel, per store value in the days of retail boom,
price per click in e-commerce).
Which multiple should one use?
While a range of values can be obtained from a number of multiples, the best estimate value is obtained
using one multiple. Multiple that seems to make the most sense for that sector should be used. For
example
In retailing: The focus is usually on same store sales and profit margins and so the revenue multiple
is the most common in this sector.
In financial services: The emphasis is usually on return on equity. Book Equity is often viewed as a
scarce resource, since capital ratios are based upon it. Price to book ratios dominate
In technology: Growth is usually the dominant theme. PEG ratios were invented in this sector.
Other aspects as to the methods of valuation

Valuation based on super profits
This approach is based on the concept of the company as a going concern. The value of the net
tangible assets is taken into consideration and it is assumed that the business, if sold, will in addition to
the net asset value, fetch a premium. The super profits are calculated as the difference between
maintainable future profits and the return on net assets. In examining the recent profit and loss
260 PP-CRVI
accounts of the target, the acquirer must carefully consider the accounting policies underlying those
accounts. Particular attention must be paid to areas such as deferred tax provision, treatment of
extraordinary items, interest capitalisation, depreciation and amortisation, pension fund contribution and
foreign currency translation policies. Where necessary, adjustments for the targets reported profits
must be made, so as to bring those policies into line with the acquirers policies. For example, the
acquirer may write off all R&D expenditure, whereas the target might have capitalised the development
expenditure, thus overstating the reported profits.
Discounted cash flow valuation method
Discounted cash flow valuation is based upon expected future cash flows and discount rates. This
approach is easiest to use for assets and firms whose cash flows are currently positive and can be
estimated with some reliability for future periods.
Discounted cash flow valuation, relates the value of an asset to the present value of expected future
cash flows on that asset. In this approach, the cash flows are discounted at a risk-adjusted discount
rate to arrive at an estimate of value. The discount rate will be a function of the riskiness of the
estimated cash flows, with lower rates for safe projects and higher rate for riskier assets.
This approach has its foundation in the present value concept, where the value of any asset is the
present value of the expected future cash flows on it. Essentially, DCF looks at an acquisition as a pure
financial investment. The buyer will estimate future cash flows and discount these into present values.
Why is future cash flow discounted? The reason is that a rupee in future is at risk of being worth less
than a rupee now. There are some business based real risks like acquired company loosing a contract,
or new competitor entering the market or an adverse regulation passed by government, which
necessitated discounting of cash flows.
The discounted cash flow (DCF) model is applied in the following steps:
1. Estimate the future cash flows of the target based on the assumption for its post-acquisition
management by the bidder over the forecast horizon.
2. Estimate the terminal value of the target at forecast horizon.
3. Estimate the cost of capital appropriate for the target.
4. Discount the estimated cash flows to give a value of the target.
5. Add other cash inflows from sources such as asset disposals or business divestments.
6. Subtract debt and other expenses, such as tax on gains from disposals and divestments, and
acquisition costs, to give a value for the equity of the target.
7. Compare the estimated equity value for the target with its pre-acquisition stand-alone value to
determine the added value from the acquisition.
8. Decide how much of this added value should be given away to target shareholders as control
premium.
Valuation by team of experts
Valuation is an important aspect in merger and acquisition and it should be done by a team of experts
keeping into consideration the basic objectives of acquisition. Team should comprise of financial
experts, accounting specialists technical and legal experts who should look into aspects, of valuation
from different angles.
Accounting expert has to foresee the impact of the events of merger on profit and loss account and
balance sheet through projection for next 5 years and economic forecast. Using the accounting data he
must calculate performance ratios, financial capacity analysis, budget accounting and management
accounting and read the impact on stock values, etc. besides, installing accounting and depreciation
policy, treatment of tangible and intangible assets, doubtful debts, loans, interests, maturities, etc.
Technician has its own role in valuation to look into the life and obsolescence of depreciated assets and
replacements and adjustments in technical process, etc. and form independent opinion on workability of
plant and machinery and other assets.
Legal experts advice is also needed on matters of compliance of legal formalities in implementing
acquisition, tax aspects, review of corporate laws as applicable, legal procedure in acquisition strategy,
laws affecting transfer of stocks and assets, regulatory laws, labour laws preparing drafts of documents
to be executed or entered into between different parties, etc.
Nevertheless, the experts must take following into consideration for determining exchange ratio.
A. Market Price of Shares
If the offeree and offeror are both listed companies, the stock exchange prices of the shares of both the
companies should be taken into consideration which existed before commencement of negotiations or
announcement of the takeover bid to avoid distortions in the market price which are likely to be created
by interested parties in pushing up the price of the shares of the offeror to get better deal and vice
versa.
B. Dividend Payout Ratio (DPR)
The dividend paid in immediate past by the two companies is important as the shareholders want
continuity of dividend income. In case offeree company was not paying dividend or its DPR was lower
than the offerors, then its shareholders would opt for share exchange for the growth company by
sacrificing the current dividend income for prospects of future growth in income and capital
appreciation.
C. Price Earning Ratio (PER)
Price earning ratios of both the offeror and offeree companies be compared to judge relative growth
prospects. Company with lower PER show a record of low growth in earning per share which depresses
market price of shares in comparison to high growth potential company. Future growth rate of combined
company should also be calculated.
D. Debt Equity Ratio
Company with low gearing offers positive factor to investors for security and stability rather than growth
potential with a geared company having capacity to expand equity base.
E. Net Assets Value (NAV)
Net assets value of the two companies be compared as the company with lower NAV has greater
chances of being pushed into liquidation.
Having taken all the above factors into consideration, the final exchange ratio may depend upon factors
representing strength and weakness of the firm in the light of merger objectives including the following:
Liquidity, strategic assets, management capabilities, tax loss carry overs, reproduction costs,
262 PP-CRVI
investment values, market values (combined companies shares) book values, etc.
Valuation by experts: effect
It is well settled that the valuation of shares is a technical matter, requiring considerable skill and
expertise. If the same has been worked out and arrived at by experts then the same should be
accepted, more so, if the same has the approval of the shareholders. That is to say, where the valuation
done by the companys auditors is approved by the majority of shareholders and is also confirmed by
eminent experts, who are appointed by the court to examine the valuation so made, as fair, and the
valuation is not shown to be patently unfair or unjust, it would be extremely difficult to hold that the
valuation so made is unfair, and, then, the court shall have to be slow to set at naught the entire
scheme of amalgamation. The court does not go into the matter of fixing of exchange ratio in great
detail or to sit in appeal over the decision of the chartered accountant. If a chartered accountant of
repute has given the exchange ratio as per valuation made by him and the same is accepted by the
requisite majority of the shareholders, the court will only see whether there is any manifest
unreasonableness or manifest fraud involved in the matter.
So, the exchange ratio of shares in the case of scheme of amalgamation, when supported by an
opinion of accounting, technicians & legal experts and approved by a very large number of
shareholders concerned, is prima facie to be accepted as fair, unless proved otherwise by the
objectors. It is also well established, that there are number of bases on which valuation or the offered
exchange ratio, which ultimately is a matter of opinion, can be founded and final determination can be
made by accepting one of amalgamation of various consideration. It is also well settled by the Supreme
Court in Hindustan Lever Employees Union v. Hindustan Lever Ltd., that mathematical precision is not
the criterion for adjudging the fair exchange ratio.
Thus, now, the law has been well settled by the Supreme Court in Miheer H. transferee company to be
allotted to the holders of the transferor company has been worked out by a recognised firm of chartered
accountants who are experts in the field of valuation, and if no mistake can be pointed out in the said
valuation, it is not for the court to substitute its exchange ratio, especially when the same has been
accepted without demur by the overwhelming majority of the shareholders of the two companies or to
say that the shareholders in their collective wisdom should not have accepted the said exchange ratio
on the ground that it will be detrimental to their interest. It is not the part of the judicial process, said the
Supreme Court in Hindustan Lever Employees Union v. Hindustan Lever Ltd., to examine
entrepreneurial activities to ferret out flaws. The court is least equipped for such oversights, nor indeed
is it a function of the judges in our constitutional scheme. It cannot be said that the internal
management, business activity or institutional operation of public bodies, can be subjected to inspection
by the court. To do so is incompetent and improper and, therefore, out of bounds.
Where the determination of the market price has been entrusted to a reputed valuer, there no reason to
doubt his competence unless mala fides are established against him. Allegations of mala fides are easy
to make but difficult to substantiate. Unless the person who challenges the valuation satisfies the court
that the valuation arrived at is grossly unfair, the court will not disturb the scheme of amalgamation
which has been approved by the shareholders of two companies, who are, by and large well informed
men of commercial world. It is difficult to set aside the valuation of experts in the absence of fraud or
mala fides on the part of the experts.
Valuation by Registered Valuer

Registered Valuer is one among the many new concepts introduced by the Companies Act, 2013 to
provides for a proper mechanism for valuation of the various assets and liabilities related to a company
and to standardize the procedure thereof.
Registered Valuer means a person registered as a Valuer under Chapter XVII of the Act. A person who
is registered as a Registered Valuer in pursuance of Section 247 of the Act with the Central
Government and whose name appears in the register of Registered Valuers maintained by the Central
Government or any authority, institution or agency, as may be notified by the Central Government only
can act as a registered valuer.
As per Section 247 of the Act -
(1) Where a valuation is required to be made in respect of any property, stocks, shares, debentures,
securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or
its liabilities under the provision of this Act, it shall be valued by a person having such qualifications and
experience and registered as a valuer in such manner, on such terms and conditions as may be
prescribed and appointed by the audit committee or in its absence by the Board of Directors of that
company.
(2) The valuer appointed shall,

(a) make an impartial, true and fair valuation of any assets which may be required to be valued;
(b) exercise due diligence while performing the functions as valuer;
(c) make the valuation in accordance with such rules as may be prescribed; and
(d) not undertake valuation of any assets in which he has a direct or indirect interest or becomes
so interested at any time during or after the valuation of assets.
(3) If a valuer contravenes the provisions of this section or the rules made thereunder, the valuer shall
be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend
to one lakh rupees:
Provided that if the valuer has contravened such provisions with the intention to defraud the company or
its members, he shall be punishable with imprisonment for a term which may extend to one year and
with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
(4) Where a valuer has been convicted under sub-section (3), he shall be liable to (i) refund the
remuneration received by him to the company; and (ii) pay for damages to the company or to any other
person for loss arising out of incorrect or misleading statements of particulars made in his report.
Note : Section 247 of the Companies Act, 2013 is yet to be notified
Fair value of shares
Valuation can be done on the basis of fair value also. However, resort to valuation by fair value is
appropriate when market value of a company is independent of its profitability.
The fair value of shares is arrived at after consideration of different modes of valuation and diverse
factors. There is no mathematically accurate formula of valuation. An element of guesswork or
arbitrariness is involved in valuation. The following four factors have to be kept in mind in the valuation
of shares. These are:
(1) Capital cover,
(2) Yield,
(3) Earning capacity, and
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(4) Marketability.
For arriving at the fair value of share, three well-known methods are applied:
(1) the manageable profit basis method (the earning per share method).
(2) the net worth method or the break-up value method, and
(3) the market value method.
The fair value of a share is the average of the value of shares obtained by the net assets method and
the one obtained by the yield method. This is, in fact not a valuation, but a compromise formula for
bringing the parties to an agreement.
The average of book value and yield-based value incorporates the advantages of both the methods and
minimizes the demerits of both the methods. Hence, such average is called the fair value of share or
sometimes also called the dual method of share valuation.
The fair value of shares can be calculated by using the formula:

Value by net assets method + Value by yield method
Fair value of shares =
2
Valuation of equity shares must take note of special features, if any, in the company or in the particular
transaction. These are briefly stated below:
(a) Importance of the size of the block of shares:
Valuation of the identical shares of a company may vary quite significantly at the same point of time on
a consideration of the size of the block of shares under negotiation.
The holder of 75% of the voting power in a company can always alter the provisions of the articles of
association; a holder of voting power exceeding 50% and less than 75% can substantially influence the
operations of the company even to alter the articles of association or comfortably pass a special
resolution.
A controlling interest therefore, carries a separate substantial value.

(b) Restricted transferability:
Along with principal consideration of yield and safety of capital, another important factor is easy
exchangeability or liquidity. Holders of shares of unquoted public companies or of private companies do
not enjoy easy marketability; therefore, such shares, however good, are discounted for lack of liquidity
at rates, which may be determined on the basis of circumstances of each case.
The discount may be either in the form of a reduction in the value otherwise determined or an increase
in the normal rate of return.
(c) Dividends and valuation:
Generally, companies paying dividends at steady rates enjoy greater popularity and the prices of their
shares are high while shares of companies with unstable dividends do not enjoy confidence of the
investing public as to returns they expect to get and, consequently, they suffer in valuation.
(d) Bonus and rights issue:
Share values have been noticed to go up when bonus or rights issues are announced, since they
indicate an immediate prospect of gain to the holder although in the ultimate analysis, it is doubtful
whether really these can alter the valuation.
Statutory valuation
Valuation of shares may be necessary under the provisions of various enactments like the Companies
Act, Income-tax Act, etc. e.g. valuation is necessary under the Companies Act in the case of an
amalgamation and under the Income-tax Act for the purposes of capital gains.
Some of the other enactments have laid down rules for valuation of shares. The rules generally imply
acceptance of open market price i.e. stock exchange price for quoted shares and asset based
valuation for unquoted equity shares and average of yield and asset methods i.e. fair value, in valuing
shares of investment companies.
Free cash-flows (FCF)
FCF is a financial tool mainly used in valuation of a business. It will be close to the profits after tax
without taking into account depreciation. Depreciation is neither a source of money nor an application of
the funds available at the disposal of a company. FCF of a company is determined by the after tax
operating cash flow minus interest paid/payable duly taking into account the savings arising out of tax
paid/ payable on interest and after providing for certain fixed commitments such as preference shares
dividends, redemption commitments and investments in plant and machinery required to maintain cash
flows. Please refer to Annexure 3 for a case study involving the acquisition of a firm as a going concern
where valuation has been done on the basis of estimated free cash flows.
Valuation Standards
Valuation Standards aims to provide uniformity in valuation of various tangible and intangible classes of
assets that provides consistent delivery of standards.
The International Valuation Standards Council

The International Valuation Standards Council is the established international standard setter for
valuation. Through the International Valuation Standards Board, the IVSC develops and maintains
standards on how to undertake and report valuations, especially those that will be relied upon by
investors and other third party stakeholders. The IVSC also supports the need to develop a framework
of guidance on best practice for valuations of the various classes of assets and liabilities and for the
consistent delivery of the standards by properly trained professionals around the globe.
The IVSC has published International Valuation Standards (IVS) since 1985.
Membership of IVSC is open to organisations of users, providers, professional institutes, educators, and
regulators of valuation services. IVSC members appoint the IVSC Board of Trustees.
In nutshell, valuations of businesses, business ownership interests, securities, tangible or intangible
assets may be performed for a wide variety of purposes including the following:
Valuation for financial transactions such as acquisitions, mergers, leveraged buyouts, initial public
offerings, employee stock ownership plans and other share based plans, partner and shareholder buy-
ins or buyouts, and stock redemptions.
Valuation for Dispute Resolution and/ or litigation/pending litigation relating to matters such as marital
dissolution, bankruptcy, contractual disputes, owner disputes, dissenting shareholder and minority
ownership oppression cases, employment disputes and intellectual property disputes.
Valuation for Compliance-oriented engagements, for example:
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(a) Financial reporting and

(b) Tax matters such as corporate reorganizations; income tax, Property tax, purchase price
allocations; and charitable contributions.
Other purposes like valuation for planning, Internal use by the owners etc.
The same business may have different values if different standard of value is used and different
approaches are adopted. The rising demand for valuation services has given new avenues for the
finance professionals. Going forward more and more professional would be engaged in performing
valuation services.
LESSON ROUND UP
There are a number of situations in which a business or a share or any other property may be required to be
valued. Valuation is essential for (i) strategic partnerships, (ii) mergers or acquisitions of shares of a
company and/or acquisition of a business. (iii) Valuation is also necessary for introducing employee stock
option plans (ESOPs) and joint ventures. From the perspective of a valuer, a business owner, or an
interested party, a valuation provides a useful base to establish a price for the property or the business or to
help determine ways and means of enhancing the value of his firm or enterprise.
The valuation methods can be divided into three broad categories viz., asset based, earning based and
market based methods.
Asset based valuation method is based on the simple assumption that adding the value of all the assets of
the company and subtracting the liabilities, leaving a net asset valuation, can best determine the value of a
business. However, for the purposes of the amalgamation the amount of the consideration for the acquisition
of a business may be arrived at either by valuing its individual assets and goodwill or by valuing the
business as a whole by reference to its earning capacity.
Valuation based on earnings based on the rate of return on capital employed is a more modern method
being adopted. From the last earnings declared by a company, items such as tax, preference dividend, if
any, are deducted and net earnings are taken.
The Market Price Method evaluates the value on the basis of prices quoted on the stock exchange.
SELF TEST QUESTIONS

1. What is the purpose of valuations?
2. What are the different types of valuation?
3. What is discounted cash flow method?
4. How do you carry out valuation exercise based on market comparables?
Lesson 15
Regulatory Aspects of Valuation with
Reference to Corporate Strategies
Regulatory aspects as regards valuation There are various methodologies for valuing a
1. Valuation of shares under FDI policy business, all having different relevance depending on
the purpose of valuation. There are many
2. Valuation of shares under SEBI
methodologies that a valuer may use to value the
Regulations
Shares of a Company/Business. In practice, the
Valuation of sweat equity shares valuer normally uses different methodologies of
Valuation under SEBI (SAST) Regulations valuation and arrives at a fair value for the entire
2011 business by combining the values arrived using
various methods. These methodologies includes
SEBI (Share Based Employee Benefits)
asset based approach, earnings based approach and
Regulations, 2014
market based approach. The concepts of these
Valuation under ESOP guidelines approaches are dealt in the previous lesson. Besides
regulatory aspects also impact valuation. For
Valuation under delisting regulations
example there are regulatory prescriptions for
Valuation under SEBI(ICDR) Regulations valuation of shares under SEBI (SAST)
Taxation aspects Regulations,2011 SEBI (ICDR) Regulations,2009
SEBI (Share Based Employee Benefits) Regulations,
Valuation of different strategies
2014 Guidelines, FEMA/Consolidated FDI Policy,
Mergers & Acquisitions Income Tax Act 1961 etc., After reading this lesson
Demerger you will be able to understand the regulatory aspects
of valuation, different valuation methodologies for
Slump sale
different strategies including taxation aspects.
Liquidation
Price is what you pay & Value is what you get. Warren Buffet
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INTRODUCTION
Understanding Corporate valuation is not only a pre-requisite during different types of restructuring
phase of the company. It is required at frequent intervals to identify the economic value creation and
any destruction if any occurred. It is also important to note that value is different from the price. The
process of valuation includes a detailed and comprehensive analysis taking into an account the past
present and future earnings prospects and analysis of physical and intangible assets and general
economic and industry conditions. Determination of realistic value of a firm is indeed a difficult process.
Some times market price of the share of the company may be an approximate indication of the firm.
Market price again depends on current earnings and the future growth. Market price of shares may not
be feasible for unlisted company for which asset based approach of valuation might be a feasible
option.
The Ministry of Corporate Affairs (the then Department of Company Affairs) has constituted an Expert
Group in 2002 under the Chairmanship of Mr. Shardul S. Shroff to suggest guidelines on valuation of
shares in connection with amalgamation, merger, de-merger, acquisition, buy-back, etc.,
The Expert Group is of the view that there are two circumstances under which the prescribed valuation
guidelines may apply to the companies.
These are:
(i) Circumstances under which a valuation from the Registered Valuer(s) is mandatory and
(ii) Circumstances under which a valuation from the Registered Valuer(s) is recommended but not
mandatory.
The Expert Group has adopted two basic principles for identifying the circumstances under which the
mandatory valuation is required. These circumstances include:
(i) Whenever a shareholders resolution, ordinary or special, is required to authorize the
transaction or where the shareholders are required to take a decision on values which may
have a bearing on or help in making the decision ; and
(ii) All Related Party transactions described herein.
Without limiting the generality of the above, some of the specific circumstances under which the Expert
Group opines that the company/Board of Directors should seek a mandatory valuation from a
Registered Valuer(s) are:
(i) All Schemes of Compromise and Arrangement)
(ii) Sale of a business, including investment business and disposal of a controlling interest in an
undertaking or a company, through disposal of shares, an undertaking or a substantial part
thereof including a slump sale / itemised sale
(iii) All equity and equity linked investments where shareholders approval is required
(iv) Purchases, Sales, combinations and restructuring entailing acquisition or disposal of business,
an undertaking or part of an undertaking, securities, equity and preference capital, and
outstanding debt and liabilities, where Related Parties are counterparties.
However, the valuation should not be mandatory for transactions, which are not material in
Lesson 15 Regulatory Aspects of Valuation with 269
nature. The Expert Group is of the view that it cannot straightjacket the test of materiality either
on a monetary test or a pro rata principle without reference to the context and purpose, e.g. the
transfer of a small percentage may result in a change of control and would be considered
material. Materiality may be in the context of liabilities, contingent liabilities or valuable
transferred rights. While the test of materiality must therefore be applied in each case, due
consideration should be given to asset/liability value, turnover and profit contribution in making
this determination;
(v) All preferential allotments made to Related Parties and persons controlling the company ;
(vi) Specified recapitalisation situations - whether effected through a buyback of shares under the
SEBI (Buy-back of Securities) Regulations, 1998 or Open Offers by persons in management or
promoters, or a capital reduction under Section 100 or in any other manner, which have the
effect of squeezing out minority shareholders, for enhancing the control of the promoters or
persons in management beyond 90% or more of the issued share capital, or which have the
declared or stated objective of delisting the company. Mandatory valuations are also
recommended where persons in management or the promoters become shareholders of 90%
or more of the issued share capital of the company and seek to negotiate the exit of minority
shareholders, provided there is substantial minority interest in such a situation.
The Expert Group is of the view that under the following circumstances, a valuation opinion may not be
prescribed as a company activity requiring disclosure to shareholders. These circumstances includes :
(i) Capital reduction, unless covered in paragraph 2.2.3 (v) above;
(ii) Issue of shares to public through a public offering;
(iii) Rights issue under the Companies Act;
(iv) Disinvestment of Central and State Public Sector Undertaking; and
(v) Family settlements.
VALUATION DOCUMENTATION
Valuation exercise is based on observation, inspection, analysis and calculation. During this process,
the valuer goes through various documents, records his observation, makes relevant calculation and
records these calculation and analysis results. In this process a lot of documents are generated which
forms the basis of his conclusion on the valuation of the subject matter. It is very necessary for his to
preserve all such records so that these documents may help him in substantiate his conclusion on
valuation. Moreover these documents also become a matter of reference in future.
Objectives of Documentation in Valuation Exercise

Documentation is an essential element of Valuation quality. Valuation documentation provides the
principal written record to support the following:
The Valuers report assertion that the valuation exercise was performed with due diligence and in
accordance of generally accepted valuation principles and
The Valuers conclusions about Valuation of the subject matter of the Valuation exercise and other
related aspects of valuation.
Valuation documentation must clearly demonstrate that the Valuation exercise was in fact performed in
compliance with generally accepted valuation principles and applicable standards. It must provide a
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clear link to valuation conclusions and must contain sufficient information, in sufficient detail, for a clear
understanding of the following
The nature, timing, and extent of the valuation exercise.
The work performed;
The purpose of the valuation
The source of the information analyzed and supporting evidential matter obtained, examined, and
evaluated; and
The conclusions reached.
The following are the more specific purposes of documentation in Valuation exercise:
Assisting Valuer to plan and perform the Valuation Exercise
Assisting those responsible to direct, supervise, and review the work performed;
Providing and demonstrating the accountability of those performing the work (i.e., compliance with
applicable standards);
Assisting quality-control reviewers to understand and assess how the engagement team reached
and supported significant conclusions;
Enabling internal and external inspection teams and peer reviewers to assess compliance with
professional, legal, and regulatory standards and requirements; and
Assisting successor Valuer.
Inadequate documentation makes it difficult or impossible to determine if the Valuation exercise was
actually done.
LIST OF DOCUMENTS
During the course of Valuation exercise, a valuation expert collects/prepares various documents. The
documents so obtained or prepared may be different from assignment to assignment but an indicative
list of documents to be maintained is as given
1. Documents pertaining to Basic information of client entity i.e. Details about Company
Promoters, Key Management professional of the Company, Memorandum of Association,
Article of Association, Prospectus, prior three years financial statement.
2. Copy of valuation engagement with the Client
3. Copy of Previous valuation report of the subject matter of valuation exercise if any.
4. Documents which are pertaining to Assumptions and limiting conditions in the valuation
assignment.
5. Information gathered and analyzed to obtain an understanding of matters that may affect the
value of the subject interest.
6. Documents pertaining to selection of Valuation approach used in the valuation assignment
including the rationale and support for their use.
7. Any restriction or limitation on the scope of the Valuers work or the data available for analysis
8. Basis for using any valuation assumption during the valuation engagement.
9. Documents pertaining to any rule of thumb used in the valuation, source(s) of data used, and
how the rule of thumb was applied.
Other documentation considered relevant to the engagement by the Valuer
DOCUMENTATION RETENTION
Generally Valuation exercise is done in connection of Statutory, legal or personal matters. It is
necessary that documents pertaining to valuation should be maintained as per applicable legislation on
subject matter of valuation.
Documentation pertaining to Valuation exercise needs to maintained at

1. Valuers End
2. Client Party End in form of valuation report along with annexure and exhibits.
Period for Retention of Documents at Valuers end
No legislation has been framed yet which specifies the period for documentation retention at valuers
end. However Government or professional Institute may bring guidelines about this matter. Standard on
Auditing (SA) 230 on Audit documentation, an Auditor should retain the documentation pertaining to an
Audit assignment for a period of 7 years.
Period for Retention of Documents at Clients end
Retention period of Valuation document at Clients party end would depend on the purpose of valuation
exercise. If valuation has got carried on for the purpose of Companies Act, Companies (Preservation
and Disposal of Records) Rules, 1966 will apply. Similarly If valuation has got carried on for the purpose
of Income tax Act, provision relating to Income Tax Act, 1961 and Income Tax Rules, 1962 will apply.
Judicial Pronouncement on Valuation Principles/Valuation Reports
Some of the salient dicta of Courts in relation to valuation principles and valuation reports are stated
under:
In Bahoo J. Coyajee v. Shanta Genevieve Prommeret Parulekar [1991] (3) Bom. LR 319, the Court
observed:
If the thing complained of is a thing which in substance the majority of the company are entitled to do
or if something has been done irregularly which the majority of the company are entitled to do regularly,
or if something has been done illegally which the majority of the company are entitled to do legally,
there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to
be called, and then ultimately the majority gets its wishes.
In Miheer H. Mafatlal v. Mafatlal Industries Ltd. [1996] 87 Comp. Cas. 792 (SC), the Honble Supreme
Court held:
If Share Exchange Ratio is fixed by Chartered Accountant upon consideration of various factors
and approved by majority of shareholders in meeting, the Court will not disturb ratio.
In Re. Maknam Investments Ltd. [1995] (4) Comp.LJ page 330, the Calcutta High Court observed:
Court does not go into the matter of fixing of exchange ratios in great detail or to sit in appeal over
272 PP-CRVI
the expert decision of concerned chartered accountant of repute. Court only sees whether there is
any manifest unreasonableness or manifest fraud involved in the matter.
In Hindustan Lever Employees Union v. Hindustan Lever Limited [1995] (Supp.) (1) SCC 499 at
517(519), the Honble Court stated:
The valuation of shares is a technical matter. It requires considerable skill and experience. There are
bound to be differences of opinion among accountants as to what is the correct value of the shares of a
company. It was emphasized that more than 99% of the shareholders had approved the valuation. The
test of fairness of this valuation is not whether the offer is fair to a particular shareholder. who may
have reasons of his own for not agreeing to the valuation of the shares, but the overwhelming majority
of the shareholders have approved of the valuation. The Court should not interfere with such valuation.
The Hindustan Lever case also repelled the case that valuation particulars needed a proper disclosure
as material facts in the Explanatory Statement. It confirmed the judgment of Jitendra R. Sukhadia v.
Alembic Chemical Works Co. Ltd.,(1987) 3 Comp.L.J 141 (Guj) as follows:
How this exchange ratio was worked out, however, was not required to be stated in the statement
contemplated under Section 394(1)(a).
The Hindustan Levers judgment (1995) Supp. (1) SCC 499 at 502 noted:
In the absence of it being shown to be vitiated by fraud and malafide, the mere fact that the
determination done by slightly different method might have resulted in different conclusion would not
justify interference of Court.
Regulatory aspects as to valuation

SEBI Regulations
1. Pricing under SEBI (ICDR) Regulations, 2009
2. Determination of offer price under SEBI (Delisting of Equity Shares) Regulations, 2009
3. Offer Price under SEBI (SAST) Regulations,2011
4. Price of sweat equity shares under SEBI(Issue of sweat equity) Regulations 2002
5. Valuation under SEBI (Share Based Employee Benefits) Regulations, 2014
Consolidated FDI policy 2016
Pricing in Public Issue as per SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009
Pricing
(1) An issuer may determine the price of specified securities in consultation with the lead merchant
banker or through the book building process.
(2) An issuer may determine the coupon rate and conversion price of convertible debt instruments in
consultation with the lead merchant banker or through the book building process.
Differential pricing
An issuer may offer specified securities at different prices, subject to the following:
(a) retail individual investors or retail individual shareholders [or employees entitled for reservation
made under regulation 42 making an application for specified securities of value not more than two
lakhs rupees, may be offered specified securities at a price lower than the price at which net offer is
made to other categories of applicants:
Provided that such difference shall not be more than ten per cent. of the price at which specified
securities are offered to other categories of applicants;
(b) in case of a book built issue, the price of the specified securities offered to an anchor investor shall
not be lower than the price offered to other applicants;
(c) in case of a composite issue, the price of the specified securities offered in the public issue may be
different from the price offered in rights issue and justification for such price difference shall be
given in the offer document.
(d) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XI,
the issuer may offer specified securities to its employees at a price lower than the floor price:
Provided that the difference between the floor price and the price at which specified securities are offered to
employees shall not be more than ten per cent. of the floor price.]
Price and price band
(1) The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue)
and floor price or price band in the red herring prospectus (in case of a book built issue) and determine
the price at a later date before registering the prospectus with the Registrar of Companies:
Provided that the prospectus registered with the Registrar of Companies shall contain only one price or
the specific coupon rate, as the case may be.
(2) The issuer shall announce the floor price or price band at least five working days before the opening
of the bid (in case of an initial public offer) and at least one working day before the opening of the bid (in
case of a further public offer), in all the newspapers in which the pre issue advertisement was released
(3) The announcement referred to in sub-regulation (2) shall contain relevant financial ratios computed
for both upper and lower end of the price band and also a statement drawing attention of the investors
to the section titled basis of issue price in the prospectus.
(3A) The announcement referred to in sub-regulation (2) and the relevant financial ratios referred to in
sub-regulation (3) shall be disclosed on the websites of those stock exchanges where the securities are
proposed to be listed and shall also be pre-filled in the application forms available on the websites of
the stock exchanges.]
(4) The cap on the price band shall be less than or equal to one hundred and twenty per cent. of the
floor price.
(5) The floor price or the final price shall not be less than the face value of the specified securities.
Explanation: For the purposes of sub-regulation (4), the cap on the price band includes cap on the
coupon rate in case of convertible debt instruments
Regulation 31 - Face value of equity shares
(1) Subject to the provisions of the Companies Act, and the ICDR (Regulations), an issuer making an
274 PP-CRVI
initial public offer may determine the face value of equity shares in the following manner:
(a) if the issue price per equity share is five hundred rupees or more, the issuer shall have the
option to determine the face value at less than ten rupees per equity share;
Provided that the face value shall not be less than one rupee per equity share;
(b) if the issuer price per equity share is less than five hundred rupees, the face value of the equity
shares shall be ten rupees per equity share:
The above mention criteria shall not apply to initial public offer made by any government
company, statutory authority or corporation or any special purpose vehicle set up by any of
them, which is engaged in infrastructure sector.
(2) The disclosure about the face value of equity shares (including the statement about the issue price
being X times of the face value) shall be made in the advertisements, offer documents and application
forms in identical font size as that of issue price or price band.
Pricing of equity shares - Frequently traded shares

(a) If listed for more than 26 weeks
If the equity shares of the issuer have been listed on a recognised stock exchange for a period of
twenty six weeks or more as on the relevant date, the equity shares shall be allotted at a price not less
than higher of the following:
(a) The average of the weekly high and low of the volume weighted average price of the related
equity shares quoted on the recognised stock exchange during the twenty six weeks preceding
the relevant date; or
(b) The average of the weekly high and low of the volume weighted average prices of the related
equity shares quoted on a recognised stock exchange during the two weeks preceding the
relevant date.
(b) If listed for less than 26 weeks
If the equity shares of the issuer have been listed on a recognised stock exchange for a period of less
than twenty six weeks as on the relevant date, the equity shares shall be allotted at a price not less than
the higher of the following:
(a) the price at which equity shares were issued by the issuer in its initial public offer or the value
per share arrived at in a scheme of arrangement under provision of the Companies Act,
pursuant to which the equity shares of the issuer were listed, as the case may be; or
(b) the average of the weekly high and low of the volume weighted average prices of the related
equity shares quoted on the recognised stock exchange during the period shares have been
listed preceding the relevant date; or
(c) the average of the weekly high and low of the volume weighted average prices of the related
equity shares quoted on a recognised stock exchange during the two weeks preceding the
relevant date.
Further where the price of the equity shares is determined in terms of sub-regulation (2), such price
shall be recomputed by the issuer on completion of twenty six weeks from the date of listing on a
recognised stock exchange with reference to the average of the weekly high and low of the volume
weighted average prices of the related equity shares quoted on the recognised stock exchange during
these twenty six weeks and if such recomputed price is higher than the price paid on allotment, the
difference shall be paid by the allottees to the issuer.
Further also any preferential issue of specified securities, to qualified institutional buyers not exceeding
five in number, shall be made at a price not less than the average of the weekly high and low of the
volume weighted average prices of the related equity shares quoted on a recognised stock exchange
during the two weeks preceding the relevant date.
Valuation for the purpose of Issue of Sweat Equity Shares

Under the SEBI (Issue of Sweat Equity) Regulations, 2002, the price of sweat equity shares shall not be
less than the higher of the following:
(a) The average of the weekly high and low of the closing prices of the related equity shares during
last six months preceding the relevant date; or
(b) The average of the weekly high and low of the closing prices of the related equity shares during
the two weeks preceding the relevant date.
"Relevant date" for this purpose means the date which is thirty days prior to the date on which the
meeting of the General Body of the shareholders is convened, in terms of the provisions of the
Companies Act, 2013 .
1. If the shares are listed on more than one stock exchange, but quoted only on one stock
exchange on the given date, then the price on that stock exchange shall be considered.
2. If the share price is quoted on more than one stock exchange, then the stock exchange where
there is highest trading volume during that date shall be considered.
3. If shares are not quoted on the given date, then the share price on the next trading day shall be
considered.
As per the sweat equity regulations, the intellectual property or the value addition in respect of which
the company intends to issue the sweat equity should also be valued in accordance with the valuation
requirements contained in the said regulations.
Valuation under SEBI (Share Based Employee Benefits) Regulations, 2014

The company granting option to its employees pursuant to ESOS will have the freedom to determine
the exercise price subject to conforming to the accounting policies specified in Regulation 15 of the
SEBI (Share Based Employee Benefits) Regulations, 2014.
Thus, the Regulation 15 states that the any company implementing any of the share based schemes shall
follow the requirements of the Guidance Note on accounting for employee share based Payments
(Guidance Note) or Accounting Standards as prescribed by the Institute of Chartered Accountants of India
(ICAI) including the disclosure requirements. However, where the existing Guidance Note or Accounting
Standards do not prescribe accounting treatment or disclosure requirements for any of the schemes then
the company shall comply with the relevant Accounting Standard.
Valuation under SEBI (Delisting of equity shares) Regulations 2009

(1) The offer price shall be determined through book building in the manner specified in Schedule II of
these regulations, after fixation of floor price. The final offer price shall be determined as the price at
which the maximum number of equity shares is tendered by the public shareholders. If the final price is
276 PP-CRVI
accepted, then, the promoter shall accept all shares tendered where the corresponding bids placed are
at the final price or at a price which is lesser than the final price. The promoter may, if he deems fit, fix a
higher final price.
(2) The floor price shall be determined in terms of regulation 8 of Securities and Exchange Board of
India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
Valuation of Shares under the Sweat Equity Unlisted Companies (Share Capital and
Debentures) Rules, 2014
Under the Companies (Share Capital and Debentures) Rules, 2014, the sub rules of rule 8 Issue of
sweat equity shares states that the:
The sweat equity shares to be issued shall be valued at a price determined by a registered valuer
as the fair price giving justification for such valuation.
The valuation of intellectual property rights or of know how or value additions for which sweat equity
shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper
report addressed to the Board of directors with justification for such valuation.
A copy of gist along with critical elements of the valuation report obtained under clause (6) and
clause (7) shall be sent to the shareholders with the notice of the general meeting.
Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation
report in respect thereof obtained from the registered valuer, such non-cash consideration shall be
treated in the following manner in the books of account of the company-
(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall
be carried to the balance sheet of the company in accordance with the accounting standards;
or
(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting
standards.
SEBI (SAST) Regulations 2011
Offer Price
Offer price is the price at which the acquirer announces to acquire shares from the public shareholders
under the open offer. The offer price shall not be less than the price as calculated under regulation 8 of
the SAST Regulations, 2011 for frequently or infrequently traded shares.
If the target companys shares are frequently traded then the open offer price for acquisition of shares
under the minimum open offer shall be highest of the following:
Highest negotiated price per share under the share purchase agreement (SPA) triggering the offer;
Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the
public announcement (PA);
Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA;
Volume weighted average market price for sixty trading days preceding the PA.
If the target companys shares are infrequently traded then the open offer price for acquisition of shares
under the minimum open offer shall be highest of the following:
Highest negotiated price per share under the share purchase agreement (SPA) triggering the offer;
Volume weighted average price of shares acquired by the acquirer during 52 weeks preceding the
public announcement (PA);
Highest price paid for any acquisition by the acquirer during 26 weeks immediately preceding the PA;
The price determined by the acquirer and the manager to the open offer after taking into account
valuation parameters including book value, comparable trading multiples, and such other parameters
that are customary for valuation of shares of such companies.
It may be noted that the Board may at the expense of the acquirer, require valuation of shares by an
independent merchant banker other than the manager to the offer or any independent chartered
accountant in practice having a minimum experience of 10 years.
Pricing under the Consolidated FDI Policy 2016
Price of shares issued to persons resident outside India under the FDI Policy, shall not be less than
a. the price worked out in accordance with the SEBI guidelines, as applicable, where the shares
of the company are listed on any recognised stock exchange in India;
b. the fair valuation of shares done by a SEBI registered Merchant Banker or a Chartered
Accountant as per any internationally accepted pricing methodology on arms length basis,
where the shares of the company are not listed on any recognised stock exchange in India;
and
c. the price as applicable to transfer of shares from resident to non-resident as per the pricing
guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on
preferential allotment.
However, where non-residents (including NRIs) are making investments in an Indian company
in compliance with the provisions of the Companies Act, as applicable, by way of subscription
to its Memorandum of Association, such investments may be made at face value subject to
their eligibility to invest under the FDI scheme.
Issue of Foreign Currency Convertible Bonds (FCCBs) and Depository Receipts (DRs)
The pricing of eligible securities to be issued or transferred to a foreign depository for the
purpose of issuing depository receipts should not be at a price less than the price applicable to
a corresponding mode of issue or transfer of such securities to domestic investors under the
relevant regulations framed under FEMA, 1999.
Issue of Rights/Bonus Shares
The offer on right basis to the person resident outside India shall be:
(a) in the case of shares of a company listed on a recognized stock exchange in India, at a
price as determined by the company;
(b) in the case of shares of a company not listed on a recognized stock exchange in India, at a
price which is not less than the price at which the offer on right basis is made to resident
shareholders.
What should be the content of valuation report for corporate strategies?

The expert group of Ministry of Corporate Affairs(the then Department of Company Affairs), which was
discussed about in the beginning of the chapter suggests the following coverage in the Valuation Report
for Corporate Strategies.
278 PP-CRVI
Contents of Summarized Valuation Report

Considering the shareholders interest and the need for transparency and upholding corporate
governance principles and after taking into consideration aspects of minority interest, transparency and
corporate governance the Expert Group recommends that the following matters should compulsorily be
covered in the summarized Valuation Report, in a clear, unambiguous and non-misleading manner,
consistent with the need to maintain confidentiality.
Background Information
Purpose of Valuation and Appointing Authority
Identity of the valuer and any other experts involved in the valuation
Disclosure of valuer Interest/Conflict, if any
Date of Appointment, Valuation Date and Date of Report
Sources of Information
Procedures adopted in carrying out the Valuation
Valuation Methodology
Major Factors influencing the Valuation
Conclusion
Caveats, Limitations and Disclaimers.
1. Background Information
The valuation report should briefly cover the following:
Brief particulars of company or business which is the valuation subject
Proposed Transaction
Key historical financials
Capital structure of the company, if relevant, and any changes as a result of the proposed transaction
Shareholding pattern, any significant changes (Promoters/FIs), and any changes as a result of the
transaction (Note a table of before and after shareholding patterns ought to be disclosed)
High/low/average market volumes/price for last six months, where applicable
Related party issues with respect to the transaction.
2. Purpose of Valuation & Appointing Authority
The context and purpose of the valuation and the appointing authority commissioning the exercise must
be clearly stated e.g. the Managements decision to seek an advisory opinion should be disclosed, or,
the Audit Committee Chairmans decision to appoint or the appointment of an independent valuer itself
should be disclosed with the date of the decision.
3. Identity of the valuer and any other experts involved in the valuation
Identity of the Registered Valuer (with his registration number) as well as organization doing the
valuation and any other experts consulted in the process of valuation. The separation of the advisory
team and details of the Chinese walls maintained between the independent valuer team and the
advisory team, if appointed with particulars of the degree of strict separation and compliance of Chinese
walls should be mentioned.
4. Disclosure of Valuer Interest/Conflict, if any
The Expert Group also recommends that a valuer shall disclose in his Report, possible sources of
conflict and material interests, including association or proposed association/with the company, its
associates, the counter-party to the transaction or its associates, in the form of auditor, lead advisor or
in any other capacity, together with the nature of the fee arrangements for the same. If the valuer has a
separate advisory engagement, the conflict disclosure should clearly record that neither the valuer or
the members of the team working on the independent valuation have directly or indirectly, through the
client or otherwise shared any advisory perspective or have been influenced or undertaken advocating
a management position in determining the value.
5. Date of Appointment, Valuation Date and Date of Report

The Report should clearly state the date of the appointment of the valuer, Valuation Date (i.e. the date
as of which the valuation assessment is done if this be other than the date of the report) and the date of
the report.
6. Sources of Information
The valuer should clearly indicate in the report the principal sources of information, both internal and
external, which have been relied upon for the purpose of valuation.
7. Procedures adopted in carrying out the valuation

Procedures adopted in carrying out a valuation may vary with circumstances, nature and purpose of
valuation as well as information and time available. The principal procedures actually adopted by the
valuer in carrying out the valuation should be set out briefly in the report. Such procedures may typically
include:
Review of Past Financials
Review and Analysis of Financial Projections
Industry Analysis
SWOT Analysis
Comparison with similar transactions
Comparison with other similar listed companies
Discussions with Management
Review of principal agreements/documents etc.
The valuer should also include in his report:
an affirmative statement that information provided and assumptions used by Management/Others in
developing projections have been appropriately reviewed, enquiries made regarding basis of key
assumptions in context of analysis of business being valued and the industry/economy; and
an affirmative statement on adequacy of information and time for carrying out the valuations; with
such modifications as may be appropriate and warranted. The affirmative statement shall not negate
the professional liability for expertise applied in determining value and if the degree of inadequacy of
information is severe, fundamental questions and information as assessed by the valuer as key for
the appropriate stage of valuation needs to be disclosed.
280 PP-CRVI
8. Valuation Methodology
Whereas one method may be more or less applicable to a particular case, they are often used in
conjunction to arrive at the fair value of a company/asset/business. The following are some of the
methods which are often used for valuations. The methods enumerated below are merely illustrative
and not exhaustive.
Asset Approach
Book Value, Adjusted Book Value, and Liquidation Value
Income Approach
Capitalization of Earnings, Capitalization of Excess Earnings, and
Discounted Future Earnings/Cash Flows.
Market Approach
Current Market Prices, Historical Market Prices, Price to Earnings, Price to Revenue, Price to
Book Value, Price to Enterprise Value, etc.
Comparable Transactions/Valuations
Comparable International and Domestic Transactions.
The valuation methodology adopted by the valuer has to be disclosed. The valuer should
mention in the report the rationale and appropriateness for the adoption of a particular method
or a combination of methods and emphasis/reliance placed on the chosen method/combination
of methods in reaching the final conclusion.
9. Major Factors influencing the Valuation
The valuer should also mention any key factors which have a material impact on the valuation, including
inter alia the size or number of the corporate assets or shares, its/their materiality or significance,
minority or majority holding and changes on account of the transaction, any impacts on controlling
interest, diminution or augmentation therein and marketability or lack thereof.
10. Conclusion
In conclusion, the report must contain a clear statement of the value ascribed to the business/assets in
question.
11 Caveats, Limitations and Disclaimers
Any caveats, limiting condition or other disclaimers to the report must be clearly stated with appropriate
specificity i.e. the valuer shall not disclaim liabilities for hisexpertise or deny his duty of care.
Valuation Strategies for Mergers

A fair market valuation is an estimate or opinion of the theoretical worth of a company's equity based
upon its underlying assets, income generating ability, and comparable transactions. There are accepted
procedures, methods and formulae for preparing valuations. These accepted approaches and methods
have been tested in tax, legal and other contentious matters. Different valuation approaches will
frequently yield strikingly different results for a given company. It's the duty of the analyst or valuator to
select the approach that is most appropriate given the facts and circumstances of the company. The
asset approach might be most appropriate when valuing a capital intensive company with steady sales.
The asset based approach may not be appropriate for a service industry. Further a combined approach
may also be used in some strategies.
RANBAXY LABORATORIES LIMITED A CASE STUDY

Background: Ranbaxy was founded in 1937 and derived its name from that of its founders Ranjit
Singh and Gurbax Singh. It started out as the Indian distributor of vitamins and anti tuberculosis drugs
for a Japanese pharmaceutical company. After the Second World War, Ranbaxy continued its role as a
distributor and ventured in manufacturing drugs by setting up its first plant in 1961. Ranbaxys first real
breakthrough came in 1969 with Calmpose, a copy of Roche patented Vellum tranquillizer. By 1971,
Ranbaxy had extended its strong position in anti infectives in the Indian market and expanded
manufacturing capacity to keep pace with sales.
Strategic Shift
Due to the changing business conditions, it had become essential in 1993 to change the strategy of the
company in order to tap rising opportunities. The senior management team of Ranbaxy underwent a
strategic planning exercise called Vision 2003. Ranbaxy aimed to achieve two milestones by 2003; 1
billion in revenues and the development of one new therapeutic chemical molecule. The mission
statement to become an international, research based pharmaceutical company was posed with many
challenges at all levels of the company. The company had to redefine its product offerings and the
markets it served. In structuring the foreign ventures, Ranbaxy focused on the entire value chain to
maximize margins. In February 2004, Ranbaxy crossed as $1 billion mark in its turnover.
In 2003, a gain a strategic planning revival exercise took place with a new plan in place called Vision
2012:
- Aspire to be a $ 5 billion company by 2012
- Become a top 5 global generics pharma company
- Significant income from the proprietary products
The company has decided to focus on the following therapeutic areas to meet its Vision 2012:
- Infectious Diseases (Anti-bacterial and Anti-fungals),
- Urology (Benign Prostatic Hyperplasia (BPH) and Urinary Incontinence),
- Metabolic Diseases (Type 2 Diabetes, Hyperlipidemia) and
- Inflammatory/Respiratory diseases (Asthma, Chronic Pulmonary Obstructive Disease and
Rheumatoid Arthritis).
These choices allow Ranbaxy to enter large markets with significant unattended medical needs and to
build on its research strengths. In 2008, Ranbaxy achieved a consolidated sale of $ 1.7 billion. Its
geographic and therapeutic sales break up is shown in Table 12.6 below:
Table 1 Geographic and Therapeutic Sales of Ranbaxy in 2008

Region % Major Therapy %
North America 27 Anti-infective 37

European Union 20 Cardiovascular 16
India 18 Gastrointestinal NA
Asia (Excluding India) 6 Musculoskeletal 8
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Russia and Ukraine 7 Central Nervous System 6

Africa and Latin Amarica 12 Respiratory 6
The Deal Value

According to details of the deal, the enterprise value of Ranbaxy is estimated to be US $ 8.5 billion at
737 price per share. The negotiated price of 737 represented a premium of 31.4% over the market
price of Ranbaxy on the day of announcement. When the deal finally closed in November 2008, DIS
had acquired 63.92% of the equity share capital of Ranbaxy as given below in table 2.
Table 2. Daiichi-Sankyo acquisition of Ranbaxy
Date of Acquisition Particulars Number of Shares % of

Shareholding
October 15, 2008 Acquisition of Shares under Open Offer

pursuant to Regulation 10 & 12 of the
SEBI (Substantial Acquisition of Shares
and Takeovers) Regulation, 1997 @
737 per share 92,519,126 22.01
Allotment of Shares on Preferential 46,258,063 11.00

October 20, 2008
basis @ 737 per share
Acquisition of Shares from the then
October 20, 2008 Promoters of the Company @ 737 per
share (First tranche)
81,913,234 19.49
Acquisition of Shares from the then
November 07, 2008 Promoters of the Company @ 737 per
share (First tranche)
48,020,900 11.42
Total 268,711,323 63.92
How much did Daiichi-Sankyo pay

Nature of Transaction Acquisition Consideration (in million yens)
Open market share purchases 169,407
Share purchases from founding family 230,970
(Gain of Promoters)
Share purchases by issuances of new shares 85,001
(Money infused in Ranbaxys balance sheet)
Direct acquisition related expenditures 2,974
Total 488,352
How did Daiichi-Sankyo value Ranbaxy
Assets and Liabilities Value Attributed (Yen billions)
Book value of assets and liabilities 78.8
(Cash, Inventory etc.)
Inventories 2.0
(Increase in inventories in fair value)

Tangible assets (Land) 10.0
Intangible assets (Leasehold land) 5.9
Intangible assets (Increase in current products, etc. to fair value) 41.0
In-process R&D expenses 6.9
Deferred tax liability (20.0)
Minority Interests (45.0) 83.69
Goodwill 408.7
Total consideration 483.3
Valuation of Ranbaxy Laboratories Ltd.
Price paid per share by Daiichi 737
th
52 week high/low as on 11 June 2008 for Ranbaxy share 593/300
Valuation of 63.92% stake by Daiichi19804 crores
Valuation of 100% equity of Ranbaxy as per the deal 30982 crores
Enterprise Valuation of Ranbaxy (on a fully diluted basis) $8.5 billion
th
Market Capitalization of Ranbaxy as on 30
May 2009 (Conclusion of Deal) 10434 crores
Table 3 Impact of Ranbaxy deal on Daiichi-Sankyo Balance Sheet
Region In Yens Remarks

Billion
Net Profit/(Loss) for Daiichi-Sankyo in FY 97.6 Recording of Y 351.3 billion in extraordinary

2008 losses due to a one-time write-off goodwill
pertaining to the investment in Ranbaxy.
Net Profit/(Loss) for Daiichi-Sankyo in FY (215.5)

2008
Net cash used in investing activities in FY 49.4 It is due to the cash acquisitions of shares in
2008 U3 Pharma and Ranbaxy, which entitled
cash outflows
Net cash used in investing activities in FY 413.8

2009
Short term bank loans in FY 2009 0.1 Borrowings for the acquisition of Ranbaxys
share Y + 240.0 billion
Short term bank loans in FY 2009 264.3 Increase by consolidation of Ranbaxy
Financing of Deal
Daiichi-Sankyo funded the acquisition through debt and existing cash reserves. Daiichi-Sankyo has
taken a short and long term loans of 240 billion yens. Thats almost 50% of the total funding
requirement of the deal.
284 PP-CRVI
Strategic Reasons
The acquisition shall pave this way for creating a new and complementary hybrid business model that
provides sustainable growth by diversification that spans the full spectrum of pharma business. The
expected synergistic benefits are summarized in the exhibit below:
Presence in Entry into

Emerging non-proprietary
Markets for drugs for
Daiichi-Sankyo Daiichi-Sankyo
Geographic Product extention
Synergy
Realisation of Acceleration
Sustainable of innovation
Growth through a drug creation
complementary by optimizing
business model value chain
efficiency
FIGURE 4
While DIS grew at 4.7% in 2007 to $7.12 billion, Ranbaxy grew at over 10% to $ 1.6 billion. While the
world pharma industry grew at 6%, the generic segment is growing at 11%. The pursuit of the hybrid
business model would help DIS to improve its growth rate substantially. Daiichi would be able to extend
its reach to 56 countries from 21 countries where they currently operate.
Benefits to Daiichi Sankyo
In addition to the expected synergies, DIS will be benefited most by the low-cost manufacturing
infrastructure and supply chain strengths of Ranbaxy. Further, DIS will be able to bring in efficiency in
its operations by sourcing APIs6 and finished dosage products from Ranbaxys 9 manufacturing plants
in India and many more in other countries.
The R&D facilities of Ranbaxy would be used by DIS to not only reduce some of its R&D expenses, but
also use competencies of Ranbaxy scientists to faster new product development. DIS is also expected
to get Zenotechs expertise in the areas of biologies, oncology and specialty injectibles. (i)
Benefits to Ranbaxy
According to the promoters of Ranbaxy, the deal was meant to take it to the next level of growth. With
India honouring the product Patent regime from 2005, Generic drug companies are finding it more
difficult to make similar versions of innovative drugs. (ii) further, tough times ahead has forced global
generic majors to merge or buy or become generic behemoths, e.g., Sandozs acquisition of German
company Hexal in 2005.
Besides, there was a strong feeling that perhaps the game is over for Indian drug companies unless
they pull up their socks and strengthen their R&D. Analysts feel that promoters of Ranbaxy could
visualize this in advance and got the best possible deal while the going was still good and made a very
decent, honorable and attractive exit.
Risk Involved
The Food and Drug Administration (FDA) issued two warning letters to Ranbaxy Laboratories and an
Import Alert for generic drug produced by Ranbaxys Dewas and Paonta Sahib plants in India on 16
September 2008. US officials could detain at the US border, any API and finished drugs manufactured
at these plants. Analysts estimate the loss of business to Ranbaxy as a result of this development to be
at $40 million. This development has resulted in sharp fall of Ranbaxy share price by 6.6% on BSE.
Just a week after DIS announcement Ranbaxy announced the settlement of its protracted multi-country
battle over Pfizers $12 billion cholesterol drug lipitor. Ranbaxy had entered into an agreement wit Pfizer
Inc. to settle most of the patent litigation worldwide over lipitor. After the announcement, Ranbaxy
shares saw a dip by 7.7% as against Bombay Stock Exchange (B.S.E.) dip of 2.2%.
Analysts have expressed their doubt about the price paid for the acquisition as it was quite high
compared to the present pricing of other Indian generic drug making companies. This many put severe
strain on DISs financials.
Notes:
1. In October 03, 2007, Ranbaxy entered into share purchase agreement with the promoters of
Zenotech Laboratories Ltd. (ZLL) for acquiring 27.35% shares of ZLL at a price of 160 per
share. On the completion of the above acquisition, Ranbaxy made the public announcement to
the shareholders of ZLL to acquire upto 20% shares at a price of 160 per share. On the
completion of the above acquisition, Ranbaxy holds 46.79% shares of ZLL. As on October 20,
2008, Ranbaxy held 46.85% shares of ZLL. As a result of acquisition of Ranbaxy by DIS, DIS
has indirectly acquired 46.85% shares of ZLL. In July, the Madurai bench of the Madras High
Court had given stay on the open offer, following complaints made by minority shareholders.
However, DIS got relief from the Supreme Court to go ahead with the offer.
2. India changed its policy of Patent regime from product to process in 1970 after enactment of
Indian Patent Act. This has opened doors of reverse engineering to prepare formulations. This
has helped Indian pharma companies in developing their capabilities at manufacturing low cost
APIs, which global majors were selling at extremely high prices. In 2005, the wheel of patent
perfection came a full circle as India amended the Patent Act, to recognize the product patent
under the obligation of WTO regime.
3. Under the agreement, Ranbaxy will delay the start of its 180 days exclusively period for a
generic version of lipitor, until November 2011. While the settlement avoided further legal cost
for Ranbaxy in fighting Pfizer, if it had won the case, Ranbaxy could have introduced generic
version as early as March 2010.
4. DIS plans to record a valuation loss of $3.99 billion on its shares in its India based subsidiary
Ranbaxy Laboratories to reflect the decline in the market value of shares.
On a non correlated basis DIS plans to record a non-cash valuation loss of $3.99 billion on its shares in
Ranbaxy in its third quarter to reflect a more than 50% decline in market value of these securities
versus the purchase price. The company said in a statement on the companys website.
DIS sees no impact on its forecasts for non-consolidated net-sales, operating income or ordinary
income for the third-quarter as a result of these anticipated extraordinary losses. The company also
sees no impact in cash flows. However, these items will have a significant negative impact on the
286 PP-CRVI
companys consolidated financial results for the net income for the year 2008-09. Reacting to this news
DIS shares fell 1.2% on the Tokyo stock exchange.
Valuation for liquidation/insolvency

Net Realisable Value Method
This method is generally used in case of liquidation. Where the business of the company is being
liquidated, its assets have to be valued as if they were individually sold and not on a going concern
basis. Liabilities are deducted from the liquidation value of the assets to determine the liquidation value
of the business. One should also consider liabilities which will arise on closure such as retrenchment
compensation, termination of critical contracts, etc. Tax consequences of liquidation should also be
considered. Any distribution to the shareholders of the company on its liquidation, to the extent of
accumulated profits of the company is regarded as deemed dividend. Dividend Distribution tax will have
to be captured for such valuation.
Valuation of Slump Sale

The concept of Slump Sale was incorporated in the Income tax Act, 1961 (the IT Act) by the Finance
Act, 1999 when Section 2(42C) was inserted defining the term slump sale as transfer of one or more
undertakings as a result of the sale for a lump sum consideration without values being assigned to the
individual assets and liabilities. Prior to the insertion of Section 2(42C), Courts have held that slump
sale is a sale of a business on a going concern basis where the lumpsum price cannot be attributed to
individual assets or liabilities.
The undertaking has to be transferred as a result of sale. If an undertaking is transferred otherwise than
by way of sale, say, by way of exchange, compulsory acquisition, extinguishment, inheritance by will,
etc., the transaction may not be covered by Section 2(42C). The consideration for transfer is a lump
sum consideration. This consideration should be arrived at without assigning values to individual assets
and liabilities.
As regards the valuation of slump sale it is appropriate to brief the provisions of Section 50B of the
Income Tax Act, 1961.
Section 50B provides the mechanism for computation of capital gains arising on slump sale. Capital
gains arising on slump sale are calculated as the difference between sale consideration and the net
worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for
the purpose of calculation of capital gains tax.
Net worth is defined in Explanation 1 to Section 50B as the difference between the aggregate value of
total assets of the undertaking or division and the value of its liabilities as appearing in books of
account
The aggregate value of total assets of the undertaking or division is the sum total of :
1. WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets.
2. The book value in case of other assets.
Valuation of Assets in a Demerger

Valuation of demerger is based on Section 19AA of demerger under the Income Tax Act 1961.
As per Section 2 (19AA) demerger, in relation to companies, means the transfer, pursuant to a
scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a
demerged company of its one or more undertakings to any resulting company in such a manner that
(i) all the property of the undertaking, being transferred by the demerged company, immediately
before the demerger, becomes the property of the resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company,
immediately before the demerger, become the liabilities of the resulting company by virtue of
the demerger;
(iii) the property and the liabilities of the undertaking or undertakings being transferred by the
demerged company are transferred at values appearing in its books of account immediately
before the demerger;
(iv) the resulting company issues, in consideration of the demerger, its shares to the shareholders
of the demerged company on a proportionate basis;
(v) the shareholders holding not less than three-fourths in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by a
nominee for, the resulting company or, its subsidiary) become share-holders of the resulting
company or companies by virtue of the demerger, otherwise than as a result of the acquisition
of the property or assets of the demerged company or any undertaking thereof by the resulting
company;
(vi) the transfer of the undertaking is on a going concern basis;
(vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of
section 72A by the Central Government in this behalf.
Explanation 1.For the purposes of this clause, undertaking shall include any part of an undertaking,
or a unit or division of an undertaking or business activity taken as a whole, but does not include
individual assets or liabilities or any combination thereof not constituting a business activity.
Explanation 2.For the purposes of this clause, the liabilities referred to in sub-clause (ii), shall
include
(a) the liabilities which arise out of the activities or operations of the undertaking;
(b) the specific loans or borrowings (including debentures) raised, incurred and utilised solely for
the activities or operations of the undertaking; and
(c) in cases, other than those referred to in clause (a) or clause (b), so much of the amounts of
general or multipurpose borrowings, if any, of the demerged company as stand in the same
proportion which the value of the assets transferred in a demerger bears to the total value of
the assets of such demerged company immediately before the demerger.
Explanation 3.For determining the value of the property referred to in sub-clause (iii), any change in
the value of assets consequent to their revaluation shall be ignored.
Explanation 4.For the purposes of this clause, the splitting up or the reconstruction of any authority or
a body constituted or established under a Central, State or Provincial Act, or a local authority or a public
sector company, into separate authorities or bodies or local authorities or companies, as the case may
be, shall be deemed to be a demerger if such split up or reconstruction fulfils 81[such conditions as may
be notified in the Official Gazette 82, by the Central Government];
288 PP-CRVI
Following Explanation 5 inserted after Explanation 4 in clause (19AA) of section 2 by the

Taxation Laws (Amendment) Act, 2016, w.e.f. 1-4-2017 :
Explanation 5.For the purposes of this clause, the reconstruction or splitting up of a company, which
ceased to be a public sector company as a result of transfer of its shares by the Central Government,
into separate companies, shall be deemed to be a demerger, if such reconstruction or splitting up has
been made to give effect to any condition attached to the said transfer of shares and also fulfils such
other conditions as may be notified by the Central Government in the Official Gazette.
As per Section 2(19AAA) demerged company means the company whose undertaking is transferred,
pursuant to a demerger, to a resulting company;
A demerger scheme usually involves the allotment of shares in the transferee company to the
shareholders of the transferor company, in lieu of their reduction of their interest in the transferee
company having a mirror image of shareholdings. If post demerger as part of strategy, intention is to
create holding subsidiary relationship or retain part stake than it is possible to allot shares of the
transferee company to the transferor company.
In the context of a demerger scheme, a valuation exercise is mandatory in order to determine the
number of shares to be issued to the shareholders of the transferor company in consideration for the
spin off/demerger of the undertaking or undertakings If demerger is going to be in Shell Company, than
valuation is primarily to determine the capital structure of the Transferee/Resultant Company.
If the demerged and resulting companies belong to same group of management and shareholders are
common, share exchange ratio based on Net Asset Based valuation model may be adopted. Any other
business valuation method may also be adopted considering the same shareholding as it will not impact
value for the shareholders in demerged company post-demerger. In ideal situation like the companies
are profitable and shareholders are different, it is recommendable to use Profit Based Valuation model
for deciding on the share exchange ratio. While demerging to the shell company, there is no value of
the shell company. Therefore, any no of shares may be issued to the shareholders of the demerged
company as there will not be any impact on the shareholders wealth.
There may be various situations and objectives wherein demerger schemes are implemented. Fair
valuation only considers the status of the businesses and other macro factors but it also considers very
big picture of implication of valuation/share exchange ratio. It does also consider costs such as stamp
duty involved in adopting any valuation model.
VALUATION OF BRANDS
Blacks Dictionary defines it as a word, mark, symbol, design, term, or a combination of these, both
visual and oral, used for the purpose of identification of some product or service.
It is the hallmark of a shrewd businessman to commence his business with a roadmap of his plans. In
the course of his business, he applies a unique mark or symbol or word to his goods. When his
customer base increases, his goods acquire reasonable reputation and his customers begin identifying
his goods by the unique mark or symbol or word he had so adopted, his goods earn the reputation of
being branded goods. What applies to goods applies to services also. When brands take charge of
consumers minds, the name of its proprietor takes the backseat. There lies the power of brands.
Functions of Brands
Brands indicate the

origin of goods
Brands connect the consumers Brands make the job of the

mind to the manufacturer or consumers very easy and
service provider consumers are choosy!
Consumer believe that branded Same manufacturer may use

goods and services offer them a different brands to differentiate
particular quality or other value goods of same description
proposition having different quality and
value
Brands enable
premium pricing
The Importance of Brand valuation

Think for a moment as to how much investment one has to make by means of money and others
resources to adopt, develop and popularize a brand or a mark during the course of his business.
Brands/marks are a class of assets like human resource, knowledge etc. They create a value premium
for the goods and services. Therefore, without the brand/mark, the goods/services may be address
less. In order to market it or use this asset wisely valuing the same is essential. But remember, valuing
a brand is a very difficult task. There is no prescribed manner to value a brand. But all knows that
brands connect markets with products and thereby they create value.
Brands do not command any value unless they are able bring cash flows to the Company that has
adopted the same. With incremental cash flows increasing, value of brand increases proportionately.
Brands have to be constantly associated with good quality goods and services; they require proper
show casing and servicing and they should remain active in appropriate markets.
Protect the Value of the Brand

In order to sustain the valuation of the brand, there must a constant attempt from the Company on the
following aspects:
To secure registration of the Brand in all relevant classes.
To secure registration of the Brand in all countries where there are opportunities to sell
Branded Products of the Company.
To set up a surveillance team within the Marketing Department of the Company so as to
ensure that there is no dilution to the value of the Brand.
To ensure that attempts to use fake brands that are similar or deceptively similar are
challenged with full force so as to spread the message that the Company is conscious of the
value of its brand and it will be aggressive in taking steps not only to put an end to such illegal,
dishonest and unauthorized use but also to punish such users and claim exemplary damages
from those who had passed off their goods to people and those who are found to be guilty of
infringement.
290 PP-CRVI
To ensure that there is always a budget allocation for promoting the brand and the Company
should devise a continuous process for being present in the existing markets and prospective
markets.
To ensure that there is a conspicuous distinction in the description of the brand when it is used
to sell premium products as opposed to use of the same brand for selling goods to the masses.
To ensure that the extent of growth in the value of the brand very year is always higher than
the depreciation or dent that existing or new competition may cause.
To adopt a proper policy with regard to slogans and catchy phrases so that the Company does
not knowingly cause any infringement of the industrial and intellectual property rights of any
other person in any country or territory.
To adopt a proper policy with regard to statements made in advertisements carrying the brand
in order to ensure that those statements are not mere attractive words and they would stand
the test of the market.
To adopt a proper policy to augment IP profile of the Company and constantly update and
upgrade the same.
For the purpose of valuation of brands, it may be necessary to make a through enquiry into the policies
and business of the company to the extent they relate to brands. For such enquiry, the following
questionnaire may prove to be helpful:
Sl. No. Query

1. What are the brands requiring valuation? Please mention all its variants and styles also.
2. What is the date of adoption of each brand?
3. Does the company use the brand owned by any third party?
4. What are goods or products that are sold under those brands?
5. For how long they have been in use?
6. Whether the use of brands has been continuous?
7. Whether use of any brand has been stopped?
8. Whether the brands of the company have been registered under the Trademarks Act, 1999?
9. Whether there has been any opposition to registration of the any of the Brands of your
company?
10. What are the Brands/Trademarks which have not yet been registered though necessary
applications have been filed already with the Registrar of Trademarks?
11. Whether the artistic works contained in the brands of the company have been registered
under the Copyrights Act,1957?
12. Whether your company has adopted any slogan or catchy phrase to highlight the policy of
your company or its branded goods?
13. What is the turnover of the company from goods sold under brand? (Brand-wise data from
three financial years may be provided)
14. Whether the company has a website of its own? Give details.
15. Whether the company has dealer/agent network?

16. How does the company take its products to its ultimate customers?
17. Has the company any brand adoption policy? Please furnish a copy of the policy.
18. Has the company granted may permission to any party for brand use? Please provide a copy
of Licence agreement if any.
19. Has the company a marketing division of its own?
20. Has there been any advertisement about the brands? Please furnish complete details
regarding advertisements in the print media/electronic media?
21. Whether there have been any radio commercial programmes of your companys brands?
22. Hs there been any use of the brand in any country other than India?
23. What are the most prominent states in India where the branded goods of the company sell
significantly?
24. Can you give product wise turnover for three financial years?
25. Can you furnish state wise turnover for three financial years?
26. Can you furnish names of the States where the products of the Company are not sold at all?
27. Can you furnish details of those products, which though manufactured by the company are
sold without applying any brand?
28. Can you furnish details of those goods that are sold by your company as branded goods
even though they are simultaneously sold without applying those brands?
29. Is there any product that the company gets manufactured through any other party (such as a
sub-contractor) who puts the brand of the company upon those goods and delivers to the
company?
30. What is the budget of the company for its advertisement and publicity for three financial
years? How much of the same could be related to brand promotion?
31. Who are the major competitors of your companys goods? What are their brands? How those
brands are superior or inferior to your companys brands?
32. What is the total market India for the goods of your company? Please give details in value
terms and in quantity terms if possible.
33. What would the approximate market share of your company?
34. Has the market share improved after introducing branded goods?
35. In your opinion would the price of branded goods sold is higher than the price of same goods
sold without brands? (You may consider a market place where two traders are selling the
same or similar goods, your company selling those goods as branded goods and the other
trader selling his goods without any brand).
36. Do you think because of Brands the goods of your company have been commanding higher
(premium) valuation?
292 PP-CRVI
37. Do you think your company has not reached out to customers adequately in respect of any
territory?
38. Could you please provide financial projections for the next three financial years?
39. Has there been any raid or criminal action against sale of spurious goods similar to your
goods upon which the Brands of your company or any brand deceptively similar to the
Brands of your company have been used?
40. Has your company ever given any warning or caution notice about Brands of your company?
41. Has your company at any time opposed the registration of any brand or trademarks of any
other person?
42. Has your company issued any legal notice to any party against misuse of any Brands of your
company?
43. Has there been any suit against any party for passing off or infringement of any of the Brands
of your company?
44. Has there been any legal notice or legal action against your company alleging copying or
misuse of brands of others?
45. Has there been any valuation of any of the Brands of your company at any time before this?
VALUATION APPROACH
Basically in an enterprise, physical resources are of the following two types:
Machinery, that work with applied force;
Men who work.
Both the above assets are capable of being organized provided the two vital inputs are present; viz.,
money and knowledge.
Brands belong to a different species. While physical resources could be created easily if augmenting
financial resources is not a problem, same is not the case of brands. That is why there is always a
premium price for buying branded goods rather than the business or plants and equipments. In the case
of Brands, the ability of the Company to leverage the same to bring revenues in other territories and
markets is of paramount importance.
As already seen, the value of an enterprise could be estimated on a going-concern basis by computing
the earning capacity. Net Asset Value method may not be ideal in the cases enterprises with
depreciating assets unless the enterprise in question is asset intensive. For instance, in the case of
company engaged in real estate sector, the lands in the hands of the company on ownership basis
could be a stock in trade and they may be highly valuable. However, in the case of Brands, which form
the lifeline of the Company, there has to be a different approach.
According to an Article that appeared in the Hindu Business Line (of Mr. G. Ramachandran, a financial
analyst and Mr. R. Vijay Shankar, Director of SSN School of Management and Computer Applications)
the hands that hold a brand will determine how much value will be created. Therefore, a brands value
is inestimable. There are no commodity-like, normative valuation methods. Brands will defy any
attempts aimed at valuing them. That is what makes brands mystical. They will trample upon the egos
of those that are mechanistically minded. Mr. David Haigh, Chief Executive, Brand Finance, and Mr. M.
Unni Krishnan, Country Manager, Brand Finance, are of the view that traditional measures of financial
performance do not reveal fully the value of brands (Praxis, Business Lines Journal on Management,
May 2005). Mr. Haigh and Mr. Krishnan bemoan the fact that earnings per share (EPS) and dividend
yield look back rather than forward.
Cost Approach for valuation of Brands may not help. The cost incurred in the initial years would not
have been very high as all resources should have been used up for setting up manufacturing facility
and sales force to give customers high quality Products for value and to ensure that customers are
happy. In the case of a premium brand, a company may be incurring expenditure in order to capitalize
the position and expand the territories and to ward off competition. Therefore for every rupee incurred
by the Company on an established brand, returns would be manifold. This enables the Company to
introduce the brand for new products and new markets. In order to retain the ability of the Brand to
reach an expanded customer base, it is essential that the company have adequate physical resources
and a favourable industrial outlook. Thus depending upon the facts and circumstances of each case,
suitable method of valuation of the brands should be adopted. In the case of a premium brand, the price
of the products that are sold under the premium brand may command a premium price as compared to
any other similar product that is sold under an ordinary brand or without any brand. The price differential
between the goods carrying premium brand and other similar goods would show the extent of premium
the branded goods command. Taking the said premium as an indicator, it is possible to evaluate the
value of the brand using the usual cash flow model of valuation. Students should refer to the section on
case studies to see a case of typical brand valuation.
Investors have become more active in protecting their value. Any transaction of purchase/ sale of
business/ companies require determination of fair value for the transaction to satisfy stakeholders
and/or Regulators. Business valuation is an unformulated and subjective process. Understanding the
finer points of valuing a business is a skill that takes time to perfect. There are various methodologies
for valuing a business, all having different relevance depending on the purpose of valuation. Key
aspects of valuation along with various restructuring options have been explained hereunder:
A clear understanding of the purpose for which the valuation is being attempted is very important aspect
to be kept in mind before commencement of the valuation exercise. The structure of the transactions
also plays very important role in determining the value. For example, if only assets are being transferred
out from a Company, valuation of equity shares is of no importance. The general purpose value may
have to be suitably modified for the special purpose for which the valuation is done. The factors
affecting that value with reference to the special purpose must be judged and brought into final
assessment in a sound and reasonable manner.
LESSON ROUND UP
Corporate valuation is not only a pre-requisite during different types of restructuring phase of the company. It
is required at frequent intervals to identify the economic value creation and any destruction if any occurred.
The process of valuation includes a detailed and comprehensive analysis taking into an account the past
present and future earnings prospects and analysis of physical and intangible assets and general economic
and industry conditions.
The valuation of shares is a technical matter. It requires considerable skill and experience. There are bound
to be differences of opinion among accountants as to what is the correct value of the shares of a company.
Slump sale as transfer of one or more undertakings as a result of the sale for a lump sum consideration
without values being assigned to the individual assets and liabilities.
294 PP-CRVI
Section 50B of the Income Tax Act, 1961 provides the mechanism for computation of capital gains arsing on
slump sale. Capital gains arising on slump sale are calculated as the difference between sale consideration
and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of
improvement for the purpose of calculation of capital gains tax.
Demerged company means the company whose undertaking is transferred, pursuant to a demerger, to a
resulting company.
A demerger scheme usually involves the allotment of shares in the transferee company to the shareholders
of the transferor company, in lieu of their reduction of their interest in the transferee company having a mirror
image of shareholders. If post demerger as part of strategy, intention is to create holding subsidiary
relationship or retain part stake than it is possible to allot shares of the transferee company to the transferor
company.
Blacks Dictionary defines brand as a word, mark, symbol, design, term, or a combination of these, both
visual and oral, used for the purpose of identification of some product or service.
SELF TEST QUESTIONS

1. Discuss the objective of corporate valuation in the emerging business environment.
2. Enumerate the content of valuation report for corporate strategies.
3. Critically examined the valuation of demerger under the Income Tax Act, 1961.
4. Explain the importance of Brand valuation.
5. Discuss briefly the functions of Brand.
Lesson 16
INSOLVENCY CONCEPTS AND
EVOLUTION
Insolvency/Bankruptcy-the concepts The laws relating to insolvencies and bankruptcies in
the earlier centuries were framed for penalizing the
Historical developments of Insolvency defaulting debtors and in the most of the cases with
Laws in India
imprisonment. As the historical aspects relating to
A Brief regulatory framework on insolvencies evidences that the European insolvency
corporate insolvency in India framework, started in the 15th century was the
preliminary base for countries that had developed
A brief on historical background of
insolvency framework in the subsequent centuries.
insolvency laws in UK
There has been revamping shift in the global
The Existing Regulatory framework in UK regulatory framework towards corporate insolvency.
The evolution of Insolvency Laws in the The principal focus of modern insolvency legislation
US along with timeline and business debt restructuring practices are not
liquidation and elimination of insolvent entities but on
The current Bankruptcy code in the US
the remodeling of the financial and organizational
structure of debtors experiencing financial distress so
as to permit the rehabilitation and continuation of
their business. Indeed, Chapter 11 of US bankruptcy
code is considered to be one of the best insolvency
frameworks in the global platform. Companies Act
2013 also facilitates rehabilitation of debtor instead of
winding up. If the rehabilitation is not possible it
enables effective winding up of companies in time
bound manner through single regulator National
Company Law Tribunal. The whole exercise of
rehabilitation and liquidation are done in time bound
manner through single forum, National Company
Law Tribunal.

understand the historical and emerging aspects of
insolvency process in India, UK and USA.
296 PP-CRVI
INSOLVENCY/BANKRUPTCY THE CONCEPT

Insolvency is when an individual, corporation, or other organization cannot meet its financial obligations for
paying debts as they are due. Bankruptcy is not exactly the same as insolvency. Technically, bankruptcy
occurs when a court has determined insolvency, and given legal orders for it to be resolved. Bankruptcy is a
determination of insolvency made by a court of law with resulting legal orders intended to resolve the
insolvency. Insolvency describes a situation where the debtor is unable to meet his/her obligations.
Bankruptcy is a legal scheme in which an insolvent debtor seeks relief.
Do you know the origin of the Word Bankruptcy?
The Old Bridge, better known as the Ponte Vecchio, is a world renowned monument, oldest segmental
arched bridge in Europe that draws thousands of people to Florence every year. Commerce on bridge began
almost at the same time when the more enterprising decided to take advantage of the elevated amount of
pedestrian traffic that crossed the bridge, especially military. The first merchants consisted mostly of tanners,
blacksmiths and butchers. A curious fact regarding the word bankruptcy derives from the economic activity
on Ponte Vecchio.
The word bankruptcy originated from the trade that was carried out on the bridge. If a merchant ran out of
money and was seriously in debt, the table from where he sold his goods known as a banco was broken
i.e. rotto in two by soldiers in an act called bancorotto or broken bank or break the bank. Without a banco
a merchant could not do business.
Historical developments of Insolvency Laws in India

The law of Insolvency in India owes its origin to English law. Before the British came to India there was no
indigenous law of Insolvency in the country.
The earliest rudiments of insolvency legislation can be traced to sections 23 and 24 of the Government of
India Act, 1800, which conferred insolvency jurisdiction on the Supreme Court.
The passing of Statute 9 in 1828 (Geo. IV. c. 73) was passed, which can be said to be the beginning of
the special insolvency legislation in India. Under this Act, the first insolvency courts for relief of insolvent
debtors were established in the Presidency-towns. A further step in the development of Insolvency Law was
taken when the law in 1848 (11 and 12 Viet. c. 21) was passed. The Provisions of the Indian Insolvency Act,
1848, were, however, found to be inadequate to meet the changing conditions. However, the Act of 1848
was in force in the Presidency-towns until the enactment in 1909 of the present Presidency-towns
Insolvency Act, 1909. The Presidency Towns Insolvency Act, 1909 and Provisional Insolvency Act, 1920 are
two major enactments that deal with personal insolvency and have parallel provisions and their substantial
content is also similar but the two differ in respect of their territorial jurisdiction. While Presidency Towns
Insolvency Act, 1909 applies in Presidency townsnamely, Kolkata, Mumbai and Chennai, Provincial
Insolvency Act, 1920 applies to all provinces of India. These two Acts are applicable to individuals as well as
to sole proprietorships and partnership firms.
Under the Constitution of India Bankruptcy & Insolvency is provided in Entry 9 List III - Concurrent List,
(Article 246 Seventh Schedule to the Constitution) i.e. both Center and State Governments make laws
relating to this subject.
The Presidency Towns Insolvency Act, 1909 and Provisional Insolvency Act, 1920 are two major enactments
that deal with personal insolvency.
Lesson 16 Insolvency Concepts and Evolution 297
Reforms in Insolvency Law For Corporate Side

Over the last two decades, the Indian financial system has undergone tremendous transformation. Various
financial sector reforms have been initiated aimed at promoting an efficient, well-diversified and competitive
financial system with the ultimate objective of improving the allocative efficiency of resources so as to
accelerate economic development. As India swiftly moves to the centre stage of world economy there has
been a consistent effort by the policy makers to undertake comprehensive reforms in the laws and systems
to bring them at par with international standards and incentivise the foreign investors to invest in the Indian
economy.
Committees on Insolvency
Tiwari Committee
Due to the incidence of industrial sickness which was resulting in loss of production, loss of employment,
loss of government revenue, blockage of funds advanced by the banks etc, a committee was constituted
under the Chairman ship of Shri T Tiwari, Chairman, Industrial Reconstruction Corporation of India to look
into the causes of Industrial sickness and to suggest remedial measures. Based on the recommendations of
Tiwari Comkittee SICA was enacted. Due to misuse of SICA by erring promoters and others, BIFR failed to
fulfill the purpose and mandate as envisaged in SICA.
N L Mitra Committee
A Standing Committee on International Financial Standards and Codes has been set up by Governor,
Reserve Bank of India on December 8, 1999 with the objectives of identifying and monitoring developments
in global standards and codes pertaining to various segments of the financial system, considering all aspects
of applicability of such standards and codes to the Indian financial system, chalking out the desirable road
map for aligning Indias standards and practices in the light of evolving international practices. The Standing
Committee in its first meeting held at New Delhi on January 13, 2000 decided to constitute non official
Advisory Groups in ten major subject areas encompassing 43 different standards/codes. In this regard, one
of the subject area identified is Bankruptcy Laws. Accordingly, an Advisory Group on Bankruptcy Laws
under the Chairmanship of Dr. N. L. Mitra, Director, National Law School of India, University, Bangalore
The N. L. Mitra Committee noted that Indian laws on cross border insolvency are outdated and that they are
not comparable to any standards set in international legal requirement and as such, stands apart and alone.
It also noted that in the event of an international insolvency proceeding involving an Indian company, Indian
courts are unlikely to provide any aid or assistance to a foreign liquidator or other insolvency official if this
were to be prejudicial to the companies creditors on the basis of how those creditors are or would have been
treated under any equivalent Indian law insolvency proceeding.
Justice Eradi Committee

In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B.Eradi, to
examine and make recommendations with regard to the desirability of changes in existing law relating to
winding up of companies so as to achieve more transparency and avoid delays in the final liquidation of the
companies; The Committee recognized after considering international practices that the law of insolvency
should not only provide for quick disposal of assets but in Indian economic scene, it should first look at the
possibilities of rehabilitation and revival of companies. The Committee also recommended that the
jurisdiction, power and authority relating to winding up of companies should be vested in a National
Company Law Tribunal instead of the High Court as at present. The Committee strongly recommended
appointing Insolvency Professionals who are members of Institute of Chartered Accountant of India (ICAI),
298 PP-CRVI
Institute of Company Secretaries of India (ICSI), Institute of Cost and Work Accountants of India (ICWAI),
Bar Councils or corporate managers who are well versed in Corporate management on lines of U.K.
Insolvency Act.
The Committee addressed and recommended the following key points:

The Committee recognized after considering international practices that the law of insolvency
should not only provide for quick disposal of assets but in Indian economic scene, it should first look
at the possibilities of rehabilitation and revival of companies.
The Committee noted that there are three different agencies namely,
(i) the High Courts, which have powers to order winding up of companies under the provisions of
the Companies Act, 1956;
(ii) the Company Law Board to exercise powers conferred on it by the Act or the powers of the
Central Government delegated to it and
(iii) Board for Industrial and Financial Reconstruction (BIFR) which deals with the references
relating to rehabilitation and revival of companies.
The committee revealed data of time taken to wind up a company it may run on an average upto
25 years; Eastern region being the worst.
Position as on 31.3.1999 as indicated by Eradi Committee was as under:
0-5 5-10 10-15 15-20 20-25 25 Total

years Years Years Years Years Years
and
Above
Northern 259 130 86 56 47 66 644
Region
Eastern 126 77 83 73 71 293 723
Region
Southern 325 212 89 68 51 78 823
region
Western 355 184 224 124 82 36 1005
Region
Total 1065 603 482 321 251 473 3195
Committee further noted that the High Courts are not able to devote exclusive attention to winding
up cases which is essential to conclude the winding up of companies quickly. The experiment with
BIFR for speedy revival of companies has also not been encouraging. Committee recognized that
there is a need for establishing a National Tribunal as a specialized agency to deal with matters
relating to rehabilitation, revival and winding up of companies. With a view to avoiding multiplicity of
fora, the National Tribunal should be conferred with jurisdiction and powers to deal with matters
under Companies Act, 1956 presently exercised by the Company Law Board; jurisdiction, power
and authority relating to winding up of companies vested with High Courts and power to consider
rehabilitation and revival of companies presently vested in the BIFR.
The Committee also recommended that the jurisdiction, power and authority relating to winding up
of companies should be vested in a National Company Law Tribunal instead of the High Court as at
present. The National Company Law Tribunal

(a) should have the jurisdiction and power presently exercised by Company Law Board under the
Companies Act, 1956;
(b) should have the power to consider rehabilitation and revival of companies a mandate
presently entrusted to BIFR/AAFIR under SICA;
(c) should have the jurisdiction and power relating to winding up of companies presently vested in
the High Courts. In view of above recommendations Article 323B of the Constitution should be
amended to set up National Tribunal. SICA should be repealed and the Companies Act, 1956
be amended accordingly.
(d) should be headed by a sitting judge or a former judge of a High Court and each of its Benches
should consist of a judicial member and a technical member.
(e) shall have such number of member as may be prescribed by the Central Government. The
principal Bench of the Tribunal should be located at New Delhi and its Benches should be
located at the principal seats of each High Court. The Central Government may set up more
such Benches if so required. While passing the order for winding up of a company, the Tribunal
shall have power to prescribe time limit for each step to be taken by the Liquidator in the course
of winding up process. The Tribunal shall also have power to prescribe the time limits for
compliance of each step by parties while considering the reference for revival of sick
companies.
(f) should be vested with the power to transfer all proceedings from one Private Liquidator to another
"Private liquidator" or to the "Official Liquidator", as the circumstances of case may require. The
Tribunal shall have the power to direct the sale of business of the company as a going concern or
at its discretion to sell its asset in a piece-meal manner.
Tribunal may continue to have jurisdiction for winding up the companies on grounds stated in
section 433 but following further grounds may be added therein, namely:
a company has failed to file balance sheet and profit and loss accounts and/or annual returns
for last three years on due dates; or
any action of the company has or is likely to threaten the security or integrity of India. Share
holder or the Central Government will be entitled to file the petition under on aforesaid grounds.
There should be two distinct aspects of the liquidation:
(i) sale of assets (ii) distribution of sale proceeds
An all-out effort should be made by the Liquidator for sale of assets of the company promptly as in
absence of the receipt of sale proceeds, timely distribution among the creditors. The pending
references before BIFR/ AAIFR under SICA should abate in view of repeal of SICA
recommendations by the Committee. However, the winding up proceedings pending in High Courts
under Companies Act, 1956 shall stand transferred to National Tribunal for expeditious disposal of
those cases.
There is a need to encourage voluntary winding up of companies. To achieve this object, a
provision may be made in the Companies Act, 1956 to provide a company having paid-up capital of
`10 lac or more may submit a petition for its winding up in the process Tribunal and companies with
paid-up capital below that amount must resort to voluntary winding up. Creditors may approach the
Tribunal for winding up only if a company defaults in payment of undisputed debts exceeding
`1,00,000 and in other cases of default, creditors voluntary Winding up should be resorted. The
300 PP-CRVI
provisions regarding winding up subject for supervision of court may be deleted as such cases will
be taken care of by procedure of compulsory winding up by Court.
It should be obligatory for a company filing a winding up petition to submit the Statement of Affairs
along with the petition for winding up. In cases where the company opposes winding up petition, it
should file Statement of Affairs along with its counter affidavit/reply statement. The Statement of
Affairs should be accompanied by latest addresses of directors/company secretary of company, a
details of location of assets and their value and debtors and creditors list with complete addresses.
This will ensure speedy winding up of the company.
"A Fund for Revival and Rehabilitation" preservation and protection of companies may be created
under the supervision and control of the Government. The Fund shall be maintained and operated
by an officer authorised in that behalf of such Government.
The winding up order passed by the Tribunal should be made available to the liquidator within a
period not exceeding two weeks from the date of passing of the order.
The directors and officers of the company should be responsible for ensuring that books of account
are completed and got audited up to the date of winding up order and submitted to the Tribunal at
the cost of company failing which such directors and officers should be subjected to monetary
penalty as well as imprisonment.
The present system of liquidator required to seek the courts directions, even for small matters
relating to routine administrative decisions not only causes delay in winding up but also takes
valuable time of the court. Therefore, the liquidator should not seek the sanction of the court except
for important matters such as confirmation of sale of assets and distribution of proceeds realised.
Appropriate legislative action must be taken to ensure that the claims of all employees of a
company and its secured creditors are ranked "pari-passu".
Specific provisions may be made in the Companies Act, 1956 that the liquidator may distribute
interim dividend.
There should be a two point criteria for determining the maintainability of the reference for revival
and rehabilitation to the of a company to the Tribunal, namely, that the company has suffered 50%
of erosion of its net worth or there is a debt default involving a sum of not less than `1 lakh in
respect of undisputed debts.
The reference to the Tribunal for revival by a company should be voluntary. As already stated the
jurisdiction of hearing references of revival and rehabilitation of companies will vest in the Tribunal and
not BIFR as at present.
An explicit provision need be made in the Companies Act giving a right to the secured creditors to
file proof of debt with the liquidator without surrendering his status as a secured creditor and get the
dividend in accordance with the priority to which he is entitled.
The committee further favoured the appointment of professionals as the Liquidators from a panel to
be prepared by the Government.
The repeal of SICA and the ameliorative, revival and reconstructionist procedures obtaining under it
to be reintegrated in a suitably amended form in the structure of the Companies Act 1956.
The committee considered the adoption of the UNCITRAL Model Law in the Companies Act itself to
deal with all cases of "Cross-Border Insolvency".
The Committee also considered that the principles enunciated under legal frame work of "Orderly
and Effective Procedure" recommended by IMF be incorporated in the Companies Act.
The Committee strongly recommended appointing Insolvency Professionals who are members of
Institute of Chartered Accountant of India (ICAI), Institute of Company Secretaries of India (ICSI),
Institute of Cost and Work Accountants of India (ICWAI), Bar Councils or corporate managers who
are well versed in Corporate management on lines of U.K. Insolvency Act. For this purpose Central
Government may maintain a panel of persons who may act as professional Insolvency practitioners
subject to their fulfilling of the qualification and experience as may be specified by rules.
DR. J.J. IRANI EXPERT COMMITTEE ON COMPANY LAW
Dr. J.J. Irani Expert Committee on Company Law was set up by the Government to recommend a new
company law as a part of the on-going legal and financial sector reform process in the country. Committee
submitted its report to the Government of India on 31 May, 2005.
The Committee proposed significant changes in the law to make the restructuring and liquidation process
speedy, efficient and effective. Recommendations are directed at restoring the eroded confidence of key
stakeholders in the insolvency system while balancing their interest.
The Committee noted that a beginning towards reform was made with the enactment of Companies (Second
Amendment) Act, 2002, which in addition to significant changes in the restructuring and liquidation provisions
provided for the setting up of a new institutional structure in the form of the National Company Law Tribunal
(NCLT)/Tribunal and its Appellate Body, the National Company Law Appellate Tribunal (NCLAT). The
highlights of the report of the Committee regarding Restructuring and Liquidation are given below:
Corporate insolvency to be addressed in company law. No need for a separate insolvency law.
Law to strike a balance between rehabilitation and liquidation process.
Rehabilitation and liquidation processes to be time bound.
Setting up of institutional structure in the form of NCLT/NCALT for overseeing such processes.
Winding up to be resorted to only when revival is not feasible.
Reasonable opportunity for rehabilitation of business before it is decided to be liquidated.
Period of one year to be adequate for rehabilitation from commencement of process to sanction of
plan.
Time bound procedures which limit the possibility of appeals and thereby delays.
Two years to be feasible for completion of liquidation.
Insolvency process to apply to all corporate entities except banks, financial institutions and
insurance companies.
Insolvent company to replace the concept of sick industrial company
Debtors and creditors to have fair access to insolvency system.
Rather than net worth erosion principle, test for insolvency should be default in payment of matured
debt on demand within a prescribed time [liquidity test].
Debtors seeking rehabilitation to approach the Tribunal only with a draft scheme. Creditors being at
least 3/4th in value may also file rehabilitation scheme.
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If tribunal deems fit, liquidation proceedings may be converted into restructuring proceedings.
Law to impose certain duties and prohibitions to apply to debtors and creditors on admission of
rehabilitation application. Automatic prohibition on Debtors rights to transfer, sale or dispose off
assets or parts of the business except to the extent necessary to operate the business, with the
approval of the Tribunal.
There should be a duty cast on companies to convene creditors and shareholders meeting in case
of default in payments to creditors to consider suitable steps to protect interest of stakeholders,
preserve assets and adopt necessary steps to contain insolvency.
Tribunal be vested with the power to summarily dismiss the proceedings for not meeting
commencement standards with cost/ sanction.
Law to impose a prohibition on the unauthorized disposition of the Debtors assets and suspension
of actions by creditors.
Law to provide for treatment of unperformed contracts.
Provisions to interfere with the contractual obligations, which are not fulfilled completely.
Meeting of the secured creditors be convened by the debtors to consider a rehabilitation plan when
the Company has failed to repay its due debt without waiting for creditors to act on default or filing of
application for rehabilitation.
Companies to convene a General Meeting without delay where losses in financial year are equal to
25% or more of its average net worth during last two financial years and there is a default in making
payments to the creditors.
Role of operating agency envisaged under the existing law should be performed by independent
Administrator or other qualified professionals.
Qualified Administrator appointed by the Tribunal in consultation with the secured creditors with
board authority to administer the estate in the interest of all stakeholders should replace
management of the going concern.
Creditors to actively participate and monitor the insolvency process.
Appointment of professional experts and specialists by Creditor Committee to advise them on

technical and legal issues.
Separate Committee to represent other categories of creditors and unsecured creditors and
stakeholders be formed with separate rules thereof.
Provisions to Coordinate meetings of unsecured and secured creditors to be made.
Mechanism to recognize and record claims of unsecured creditors in preparation of the

rehabilitation plan.
Panel of Administrators and Liquidators to be prepared and maintained by an independent body of

professionals with appropriate experience and knowledge of insolvency practice.
Tribunal to appoint Administrator and Liquidators out of the panel maintained by the independent
body and Official Liquidators from panel of officials made available by the Government.
Identification of the assets that constitute the insolvency estate including assets of debtor and third
party owned assets wherever located and collection of assets forming part of insolvency estate by
Administrator/ Liquidator be facilitated.
Avoidance or cancellation of pre-bankruptcy fraudulent and preferential transactions. A flexible but

transparent system for disposal of assets efficiently to be provided for.
Sales free and clear of security interests, charges or other encumbrances be allowed subject to
priority of interests in the proceeds from assets disposal.
Provision for monitoring and effective implementation of the scheme/ plan to be made.
Provision should also be made to
amend the plan in the interest of rehabilitation
terminate the plan and to liquidate the company.
Discharge or for alternation of debts and claims that have been discharged or otherwise altered
under the plan.
National Company Law Tribunal (NCLT) envisaged as the forum to address Insolvency issues to be
constituted speedily.
Provisions to be made for ready access to court records, court hearings, debtors, financial data and
other public information.
Tribunal should have clear authority and effective methods of enforcing its judgments.
Encourage and recognize the concept of Insolvency Practitioners (Administrators, Liquidators,
Turnaround Specialists, Valuers etc). CA, CS and Cost Accountancy disciplines can offer high
quality professional for this purpose.
Insolvency Fund may be set up to meet the costs of the insolvency process.
Company under restructuring and liquidation to draw out of the Fund only in proportion of the
contribution made by it to the Fund in the pre-restructuring and pre-liquidation period. Application of
the Fund to the insolvency/ rehabilitation process be subject to the orders of the Tribunal.
International considerations
Insolvency law to provide for rules of jurisdiction, recognition of foreign judgments and co-operation
amongst courts in different countries.
Provisions to deal with issues concerning treaties and arrangements entered into with different
countries be framed.
Banking Laws Reforms Committee

The Bankruptcy Law Reforms Committee (Chairman: Dr.T. K. Viswanathan) submitted its report to the
Finance Ministry on November 4, 2015.
The objectives of the Committee were to resolve insolvency with:

(i) lesser time involved,
(ii) lesser loss in recovery, and
(iii) higher levels of debt financing across instruments.
The Committee has presented its report in two parts: Volume 1, with its rationale and design for legislation,
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and Volume 2, with the Draft Insolvency and Bankruptcy Bill.
Insolvency refers to a situation where individuals or organisations are unable to meet their financial
obligations. If insolvency cannot be resolved, a company proceeds towards liquidation of assets, and an
individual goes in for bankruptcy resolution.
The Committee has recommended a consolidation of the existing legal framework, by repealing two laws and
amending six others.
It has proposed to repeal the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act,
1920. In addition, it has proposed to amend: (i) Companies Act, 2013, (ii) Sick Industrial Companies (Special
Provisions) Repeal Act, 2013, (iii) Limited Liability Partnership Act, 2008, (iv) Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (v) Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 and (vi) Indian Partnership Act, 1932.
The Committee observed that currently creditors have limited power, in case the debtor defaults in making
the payment. They are able to recover only 20% of the debt amount on an average, which ultimately leads to
lending being restricted to a few large companies.
The Committee also observed that decisions regarding the defaulting firm are business decisions, and
should be taken by the creditors.
Presently, laws in India bring together the legislature, executive and judiciary for insolvency resolution.
The Committee has moved away from this approach, and has proposed to establish a Creditors committee,
where the financial creditors will have votes in proportion to their magnitude of debt. The creditors committee
will undertake negotiations with the debtor, to come up with a revival or repayment plan.
Insolvency and Bankruptcy Resolution:

The report outlines the procedure for insolvency resolution for companies and individuals. The process may
be initiated by either the debtor or the creditors.
Presently, only secured financial creditors (creditors holding collateral against loans), can file an application
for declaring a company sick. The Committee has proposed that operational creditors, such as employees
whose salaries are due, be allowed to initiate the insolvency resolution process (IRP).The entire IRP will be
managed by a licensed insolvency professional.
During the IRP, the professional will control and manage the assets of the debtor, to ensure that they are
protected, while the negotiations take place.
The Committee has proposed to set up Insolvency Professional Agencies. The agencies will admit
insolvency professionals as members and develop a code of conduct. An environment where the agencies
compete with each other, to achieve greater efficiency and better performance has been envisioned.
The report recommends speedy insolvency resolution and time bound negotiations between creditors and
the debtors. To ensure this, a 180 day time period for completion of the IRP has been recommended. For
cases with high complexity, this time period may be extended by 90 days, if 75% of the creditors agree.
Information Utilities:
The committee has proposed to establish information utilities which will maintain a range of information about
firms, and thus avoid delays in the IRP, typically caused by a lack of data.
Insolvency regulator:
The Committee has proposed to establish the Insolvency and Bankruptcy Board of India as the regulator, to
maintain oversight over insolvency resolution in the country.
The Board will regulate the insolvency professional agencies and information utilities, in addition to making
regulations for insolvency resolution in India.
Bankruptcy and Insolvency Adjudicator:
The Committee observed that individual and company insolvency resolution has similar goals. However, the
infrastructure for individual insolvency resolution has to be spread across the country. Hence, the Committee
proposes two tribunals to adjudicate grievances under the law:
(i) the National Company Law Tribunal will continue to have jurisdiction over insolvency resolution and
liquidation of companies and limited liability partnerships; and
(ii) the Debt Recovery Tribunal will have jurisdiction over insolvency and bankruptcy resolution of
individuals.
Regulatory Framework in India Corporate Insolvency

The Companies Act 2013 provides for regulation of insolvency, including rehabilitation, winding up and
liquidation of companies in time bound manner. It incorporates international best practices based on models
suggested by the United Nations Commission on International Trade Law (UNCITRAL). The powers and
jurisdiction of Company Law Board, Board of Industrial and Financial Reconstruction and High Court in this
regard, is being exercised by National Company Law Tribunal and Appellate Tribunal. The purpose of
creation of the Tribunal is to avoid multiplicity of litigation before various courts or quasi-judicial bodies or
forums regarding revival or rehabilitation or merger and amalgamation, and winding up of companies. NCLT
will have-
The power to consider revival and rehabilitation of companies a mandate presently entrusted to
BIFR under SICA.
The jurisdiction and power relating to winding up of companies presently vested in the High Court.
The winding up proceeding pending in High Courts shall stand transferred to the Tribunal.
The jurisdiction and power exercised by the Company Law Board under the 1956 Act. The
Company Law Board will stand abolished.
The Act also provides for larger role for professionals like Company Secretaries to act as interim
administrator/Company administrator and Company liquidators. Companies Act, 2013 provides following
remedies:
The Companies Act, 2013 and the insolvency and bankruptcy code 2016 includes provision for determination
of sickness, application for revival, appointment of interim/Company administrator, time bound revival
process and if revival not possible, time bound winding up process through single regulator National
Company Law Tribunal The relevant provisions are described in separate chapter.
Securitisation Act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002
(Securitisation Act ) has been enacted. SARFAESIA empowers banks or financial institutions with a
presence in India or which have been notified by the Government of India to recover on non-performing
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assets without court intervention. An asset is classified as non-performing if interest or installments of

principal due remain unpaid for more than 180 days. SARFAESIA provides three alternative methods for
recovery of non-performing assets, including taking possession, selling and leasing the assets underlying the
security interests such as movable property (tangible or intangible, including accounts receivable) and
immovable property without the intervention of the courts. The SARFESIA is not available to secured
creditors, which are not Indian banks, or financial institutions notified. The provisions of Securitisation Act are
dealt in detail in lesson no. 18.
United Kingdom Insolvency Framework

A Brief on Historical background on UK Insolvency Framework
In England, the first bankruptcy law was enacted in 1542, being Statute 34 Henry VIII. Under this act a
debtor was still looked upon as in a sense an offender, and the law was mainly for the benefit of creditors,
providing for an equal distribution of the debtor's assets among his creditors, but not releasing the debtor
from his debts. The early bankruptcy laws of England was exclusively an instrument of debt-collection: its
finality was to seize the debtors assets against the strong protections to private property offered by the
Common law, since medieval times. The procedure thus worked rather as a continuation of private remedies
with different, collective, legal instruments.
The Current Regulatory Framework in UK
The 1982 Report of the Insolvency Law review Committee, Insolvency Laws and Practice (commonly known
as the Cork Report) recommended the adoption in the United Kingdom of Unified Insolvency legislation.
Ultimately the Insolvency Act, 1986 (UK) was enacted and this encompasses both types of insolvency
administrations, including corporate restructuring.
The existing UK insolvency framework is defined by the Insolvency Act 1986. According to the Act, failing
companies are either liquidated or submitted to an insolvency process that may allow them to be rescued as
going concerns.
The Insolvency Act, 1986 deals with the insolvency of individuals and companies. The Act is divided into
three groups and 14 Schedules as follows:
Group 1 deals with Company Insolvency
Group 2 deals with Insolvency of Individuals and
Group 3 deals with Miscellaneous Matters Bearing on both Company & Individual Insolvency
Basically, a company in financial difficulties may be made subject to any of five statutory procedures.
1. administration;
2. company voluntary arrangement;
3. scheme of arrangement;
4. receivership (including administrative receivership); and
5. liquidation (winding-up).
With the exception of schemes of arrangement, which fall within the ambit of the Companies Act, 2006, these
are formal insolvency procedures governed by the Insolvency Act, 1986.
The administration procedure was introduced by the Insolvency Act, 1986 and substantially revised by the
Enterprise Act, 2002 to include a streamlined procedure allowing the company or (more often) its directors to
appoint an administrator without the involvement of the Court subject to conditions.
Firms are in fact liquidated if they become the subject of a compulsory liquidation order obtained from the
court by a creditor, shareholder or director. Alternatively, the company may itself decide to pass a liquidation
resolution subject to the approval of a creditors' meeting for the company to be wound-up (a Creditors
Voluntary Liquidation). Either way, the result of both these procedures is the winding-up of the company.
Neither process makes any attempt to rescue or sustain the company as a legal entity.
The Insolvency Act 1986 also introduced three new procedures that held out the possibility of a company
being brought back to life as a viable entity. These measures represented an attempt to emulate the rescue
culture that characterised the corporate sector in the US.
The first of these procedures Company Voluntary Arrangements (CVAs) provides a way in which a
company in financial difficulty can come to a binding agreement with its creditors.
The second procedure Administration offers companies a breathing space during which creditors are
restrained from taking action against them. During this period, an administrator is appointed by a court to put
forward proposals to deal with the companys financial difficulties.
A third option Administrative Receivership permits the appointment of a receiver by certain creditors
(normally the holders of a floating charge) with the objective of ensuring repayment of secured debts.
The Enterprise Act, 2002 attempted to embed a rescue culture by creating entry routes into administration
that did not require a court order, and simplified the means by which a company could emerge from
administration. It also prohibited with certain exceptions the right of creditors to appoint an administrative
receiver (which had previously blocked a companys ability to opt for administration).
In addition, the Act explicitly established a hierarchy of purposes for the administration process. The primary
duty of administrators was defined as rescuing the company as a going concern (a duty that does not exist
for an administrative receiver). Only if this is not practicable or not in the interests of creditors as a whole
is the administrator allowed to consider other options, such as realising the value of property in order to
make a distribution to creditors.
US Bankruptcy laws
The evolution of Insolvency Laws in US along with timeline
As we read earlier, England first established a bankruptcy law in 1542. Under the English law, bankruptcy
was treated as a criminal act punishable by imprisonment or death. Only merchants were eligible for
bankruptcy and only creditors could institute bankruptcy proceedings.
The English bankruptcy system was the model for bankruptcy laws in the English colonies in America and in
the American states after independence from England in 1776.
Early American bankruptcy laws were only available to merchants and generally involved imprisonment until
debts were paid or until property was liquidated or creditors agreed to the release of the debtor. The laws
were enacted by each individual state and were inconsistent and discriminatory. For example, the laws and
courts of one state might not enforce debts owed to citizens of other states or debts of certain types. The
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system was not uniform and some states became known as debtors havens because of their unwillingness
to enforce commercial obligations.
The lack of uniformity in bankruptcy and debt enforcement laws hindered business and commerce between
the states. The United States Constitution as adopted in 1789 provides in Article I, Section 8, Clause 4 that
the states granted to Congress the power to establish uniform laws on the subject of bankruptcies throughout
the United States.
To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout
the United States;
Article I, Section 8, Clause 4 of US Constitution
However, until 1898 there was no bankruptcy law in continuous effect in the United States. The Congress
enacted temporary bankruptcy statutes in 1800, 1841 and 1867 to deal with economic downturns. However,
those laws were temporary measures and were repealed as soon as economic conditions stabilized. The
Act of 1800 was repealed in 1803. The Act of 1841 was repealed in 1843 and the Act of 1867 only lasted
until 1878.
These early laws only permitted merchants, traders, bankers and factors to be placed in bankruptcy
proceedings. The Acts of 1800 and 1841 vested jurisdiction in the federal district courts. The district court
judges were given the power to appoint commissioners or assignees to take charge of and liquidate a
debtors property.
A permanent bankruptcy statute was not enacted until 1898. The National Bankruptcy Act of 1898 was
based upon the liquidation of a debtors non-exempt assets to pay creditors. In 1938 the law was amended
to provide for the rehabilitation or reorganization of a debtor as an alternative to liquidation of assets. The
Bankruptcy Act of 1898, together with its amendments, was known as the Bankruptcy Act. Under the
Bankruptcy Act, the district court had jurisdiction over bankruptcy cases, but could appoint a referee in
bankruptcy to oversee the administration of bankruptcy cases, the allowance of claims and the distribution of
payments to creditors. The Bankruptcy Act governed bankruptcy in the United States for 80 years.
After a series of critical studies and review of the then existing law and practice, Congress passed the
Bankruptcy Reform Act of 1978.
Since 1978
The US Congress enacted the "Bankruptcy Code" in 1978. The Bankruptcy Code, which is codified as title
11 of the United States Code, has been amended several times since its enactment. It is the uniform federal
law that governs all bankruptcy cases.
The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy
Procedure (often called the "Bankruptcy Rules") and local rules of each bankruptcy court. The Bankruptcy
Rules contain a set of official forms for use in bankruptcy cases. The Bankruptcy Code and Bankruptcy
Rules (and local rules) set forth the formal legal procedures for dealing with the debt problems of individuals
and businesses.
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code.
Chapter 7 bankruptcy leading to liquidation. In this type of bankruptcy, a court-appointed trustee or

administrator takes possession of any nonexempt assets, liquidates these assets (for example, by
selling at an auction), and then uses the proceeds to pay creditors.
Chapter 9 entitled Adjustment of Debts of a Municipality, provides essentially for reorganization.

Only a "municipality" may file under chapter 9, which includes cities and towns, as well as villages,
counties, taxing districts, municipal utilities, and school districts.
Chapter 11 entitled Reorganization, ordinarily is used by commercial enterprises that desire to

continue operating a business and repay creditors concurrently through a court-approved plan of
reorganization..
Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is
being carried out.
Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their
debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over
three to five years.
Chapter15 is to provide effective mechanisms for dealing with insolvency cases involving debtors,
assets, claimants, and other parties of interest involving more than one country.
The Evolution of U.S. Bankruptcy Law- a time line
1787 - The U.S. Constitution (Article I, sec. 8) authorizes Congress to establish uniform bankruptcy laws
throughout the nation..
Bankruptcy Act of 1800, the first federal bankruptcy law, the Act authorizes district court judges to
appoint nonjudicial commissioners to oversee and help administer bankruptcy proceedings.
1803- Citing excessive costs and corruption, Congress repeals the Act of 1800.
Bankruptcy Act of 1841 grants district courts jurisdiction in all matters and proceedings in
bankruptcy, including developing rules for proceedings and appointing bankruptcy commissioners and
assignees.
1843 High administrative costs, lack of state law exemptions, and creditor frustration lead to the 1841
Acts repeal.
Bankruptcy Act of 1867 (14 Stat. 517) marks the first time Congress refers to district courts as
constituted courts of bankruptcy with original jurisdiction in all bankruptcy matters.
1874 Congress amends the 1867 Act so that debtors can create a plan for distributing assets among
creditors as a way to settle a case
1878 In response to abuses and excessive fees, Congress repeals the Acts of 1867 and 1874.
Bankruptcy Act of 1898 (30 Stat. 544), is the first long-term bankruptcy legislation. In effect for the next
80 years, the Act establishes the position of referee to oversee administration of bankruptcy cases.
Referees are appointed to two-year terms by the district judge and can be removed only for
incompetency, misconduct, or neglect of duty. They are paid a percentage of funds brought into the
estate. Besides the referee position, the 1898 Act establishes the office of trustee (previously assignee)
in bankruptcy. In general, the Act is perceived as pro-debtor, establishing relatively narrow exceptions to
discharge. Corporations are ineligible for voluntary relief, butsome can be involuntary debtors.
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(Amendments enacted in 1910 make corporations eligible for voluntary bankruptcy.

Chandler Act of 1938 (52 Stat. 840, 841), an overhaul of the 1898 Act, reworks previous reorganization
amendments into Chapters:
Bankruptcy Reform Act of 1978 (92 Stat. 2657), superseding the 1898 Act, establishes bankruptcy
courts in each district and allows for separate bankruptcy judges, appointed by the President and
confirmed by the Senate, to serve 14-year terms beginning in 1984. While bankruptcy courts may now
hear all matters arising in or related to bankruptcy cases, judges remain non- Article III adjuncts of the
district courts. Also, a new Chapter 11 (replacing X, XI, and XII) and Chapter 13, which offers a super
discharge, make filing and reorganizing easier for businesses and individuals.
Bankruptcy Reform Act of 1994 (Public Law 103-394) creates the second National Bankruptcy
Commission to investigate changes in bankruptcy law. The Act expands bankruptcy courts ability to
hold jury trials in some proceedings and encourages circuit councils to establish bankruptcy appellate
panels.
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 attempts to overhaul 1978
code with specific reference to consumer protection, restoring personal responsibilities and integrity in
the bankruptcy system.
LESSON ROUND UP
Insolvency is when an individual, corporation or other organization cannot meet its financial obligations for
paying debts as they are due. Bankruptcy is not exactly the same as insolvency.
The Presidency Towns Insolvency Act, 1909 and Provisional Insolvency Act, 1920 are two major enactments
that deal with personal insolvency.
Corporate insolvencies in India are majorly governed by the Companies Act, 2013,The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002.
In England, the first bankruptcy law was enacted in 1542, being Statute 34 Henry VIII.
The existing UK insolvency framework is defined by the Insolvency Act 1986.
The US Congress enacted the "Bankruptcy Code" in 1978.
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code.
Chapter 7 bankruptcy leading to liquidation.
Chapter 9, entitled Adjustment of Debts of a Municipality, provides essentially for reorganization.
Chapter 11, entitled Reorganization, ordinarily is used by commercial enterprises that desire to continue
operating a business.
Chapter 12 allows a family farmer or fisherman to continue to operate the business while the plan is being
carried out.
Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts.
Chapter 15 is to provide effective mechanisms for dealing with insolvency cases involving debtors, assets,
claimants, and other parties of interest involving more than one country.
SELF TEST QUESTIONS

1. Explain the corporate insolvency framework in India.
2. European insolvency framework has been taken as base in many countries. Explain.
3. Write briefly about the evolution of insolvency framework in the US.
4. Explain different modes of corporate insolvency under US bankruptcy code.
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Lesson 17
Corporate Insolvency and Resolution
Process
Insolvency and Bankruptcy Code, 2016 The Insolvency and Bankruptcy Code, 2016 that
received Presidents assent on May 28, 2016, is a
Introduction
consolidated legislation providing for insolvency
Background resolution process of individuals, partnership firms,
Institutional Infrastructure Limited Liability Partnerships and Corporate. The
Code offers a uniform, comprehensive insolvency
Functions of Insolvency Professional
legislation encompassing all companies, partnerships
Agencies
and individuals. NCLT and Debt Recovery Tribunal
Duties of Insolvency Professionals etc. play a vital role as an Adjudicating Authority. The
Corporate Insolvency Resolution code facilitates time-bound process for insolvency
Process resolution and liquidation. It proposes to repeal and
amend a number of legislations. The Code also
introduces new regulator Insolvency and Bankruptcy
Board of India (The Board). The adjudication
process in relation to Corporates and LLPs would be
under National Company Law Tribunal and in relation
to individuals and partnerships under Debt Recovery
Tribunal. The insolvency process will be handled by
insolvency professionals who shall be a Member of
the Insolvency Professional Agencies and registered
with the Board.
This chapter also covers basics of corporate

insolvency resolution process under The Insolvency
and Bankruptcy Code 2016. It also covers
consolidated step by step flow charts on insolvency
resolution process by financial creditor, operational
creditor and corporate debtor, role of insolvency
resolution professional etc.
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1. Historical Background
In the wake of sickness in the countrys industrial climate prevailing in the eighties, the Government of India
set up in 1981, a Committee of Experts under the Chairmanship of Shri T.Tiwari to examine the matter and
recommend suitable remedies therefore. Based on the recommendations of the Committee, the Government
of India enacted a special legislation namely, the Sick Industrial Companies (Special Provisions) Act, 1985 (1
of 1986) commonly known as the SICA.
The main objective of SICA is to determine sickness and expedite the revival of potentially viable units or
closure of unviable units (unit here in refers to a Sick Industrial Company). It was expected that by revival,
idle investments in sick units will become productive and by closure, the locked up investments in unviable
units would get released for productive use elsewhere.
The Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called the Act) was enacted with a
view to securing the timely detection of sick and potential sick companies owning industrial undertakings, the
speedy determination by a body of experts of the preventive, ameliorative, remedial and other measure
which need to be taken with respect to such companies and the expeditious enforcement of the measures so
determined and for matters connected therewith or incidental thereto.
The Board of experts named the Board for Industrial and Financial Reconstruction (BIFR) was set up in
January, 1987 and functional with effect from 15th May 1987. The Appellate Authority for Industrial and
Financial Reconstruction (AAIRFR) was constituted in April 1987. Government companies were brought
under the purview of SICA in 1991 when extensive changes were made in the Act including, inter-alia,
changes in the criteria for determining industrial sickness.
The major constraint of the SICA was that it was applicable only to sick industrial companies keeping away
other companies which are in trading, service or other activities. The Act was modified in 1991 to include
within its purview the Government companies by Industrial Companies (Special Provisions) Amendment Act,
1991 which came into force w.e.f. 28.12.91.
However, the overall experience was not satisfactory because of various factors including non-applicability of
SICA to non industrial companies and small/ancillary companies, misuse of immunity provided under Section
22 of SICA etc.
In view of this, the Insolvency and Bankruptcy Code, 2016 was notified on the May 28, 2016.
Notification of National Company Law Tribunal under the SICA (Special Provisions) Repeal
Act 2003
The Ministry of Finance (MoF), vide notification nos. S.O. 3568(E) and 3569(E), has notified 1 December,
2016 (appointed date) as the date on which the provisions of Sick Industrial Companies (Special Provisions)
Repeal Act, 2003 (Repeal Act) shall come into force. The Repeal Act provides for repeal of the Sick
Industrial Companies (Special Provisions) Act, 1985 (SICA) and related matters. Therefore, the SICA is
repealed with effect from 1 December, 2016. The BIFR and AIFR stand dissolved with effect from that date,
and all proceedings before them stand abated.
The section 4(b) of the SICA (Special Provisions) Repeal Act 2003 was also amended by section 252 of the
Insolvency Code 2016.
Ministry of Corporate Affairs through its Gazette Notification Dated 1st November 2016 appointed 1st day of
November 2016 to give effect to section 252 of the Insolvency Code.
Lesson 17 Corporate Insolvency and Resolution Process 315
The effect of the amended section 4(b) is that from the date notified by the Government all proceedings
pending before the BIFR and AAIFR shall stands abated and will comes to an end. However, it shall be
open to the company whose appeal, reference or inquiry has abated to initiate fresh proceedings (that is, the
corporate insolvency resolution process under the Insolvency Code) before the National Company Law
Tribunal (NCLT) in accordance with the provisions of Insolvency Code, within 180 days of the
commencement of the Insolvency Code and to get the protection under section 14 of the IBC 2016.
Transfer of Pending Proceedings in Courts and BIFR

The Ministry of Corporate Affairs had issued the Gazette Notification dated 07th December 2016 relating to
(Transfer of Pending Proceedings) Rules, 2016 appointing 15th December 2016 for Transfer of Pending
proceedingsrelating to revival of sick companies from High Court and Board of Industrial and Financial
Reconstruction to National Company Law Tribunal .
Status of Appeal made under the SICA Act 1985

At present the SICA Act, 1985 is repealed and the company in respect of which such appeal or reference or
inquiry stands abated in BIFR and AAIFR may make reference to NCLT under the Insolvency and
Bankruptcy Code 2016 by filing fresh application for Corporate Insolvency Resolution Process (CIRP) within
180 days from the commencement of IBC 2016.
The Insolvency and Bankruptcy Code 2016

The Insolvency and Bankruptcy Code,2016 is an Act to consolidate and amend the laws relating to
reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time
bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability
of credit and balance the interests of all the stakeholders including alteration in the order of priority of
payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters
connected therewith or incidental thereto.
Background
In India, there were multiple laws like Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the
Recovery of Debt Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Companies Act, 2013
dealing with insolvency and bankruptcy of companies, limited liability partnerships, partnerships firms,
individuals and other legal entities in India. As a result High Courts, District Courts, the Company Law Board,
the Board for Industrial and Financial Reconstruction (BIFR) and the Debt Recovery Tribunals (DRTs), have
jurisdiction at various stages, giving rise to the potential systemic delays and complexities in the process
whereas liquidation of companies is handled by the high courts, individual cases are dealt with under the
Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. The present legal framework
does not aid lenders in effective and timely recovery of defaulted assets and causes undue strain on the
Indian credit system. Insolvency means the situation where an entity cannot raise enough cash to meet its
obligations or to pay debts as they become due for payment and bankruptcy means when a person voluntary
declares him as an insolvent and goes to the court. On declaring the person as bankrupt, the court is
responsible to liquidate the personal property of the insolvent and distribute it among the creditors of the
insolvent. In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B.
Eradi, Judge of Supreme Court of Indiato examine and make recommendations with regard to the desirability
of changes in existing law relating to winding up of companies so as to achieve more transparency and avoid
delays in the final liquidation of the companies. The committee completed its work and submitted its report to
316 PP-CRVI
the Central Government in the year 2000. The committee recommended that the jurisdiction, power and
authority relating to winding up of companies should be vested in a National Company Law Tribunal instead
of the High Court.
In December 2002, Indian Parliament passed the Companies (Second Amendment) Act, 2002 to restructure
the Companies Act, 1956 including the setting up of NCLT and NCLAT. Dr J JIrani committee was set up to
deal with of the Second Amendment Act.. On 31st May, 2005, Dr J JIrani committee handed over its report to
Government of India. Key recommendations of the committee were time bound proceedings, applicability
and accessibilities, moratorium and suspension of proceedings, operating agencies, appointment of
Administrators and their duties, Creditors committee and liquidators, increased role of professionals,
insolvency practitioners, cross border insolvency etc.
Considering the abovementioned recommendations, the Government set in motion a plan to overhaul the
existing bankruptcy laws and replace them with one that will facilitate easy and time-bound closure of
businesses. The draft legislation was based on the report of a high-level panel headed by former law
secretary T.K. Viswanathan. The Finance Ministry put up the Insolvency and Bankruptcy Bill, 2015 drafted by
a specially constituted 'Bankruptcy Law Reforms Committee' (BLRC) under the Ministry of Finance. on its
website for public comments.
After a public consultation process and recommendations from a joint committee of Parliament, (both houses
of Parliament) it was passed on 05th May, 2016 by the Parliament as The Insolvency and Bankruptcy Code,
2016 and came into force vide notification dated 28th May, 2016. As the legislation of the Code is a
historical development for economic reforms in India, its effect will be seen in due course when the
institutional infrastructure and implementing rules as envisaged under the Code are formed
Multiplicity of laws and adjudicating authorities for insolvency and bankruptcy of various entities were a
hindrance towards resolution of recovery problems of creditors and declaration of insolvency, their revival
plan and liquidation of corporate entities. The objective of Insolvency and Bankruptcy Code, 2016 is to
consolidate multiple laws and adjudicating authorities dealing with insolvency, bankruptcy, revival and/or
liquidation of various entities including individual, partnership firms, corporate entities etc. Earlier laws
pertaining to DRT and SARFAESI were the exclusive forums for banks/financial institutions while BIFR and
Companies Act had limited application for sick companies, their revival and/or liquidation. The Insolvency
and Bankruptcy Code, 2016 will overcome these kinds of problems.
The Code
The Insolvency and Bankruptcy Code, 2016 (the Code) extends to the whole of India (except Part III which
deals with Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms of the Code which
shall not extend to the State of Jammu and Kashmir).
The Code offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships
firms, Limited Liability Partnership firms and individuals (other than financial firms). The Government is
proposing a separate framework for bankruptcy of failing banks and financial sector entities.
One of the fundamental features of the Code is that it allows creditors to assess the viability of a debtor as a
business decision, and agree upon a plan for its revival or a speedy liquidation. The Code creates a new
institutional framework, consisting of a regulator, insolvency professionals, information utilities and
adjudicatory mechanisms, that will facilitate the formal and time bound insolvency resolution process and
liquidation.
The Code addresses several problems that plague the current system. It consolidates multiplicity of laws,
provides a time bound process for resolution of insolvency, makes information available for rational decision-
making, shortens and clarifies the appeal process and manner of distribution of recovery proceeds. The
Code outlines a 2-stage process with the first stage being the insolvency resolution process and the second
stage being liquidation process triggered upon failure of resolution.
The Objectives
The objective of the Insolvency and Bankruptcy Code is to consolidate and amend the laws relating to
reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time
bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability
of credit and balance the interests of all the stakeholders including alteration in the priority of payment of
government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or
incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would
support development of credit markets and encourage entrepreneurship. It would also improve Ease of
Doing Business, and facilitate more investments leading to higher economic growth and development.
The Code seeks to provide for designating the NCLT and DRT as the Adjudicating Authorities for corporate
persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy. The
Code separates commercial aspects of insolvency and bankruptcy proceedings from judicial aspects. The
Code also seeks to provide for establishment of the Insolvency and Bankruptcy Board of India (Board) for
regulation of insolvency professionals, insolvency professional agencies and information utilities. Till the
Board is established, the Central Government shall exercise all powers of the Board or designate any
financial sector regulator to exercise the powers and functions of the Board. Insolvency professionals will
assist in completion of insolvency resolution, liquidation and bankruptcy proceedings envisaged in the Code.
Information Utilities would collect, collate, authenticate and disseminate financial information to facilitate such
proceedings. The Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund
of India for the purposes specified in the Code.
An insolvency resolution process can be initiated by either a creditor, or by the debtor, upon an event of
default. A revival plan is to be proposed and agreed by the parties within 180 days from the admission of the
application. Making this process time bound is very essential as the value of the assets can erode
substantially with the passage of time. In event of disagreement or if a decision is not taken within the
stipulated time frame the applicant automatically moves to the next stage of Insolvency Process.
The liquidation process will be led by a regulated insolvency professional, the liquidator. The liquidator will
form an estate of the assets of the company and hold the estate as a fiduciary for the benefit of all the
creditors. The secured creditors may relinquish their security interest in the estate, or realise its security post
verification from the liquidator. The recoveries that are obtained are paid out to the various claimants through
a well-defined waterfall process. The cost of insolvency will be paid first followed by workmens dues and
secured creditors on pari-pasu basis. Next in line will be unsecured creditors followed by government dues.
Insolvency and Bankruptcy

The terms insolvency and bankruptcy arise from one common feature namely inability to pay the debts.
Blacks Law Dictionary defines the terms as under:
Insolvency:
The condition of a person who is insolvent; inability to pay ones debts; lack of means to pay ones debts.
Such a relative condition of a mans assets and liabilities that the former, if all made immediately available,
would not be sufficient to discharge the latter. Or the condition of a person who is unable to pay his debts as
they fall due, or in the usual course of trade and business.
318 PP-CRVI
Bankruptcy:
The state or condition of one who is a bankrupt; amenability to the bankruptcy laws; the condition of one who
has committed an act of bankruptcy, and is liable to be proceeded against by his creditors therefor, or of one
whose circumstances are such that he is entitled, on his voluntary application, to take the benefit of the
bankruptcy laws. The term is used in a looser sense as synonymous with insolvency.
Important Definition Under Corporate Insolvency Resolution Process Regulations

As per Insolvency and Bankruptcy Code 2016, Corporate Insolvency Resolution process can be initiated by
(a) Financial Creditor
(b) Operational Creditor and
(c) Corporate Debtor.
It is important to understand the terms financial debt, operational debt, financial creditor, operational creditor
etc.
debt means a liability or obligation in respect of a claim which is due from any person and includes a
financial debt and operational debt;
creditor means any person to whom a debt is owed and includes a financial creditor, an operational
creditor, a secured creditor, an unsecured creditor and a decreeholder;
corporate person means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a
limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability
Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being
in force but shall not include any financial service provider;
corporate debtor means a corporate person who owes a debt to any person;
insolvency professional means a person enrolled under section 206 with an insolvency professional
agency as its member and registered with the Board as an insolvency professional under section 207;
insolvency professional agency means any person registered with the Board under section 201 as an
insolvency professional agency;
information utility means a person who is registered with the Board as an information utility under section
210;
financial creditor means any person to whom a financial debt is owed and includes a person to whom
such debt has been legally assigned or transferred to;
financial debt means a debt alongwith interest, if any, which is disbursed against the consideration for the
time value of money and includes
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance credit facility or its de-materialised
equivalent;
(c) any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures,
loan stock or any similar instrument;
(d) the amount of any liability in respect of any lease or hire purchasecontract which is deemed as a
finance or capital lease under the IndianAccounting Standards or such other accounting standards
as may be prescribed;
(e) receivables sold or discounted other than any receivables sold on nonrecourse basis;
(f) any amount raised under any other transaction, including any forward sale or purchase agreement,
having the commercial effect of aborrowing;
(g) any derivative transaction entered into in connection with protection against or benefit from
fluctuation in any rate or price and for calculating the value of any derivative transaction, only the
market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee, indemnity,bond, documentary letter of
credit or any other instrument issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items
referred to in sub-clauses (a) to (h) of this clause;
financial information, in relation to a person, means one or more of the following categories of
information, namely :
(a) records of the debt of the person;
(b) records of liabilities when the person is solvent;
(c) records of assets of person over which security interest has been created;
(d) records, if any, of instances of default by the person against any debt;
(e) records of the balance sheet and cash-flow statements of the person;and
(f) such other information as may be specified.
financial service includes any of the following services, namely :

(a) accepting of deposits;
(b) safeguarding and administering assets consisting of financial products, belonging to another
person, or agreeing to do so;
(c) effecting contracts of insurance;
(d) offering, managing or agreeing to manage assets consisting of financial products belonging to
another person;
(e) rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of
(i) buying, selling, or subscribing to, a financial product;
(ii) availing a financial service; or
(iii) exercising any right associated with a financial product or financial service;
(f) establishing or operating an investment scheme;
(g) maintaining or transferring records of ownership of a financial product;
(h) underwriting the issuance or subscription of a financial product; or
(i) selling, providing, or issuing stored value or payment instruments or providing payment services;
320 PP-CRVI
financial service provider means a person engaged in the business of providing financial services in
terms of authorisation issued or registration granted by a financial sector regulator;
financial sector regulator means an authority or body constituted under any law for the time being in
force to regulate services or transactions of financial sector and includes the Reserve Bank of India, the
Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, the
Pension Fund Regulatory Authority and such other regulatory authorities as may be notified by the Central
Government;
operational creditor means a person to whom an operational debt is owed and includes any person to
whom such debt has been legally assigned or transferred;
operational debt means a claim in respect of the provision of goods or services including employment or a
debt in respect of the repayment of dues arising under any law for the time being in force and payable to the
Central Government, any State Government or any local authority.
Institutions under Insolvency and Bankruptcy Code, 2016

The Code provides for setting up of the following institutions to ensure effective governance and
implementation of the provisions of the law.
The Insolvency and Bankruptcy Board of India
Information Utilities Insolvency Professional Agencies
Insolvency Professional
(a) Insolvency and Bankruptcy Board of India (IBBI)

Section 3 (1) of IBC, 2016: Board means the Insolvency and Bankruptcy Board of India established under
sub-section (1) of Section 188. The Code provides for the establishment of the Board called Insolvency and
Bankruptcy Board of India.
The Board shall consist of the following members, who shall be appointed by the Central Government:
1. Chairperson
2. Three members amongst the officers of the Central Government not below the rank of Joint
Secretary or equivalent, one of each to represent the Ministry of Finance, the Ministry of Corporate
Affairs and Ministry of Law, ex officio.
3. One member nominated by the Reserve Bank of India, ex officio
4. Five other members to be nominated by the Central Government, out of which three shall be the
whole-time members.
The Chairperson and the other members shall be persons of ability, integrity and standing, who have shown
capacity in dealing with problems relating to insolvency or bankruptcy and have special knowledge and
experience in the field of law, finance, economics, accountancy or administration.
Powers of the Board

The Board has the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while
trying a suit, in respect of the following matters, namely:
(i) The discovery and production of books of account and other documents, at such place and such
time as may be specified by the Board;
(ii) Summoning and enforcing the attendance of persons and examining them on oath;
(iii) Inspection of any books, registers and other documents of any person at any place;
(iv) Issuing of commissions for the examination of witnesses or documents. (Sec-196).
Role of the Board includes

1. Regulating all matters related to insolvency and bankruptcy process.
2. Setting out eligibility requirements of insolvency intermediaries i.e., Insolvency Professionals,
Insolvency Professional Agencies and Information Utilities.
3. Regulating entry, registration and exit of insolvency intermediaries.
4. Making model bye laws for Insolvency Professional Agencies.
5. Setting out regulatory standards for Insolvency Professionals.
6. Specifying the manners in which Information Utilities can collect and store data.
(b) Insolvency Professional Agencies (IPAs)

Section 3 (20) of IBC, 2016: Insolvency professional agency means any person registered with the Board
under section 201 as an insolvency professional agency These agencies are required to get registered and
obtain certificate of registration from the Board. The Board shall have regard to the following principles while
registering the insolvency professional agencies, namely: 1. Promote the professional development of and
regulation of insolvency professionals. 2. Promote good professional and ethical conduct amongst insolvency
professionals. 3. Protect the interests of debtors, creditors etc. 4. Promote the services of competent
insolvency professionals to cater to the needs of debtors, creditors etc. 5. Promote the growth of insolvency
professional agencies for the effective resolution of insolvency and bankruptcy processes under this Code.
The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, was notified on
November 23, 2016, which provides that an individual whopossess such qualifications and experience and
who has passed qualifying examinations shall be enrolled with the insolvency professional agency as a
professional member. The Insolvency Professional shall act as a Resolution professional or as Liquidator.
The Duties of Resolution Professional inter alia includes:-

1. Conducting Resolution process.
2. Conducting Meeting of Creditors
3. Management of Operations of Corporate debtor as going concern
4. Preparation of Information Memorandum
5. Submission of resolution plan
6. Conducting of Liquidation process under the order of Adjudicating Authority if the resolution plan is
not accepted or approved etc.
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The Insolvency and Bankruptcy Board of India (Insolvency Professional Agencies)

Regulations, 2016 (IPA Regulations)
The IPA Regulations provides that only a company registered under section 8 of the Companies Act, 2013,
with the sole object of functioning as an insolvency professional agency under the Insolvency Code shall be
entitled to be registered as an insolvency professional agency (IPA).
At present the following few Insolvency Professional Agencies are registered under section 8 of the
Companies Act, 2013 and registered with Insolvency and Bankruptcy Board of India.
1. ICSI Insolvency Professionals Agency.
2. Insolvency Professional Agency of Institute of Cost Accountants of India.
3. Indian Institute of Insolvency Professionals of ICAI.
Functions of the Insolvency professional agencies are:-

1. To grant membership to persons who fulfil all requirements set out in its byelaws on payment of
Membership fee.
2. Lay down standards of professional conduct for its members;
3. Monitor the performance of its members;
4. Safeguard the rights, privileges and interests of insolvency professionals who are its members;
5. Suspend or cancel the membership of insolvency professionals who are its members on the
grounds set out in its bye-laws;
6. Redress the grievances of consumers against insolvency professionals who are its members; and
7. Publish information about its functions, list of its members, performance of its members and such
other information as may be specified by regulations.
(c) Insolvency Professionals(IPs)

Section 3 (19) of IBC, 2016: Insolvency Professional means a person enrolled under section 206 with an
insolvency professional agency as its member and registered with the Board as an insolvency professional
under section 207. The Code provides for insolvency professionals as intermediaries who would play a key
role in the efficient working of the insolvency and bankruptcy process. These professionals will be enrolled as
a member of an insolvency professional agency and registered with Insolvency and Bankruptcy Board of
India. The Board may specify the categories of professionals or persons possessing such qualifications and
experience in the field of finance, law, management, insolvency or such other field, as it deems fit.
Functions of Insolvency Professionals

Every Insolvency Professional shall abide by the following code of conduct:-
To take reasonable care and diligence while performing his duties.
To comply with all requirements and terms and conditions specified in the bye laws of the Insolvency
professional agency of which he is a member.
To allow the insolvency professional agency to inspect his records.
To submit a copy of the records of every proceedings before the adjudicating authority to the board as
well as to the Insolvency professional agency of which he is a member.
To perform his function in such manner and subject to such conditions as may be prescribed.
Therefore, The Code provides for insolvency professionals as intermediaries who would play a key role in
the efficient working of the bankruptcy process. The Code contemplates insolvency professionals as a class
of regulated but private professionals having minimum standards of professional and ethical conduct.
In the resolution process, the insolvency professional verifies the claims of the creditors, constitutes a
creditors committee, runs the debtor's business during the moratorium period and helps the creditors in
reaching a consensus for a revival plan. In liquidation, the insolvency professional acts as a liquidator and
bankruptcy trustee.
(d) Information Utility

Section 3 (21) of IBC, 2016: Information Utility means a person who is registered with the Board as an
information utility under Section 210.
A person shall obtain a certificate of registration by the Board to carry on its business as information utility
under this Code. The purpose of this intermediary (Information utility) is to remove information dependency
on the debtors management for critical information that is required to resolve insolvency. And this
information would be available to creditors, resolution professionals, liquidators and other stakeholders in
insolvency and bankruptcy proceedings.
Obligations of Information Utility:-

Collect, collate, authenticate and disseminate financial information of debtors in a universally accessible
format with in a centralised electronic databases.
Get the information received from various persons authenticated by all concerned parties before storing
such information.
Provide access to the financial information stored by it to any person who intends to access such
information.
Have the ability to operate with other information utilities.
The Code requires creditors to provide financial information of debtors to multiple utilities on an ongoing
basis. Such information would be available to creditors, resolution professionals, liquidators and other
stakeholders in insolvency and bankruptcy proceedings. The purpose of this is to remove information
asymmetry and dependency on the debtor's management for critical information that is needed to swiftly
resolve insolvency
Accordingly the Information Utilities will serve as a repository of financial information of a company. The
financial and operational creditors will have an obligation to submit the relevant information to the IUs. The
information maintained in these IUs will be available to all relevant parties on the payment of a fee.
(e) Adjudication Authorities:

The National Company Law Tribunal is the adjudicating authority to deal with the insolvency matters of
Companies and Limited Liability Partnership Firms. Appeals from NCLT orders lie to the National Company
Law Appellate Tribunal and thereafter to the Supreme Court of India.
NCLAT shall be the appellate authority to hear appeals arising out of the orders passd by the Board in
respect of Insolvency Professional Agency or Insolvency Professional or Information Utilities.
The Debt Recovery Tribunal is the adjudicating authority to deal with the insolvency & bankruptcy
matters of Individual & Partnership Firms. Appeals from DRT orders lie to the Debt Recovery Appellate
Tribunal and thereafter to the Supreme Court of India.
324 PP-CRVI
In keeping with the broad philosophy that insolvency resolution must be commercially and professionally
driven (rather than court driven), the role of adjudicating authorities is limited to ensuring due process
rather than adjudicating on the merits of the insolvency resolution.
Insolvency Resolution and Liquidation for Corporate Persons

The Insolvency Adjudication Process
Individual Insolvency of Insolvency of Limited Corporate Insolvency

Insolvency Partnership Firm Liability Partnership
Debt Recovery Tribunal National Company law Tribunal

Adjudication Authority (NCLT) - Adjudicating Authority
Appeal to Debt Recovery Appeal to National Company Law

Appellate tribunal (DRAT) Appellate Tribunal (NCLAT)
Appeal to Supreme Court
Part II of the Code deals with matters relating to the insolvency and liquidation of Companies and Limited
Liability Partnership Firms where the minimum amount of the default is Rupees one lakh and this amount
can be increased up to Rupees one crore by the Central Government.
Filing of an Application before the Adjudicating Authority:

Any of the following can file an application before the Adjudicating authorities:
Financial Creditors are the creditors to whom corporate debtor owes financial debt
Operational Creditors are the creditors to whom corporate debtor owes operational debts such as claims
for goods and services, employees, etc.
Corporate Applicant means corporate debtor or its shareholders, partner, management personnel or
employees
On receipt of an application, the Adjudicating Authority shall within fourteen days by order may:
Admit the application if it is complete
Reject the application, if it is incomplete
Before rejecting an application, the Adjudicating Authority gives a notice to the applicant to rectify the defect
from the application within seven days of receipt of such notice from the Adjudicating Authority.
Persons who are not entitled to initiate corporate insolvency resolution

The following persons shall not be entitled to make application to NCLT for initiation of corporate insolvency
resolution process:-
(a) a corporate debtor undergoing a corporate insolvency resolution process; or
(b) a corporate debtor having completed corporate insolvency resolution process twelve months
preceding the date of making of the application; or
(c) a corporate debtor or a financial creditor who has violated any of the terms of resolution plan which
was approved twelve months preceding the date of making application; or
(d) a corporate debtor in respect of whom a liquidation order has been passed so that finality of the
liquidation order is ensured.
For making an application, a corporate debtor includes a corporate applicant in respect of such corporate
debtor
Application to NCLT for initiation of Corporate Insolvency Resolution Process

For making application for initiation of corporate insolvency resolution process, the eligible persons will have
to take the following steps keeping in view their status as applicants:
Application by financial creditor
A financial creditor can file application either by itself or jointly with other financial creditor(s) when a
default in respect of a financial debt owed not only to the applicant financial creditor, but to any other
financial creditor of the corporate debtor is made.
The application shall be made in prescribed form in prescribed manner and shall be accompanied by
prescribed fee.
The following documents shall be enclosed with the application:-
(a) Record of the default recorded with the information utility or such other record or evidence of default
as may be specified. (Information utility means a person who is registered with the Insolvency and
Bankruptcy Board of India as an information utility under section 210 of the Code.)
(b) The name of the resolution professional proposed to act as an interim resolution professional; and
(c) Any other information as may be specified by the Insolvency and Bankruptcy Board of India.
The application is to be made to the National Company Law Tribunal (NCLT) which is designated as the
Adjudicating Authority for the purpose.
If the NCLT, within 14 days of receipt of the application is satisfied on the basis of the evidence furnished
that a default has occurred and the application is complete and there is no disciplinary proceeding is pending
against the proposed professional, it shall admit the application and within 7 days of the admission of the
application communicate the order of admission to the financial creditor and the corporate debtor concerned.
The corporate insolvency process shall commence from the date of admission of the application.
Where, however, default is not made or the application is incomplete or any disciplinary proceeding is
pending against the proposed professional, NCLT may reject the application within 14days of the receipt of
the application and it shall, within 7 days of rejection of the application communicate the order of rejection to
the financial creditor.
326 PP-CRVI
Application by operational creditor
On occurrence of the default, the operational creditor has to deliver a demand notice of unpaid
operational debtor or copy of invoice demanding repayment of the amount involved in the default to the
corporate debtor in the prescribed form and prescribed manner.
The corporate debtor must, within 10 days of the receipt of the demand notice or the copy of the invoice
as above, bring to the notice of the operational creditor existence of any dispute, if any, and record of
the pendency of any suit or arbitration proceeding filed before the receipt of the notice or the copy of the
invoice in relation to such dispute. Where the amount of debt has been already paid, the corporate
debtor must bring to the notice of the operational debtor the repayment of unpaid operational debt by
sending an attested copy of the record of electronic transfer of unpaid amount from the bank account of
the corporate debtor or by sending an attested copy of the record that the operational creditor has
encashed the cheque issued by the corporate debtor.
After the expiry of 10 days from the date of delivery of demand notice or the copy of the invoice, if the
operational creditor does not receive payment or notice of dispute as above, the operational creditor
may file application to NCLT in prescribed form and in prescribed manner and the application has to be
accompanied by prescribed fee for initiation of corporate insolvency resolution process.
The following documents shall be enclosed to the application:-

(a) Copy of the invoice demanding payment or demand notice delivered by the operational creditor to
the corporate debtor;
(b) an affidavit to the effect that there is no notice given by the corporate debtor relating to the dispute
of the unpaid operational debt;
(c) copy of the certificate from the financial institutions maintaining accounts of the operational creditor
confirming that there is no payment of an unpaid operational debt by the corporate debtor; and
(d) such other information as may be specified by the Board.
An operational creditor initiating corporate insolvency resolution process may propose a resolution
professional to act as an interim resolution professional.
Within 14 days of the receipt of the application, NCLT shall admit the application if the following requirements
are fulfilled:-
(a) The application is complete.
(b) There is no repayment of the unpaid operational debt.
(c) The invoice or notice for payment to the corporate debtor has been delivered by the corporate
creditor.
(d) No notice of dispute has been received by the operational creditor or there is no record of dispute in
the information utility.
(e) There is no disciplinary proceeding pending against any resolution professional proposed, if any.
The decision of admission of the application will be communicated by NCLT to the operational debtor and the
corporate debtor. The corporate insolvency resolution process shall commence from the date of admission of
the application.
NCLT may reject the application in the following circumstances:-

(a) if the application is incomplete;

(b) if there has been repayment of the unpaid operational debt;
(c) if the creditor has not delivered the invoice or notice for payment to the corporate debtor;
(d) if the notice of dispute has been received by the operational creditor or there is a record of dispute
in the information utility; and
(e) if any disciplinary proceeding is pending against any proposed resolution professional.
Before rejecting the application, NCLT will have to give notice to the applicant to rectify the defect in his
application within 7 days of such notice from NCLT. NCLT shall communicate the decision of rejection of the
application to the operational creditor and the corporate debtor.
Application by the corporate debtor
Where a corporate debtor has committed a default, a corporate applicant thereof may file an application to
NCLT for initiating corporate insolvency resolution process by taking the following steps:-
The application shall be filed in prescribed form containing prescribed particulars in prescribed manner
and the application shall be accompanied by prescribed fee.
Corporate debtor shall enclose the following documents to the application:-

(a) Its books of account and such other documents relating to such period as may be specified by the
Board;
(b) The particulars of the resolution professional proposed to be appointed as an interim resolution
professional.
The NCLT shall, by an order, admit the application within 14 days of the receipt of the application if it is
complete. The corporate insolvency resolution process shall commence from the date of admission of the
application.
If the application is incomplete, NCLT may reject the application, but before rejecting the application, NCLT
shall give notice to the applicant to rectify the defects in the application within 7 days from the date of receipt
of the notice.
Timelines for completion of Insolvency Resolution Process
The Corporate Insolvency resolution process shall be completed within one hundred and eighty days from
the date the application is admitted by the National Company Law Tribunal. If the process cannot be
completed within one hundred and eighty days then one time extension of ninety days subject to resolution
passed at a meeting of the committee of creditors by a vote of seventy-five percent of the voting shares.
Here, committee of creditors means the committee which shall comprise of all financial creditors of the
Company or Limited Liability Partnership Firms. After admission of the application, National Company Law
Tribunal shall by an order:
Declare A Moratorium
Cause A Public Announcement
Appoint A Interim Resolution Professional
Moratorium
The NCLT a moratorium on the debtors operations for the period of the Insolvency Resolution orders
328 PP-CRVI
Process. This operates as a calm period during which no judicial proceedings for recovery, enforcement of
security interest, sale or transfer of assets/ legal rights/ beneficial interest can take place against the debtors.
The order of moratorium shall have effect till the completion of corporate insolvency process.
Public announcement
The public announcement shall contain the following information about the corporate debtor:
1. Name and address
2. Name of the Registrar with which it is incorporated
3. Last date for submission of claims
4. Details of interim professionals
5. Penalties for false or misleading claims
6. Date on which the corporate insolvency resolution process shall close
Appointment of interim resolution professional

The Adjudicating Authority shall appoint an Interim Resolution Professional within fourteen days from the
insolvency commencement date.
Functions of interim professional are:

To take over the management of the affairs of the corporate debtor.
All officers and managers of the corporate debtor shall act on the instructions of the interim
professionals.
Have access to all books of account, record and other relevant documents shall be managed by these
professionals
Committee of creditors
The Interim Professionals identify the financial creditors and constitute a committee of creditors. Operational
creditors are allowed to attend the meetings of committee if their dues are not less than ten percent of the
debt but they do not have voting power. Each decision of the committee requires a seventy five per cent
majority vote.
Appointment of final resolution professional

The first meeting of the Committee shall be held within seven days of the constitution of the committee of
creditors where may:
Resolve to appoint the interim resolution professional as a final resolution professional OR
Replace the interim resolution professional by another resolution professional.
The Final Resolution Professionals-
Shall conduct the entire corporate insolvency process
Manage operations of the corporate debtor
Have the same powers as that of the interim professionals under the Code.
Resolution plan
A resolution applicant may submit a resolution plan to the final resolution professional.
Final resolution professional examine the plan.
Then he shall present such plan to the committee of creditors for their approval.
After obtaining approval from the committee of creditors, final resolution professional shall submit the
approved plan to the Adjudicating Authority.
If the Adjudicating Authority approves the plan, then this will be binding upon the employees, members,
creditors and other stakeholders. And after approval of the plan, time period of moratorium ends here.
If application gets rejected, then NCLT shall pass an order of liquidation of the corporate debtor and
requires such order shall be sent to the registering authority.
CORPORATE INSOLVENCY RESOLUTION PROCESS AT A GLANCE:

Steps for the Corporate Insolvency Resolution process are as under:
The Financial Creditor/Operational Creditor or Corporate Debtor as the case may be, initiate the CIRP by
application to NCLT under section 7,8 and 10 respectively
Financial Creditor on Default and operational Creditor after ten days from the date of delivery of demand
notice can initiate CIRP
A Financial Creditor and Corporate Debtor shall propose the name of IRP and Operational Creditor may
propose the name of IRP
NCLT within 14 days of receipt of application by order admit or reject application(before rejecting* give notice
to rectify the defect within 7 days of receipt of notice)
Intimation of admission or rejection to be given by NCLT within seven days of admission or rejection
NCLT to declare Moratorium, appoint Interim Resolution Professional (IRP) for a term not exceeding thirty
days from the date of appointment and cause public announcement
Public announcement shall contain the information, such as - name and address of the corporate debtor
under the CIRP, name of the authority with which corporate debtor is registered, the last date for submission
of claims and date on which CIRP will be closed etc.
Insolvency Commencement date** starts from the date of admission of application and is to be completed
within 180 days of commencement which can be extended to ninety days(one time) by NCLT
Interim Resolution Professional to constitute Committee of Creditors comprising all financial creditors
330 PP-CRVI
Management of affairs of corporate debtor as a going concern, powers of Board of Directors or the partners
of debtor shall stand suspended and exercised by the Interim Resolution Professional (IRP)
Committee of Creditors within 7 days of its constitution either to resolve to appoint IRP as Resolution
Professional(RP) or replace IRP with another RP
All decisions of committee of creditors shall be taken by vote of not less than 75% of voting share ***of
financial creditor
Preparation of information memorandum by RP for formulation of Resolution Plan by Resolution Applicant.
Resolution Applicant prepares the Resolution plan based on information memorandum
Submission of Resolution Plan by Resolution Applicant to be examined by RP and to be approved by 75% of

voting share of financial creditor
RP to submit approved Resolution Plan to NCLT which shall Approve or Reject/Order for Liquidation
The approved plan shall be binding on the corporate debtor and its employees, members, creditors,
guarantors and other stakeholders involved in the resolution plan.
Moratorium ends on the date of approval
Appeal may be made to NCLAT on Rejection
Corporate Insolvency Resolution Process Financial Creditors
1. Application to NCLT by Financial Creditor singly or jointly
A financial creditor either by itself or jointly with other financial creditors may file an application before the
NCLT when a default has occurred.
Default includes a default in respect of a financial debt owned not only by applicant financial creditor but to
any other financial creditor of the corporate debtor.
2. Furnishing of evidence of default and other information along with applicationunder

section
The financial creditor shall, along with the application furnish

a record of the default recorded with the information utility or such other record or evidence of default as
may be specified,
the name of the resolution professional proposed to act as an interim resolution professional and
any other information as specified by the Board.
3. NCLT to ascertain the default within 14 days of application under sub section (4) of
section 7
The NCLT shall within fourteen days of the receipt of the application, ascertain the existence of default from
the records of information utilities or on the basis of evidence furnished by the financial creditor.
4. Grounds of rejection of application as per provisions of sub-section (5) of section (7)

When National Company Law Tribunal is satisfied that a:
Default has occurred The application is complete, and there is no discrepancy proceedings pending
against the proposed resolution professional, it may, by order, admit such application or
Default has not occurred The application is incomplete, or any disciplinary proceeding is pending
against the proposed resolution professional, it may, by order, reject such application.
5. Notice of Rejection
The NCLT shall, before rejecting the application give notice to the applicant to rectify the defect in his
application within seven days of receipt of such notice.
6. Acceptance of Application
The Corporate insolvency resolution process shall commence from the date of admission of the application
by NCLT
7. Notice of Acceptance of Application under sub-section (7) of section 7

The National Company law Tribunal shall communicate the order to the financial creditor within seven days
of admission or rejection of such application, as the case may be.
8. NCLT to declare Moratorium, appoint interim resolution professional and cause a public
announcement as per section 13
The NCLT shall after the admission of the application declare by order Moratorium, appointment of interim
resolution professional and cause public announcement.
9. Moratorium period under sub-section (1) of section 14

The order of moratorium shall have effect from the date of admission of application for insolvency resolution
process and shall cease to have effect from the date of approval of resolution plan or liquidation order, as the
case may be.
10. Effect of Moratorium as provisions of clause (a) to (d) of sub-section (1) of section 14
The motivation behind the moratorium is that it is value maximising for the entity to continue operations even
as viability is being assessed during the Insolvency resolution process (IRP). There should be no additional
stress on the business after the public announcement of the IRP.
The NCLT shall by order prohibit the following namely:

1. The institution of suits or continuation of pending suits or proceedings against the corporate debtor
including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel
or other authority.
332 PP-CRVI
2. Transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or
any legal right or beneficial interest therein.
3. any action to foreclose, recover or enforce any security interest created by the corporate debtor in
respect of its property including any action under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002,
4. the recovery of any property by an owner or lessor where such property is occupied by or in the
possession of the corporate debtor.
Note The supply of essential goods or services to the corporate debtor as may be specified shall not be
terminated or suspended or interrupted during moratorium period.
The provisions as specified above shall not apply to such transactions as may be notified by the Central
Government in consultation with any financial sector regulator.
11. Tenure of Interim Resolution Professional as per sub-section(5) of section 16

The NCLT shall appoint an interim resolution professional at the start of the Insolvency resolution process
i.e. within fourteen days from the insolvency commencement date, if no disciplinary proceedings are pending
against him.
The term of shall not exceed 30 days from the date of his appointment.
12. Contents of public announcement under section 15

The Public announcement shall contain the following information, namely:-
(a) name and address of the corporate debtor under the process, name of the authority with which the
corporate debtor is incorporated or registered,
(b) the last date for submission of claims,
(c) details of the interim resolution professional who shall be vested with the management of the
corporate debtor and be responsible for receiving claims,
(d) penalties for false or misleading claims and
(e) the date on which the corporate insolvency resolution process shall close, which shall be the one
hundred and eightieth day from the date of the admission of the application, as the case may be.
The public announcement under this section shall be made in such manner as may be specified.
13. Management of Affairs of Corporate Debtor under section 17

From the date of appointment of interim resolution professional
the management of the affairs of the corporate debtor shall vest with the interim resolution
professional;
powers of Board of Directors or the partners as the case may be shall stand suspended and
exercised by the interim resolution professional.
The officers and the managers shall report and provide access to such documents and records of
the corporate debtor as may be required by the interim resolution professional.
The financial institutions maintaining accounts of the corporate debtor shall act and furnish all the
information relating to corporate debtor available with them to interim resolution professional.
Following are the powers vested with interim resolution professional with the management of the corporate
debtor
(a) to act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other
documents, if any;
(b) to take such actions, in the manner and subject to such restrictions, as may be specified by the
Board;
(c) have the authority to access the electronic records of corporate debtor from information utility
having financial information of the corporate debtor;
(d) have the authority to access the books of account, records and other relevant documents of
corporate debtor available with government authorities, statutory auditors, accountants and such
other persons as may be specified.
14. Duties of interim resolution professional under section 18

The interim resolution professional shall perform the following duties, namely:-
(a) collect all information relating to the assets, finances and operations of the corporate debtor for
determining the financial position of the corporate debtor information relating to business
operations for the previous two years, financial and operational payments for the previous two
years, listof assets and liabilities as on the initiation date and such other matters as may be
specified;
(b) receive and collate all the claims submitted by creditors to him, pursuant to the public
announcement; ,
(c) constitute a committee of creditors;
(d) monitor the assets of the corporate debtor and manage its operations until a resolution professional
is appointed by the committee of creditors;
(e) file information collected with the information utility, if necessary; and
(f) take control and custody of any asset over which the corporate debtor has ownership rights as
recorded in the balance sheet of the corporate debtor, or with information utility or the depository of
securities or any other registry that records the ownership of assets including
(i) assets over which the corporate debtor has ownership rights which may be located in a foreign
country;
(ii) assets that may or may not be in possession of the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the corporate ,financial instruments,
insurance policies;
(vi) assets subject to the determination of ownership by a court or authority, to perform such other
duties as may be specified by the Board. Assets shall not include:
assets owned by a third party in possession of the corporate debtor held under trust or under
contractual arrangements including bailment,
334 PP-CRVI
assets of any Indian or foreign subsidiary of the corporate debtor and

such other assets as may be notified by the Central Government in consultation with any
financial sector regulator.
15. Committee of Creditors

Interim Resolution Professional to Constitute a Committee of Creditors
The interim resolution professional shall after collation of all claimsreceived against the corporate debtor
and determination of the financial position of the corporate debtor, constitute a committee of creditors.
Committee of Creditors to Comprise of all Financial Creditors
The committee of creditors shall comprise all financial creditors of the corporate debtor:
Financial Creditor who is a related party to corporate Debtor not eligible to Vote.
A related party to whom a corporate debtor owes a financial debt shall not have any right of
representation, participation or voting in a meeting of the committee of creditors.
Related Party means related party as defined under Section 5(24) of The Insolvency and Bankruptcy
Code 2016.
Position of Financial Creditor in case of Consortium agreement
Where the corporate debtor owes financial debts to two or more financial creditors as part of a
consortium or agreement, each such financial creditor shall be part of the committee of creditors and
their voting share shall be determined on the basis of the financial debts owed to them.
Position of Financial Creditor when he is also an operational Creditor
If, any person is a financial creditor as well as an operational creditor,such person shall be a financial
creditor to the extent of the financial debt owed by the corporate debtor and shall be included in the
committee of creditors, with voting share proportionate to the extent of financial debts owed to such
creditor. Such person shall be considered to be an operational creditor to the extent of the operational
debt owed by the corporate debtor to such creditor.
Assignment of operational debt to financial creditor.
If an operational creditor has assigned or legally transferred any operational debt to a financial creditor,
the assignee or transferee shall be considered as an operational creditor to the extent of such
assignment or legal transfer.
Manner of determining the voting share by financial creditor
The Insolvency and Bankruptcy Board of India may specify the manner of determining the voting share
in respect of financial debts issued as securities.
Decisions of Committee of Creditors
All decisions of the committee of creditors shall be taken by a vote of not less than seventy-five per cent.
of voting share of the financial creditors:
Provided that where a corporate debtor does not have any financial creditors, the committee of creditors
shall be constituted and comprise of such persons to exercise such functions in such manner as may be
specified by the Board.
16. Appointment of Resolution professional under section 22

The committee of creditors may, in their first meeting held within seven days of the constitution of committee,
by a majority of vote of not less than seventy-five per cent of voting share of financial creditor, either resolve
to appoint the interim resolution professional as resolution professional or replace the interim resolution
professional by another resolution professional. Replacement of resolution professional can also be done by
committee in the meeting during the process period by filing an application before the NCLT for appointment
of proposed resolution.
NCLT shall forward the name proposed to the Insolvency and Bankruptcy Board of India (the Board) for
confirmation and shall make such appointment after confirmation by the Board. If no confirmation is received
within ten days of the receipt of the name so proposed from the Board then NCLT shall by order, direct the
Interim resolution professional to continue to function until such time the Board confirms the appointment of
proposed resolution.
17. Duties of Resolution professional under section 25

The resolution professional has wider role, in addition to monitoring and supervising the entity, controlling its
assets. Resolution professional conduct the entire corporate insolvency resolution process and manage the
operations of the corporate debtor during the process period. He/she becomes the manager of the
negotiation between the debtor and the creditors in assessing the viability of the entity.
In this role he/she has the responsibility of managing all information so that debtors and creditors are equally
informed about the business in the negotiations. Finally, he/she is responsible for inviting and collecting
proposals from solutions to keep the entity going. It shall be the duty of resolution professional to preserve
and protect the assets of corporate debtor including the continued business operations of corporate debtor..
Following actions to be undertaken for this purpose :

1. take immediate custody and control of all the assets of the corporate debtor, including the business
records of the corporate debtor,
2. represent and act on behalf of the corporate debtor with third parties, exercise rights for the benefit
of the corporate debtor in judicial, quasi judicial or arbitration proceedings,
3. raise interim finances subject to the approval of the committee of creditors,
4. appoint accountants, legal or other professionals in the manner as specified by Board,
5. maintain an updated list of claims,
6. convene and attend all meetings of the committee of creditors,
7. prepare the information memorandum in accordance with section 29 invite prospective lenders,
investors, and any other persons to put forward resolution plans,
8. present all resolution plans at the meetings of the committee of creditors,
9. file application for avoidance of transactions in accordance with Chapter III, if any and
10. such other actions as may be specified by the Board.
Prior approval of committee of creditors by vote of seventy five percent of voting shares is required for the
following actions.
(a) raise any interim finance in excess of the amount as may be decided by the committee of creditors
336 PP-CRVI
in their meeting;
(b) create any security interest over the assets of the corporate debtor;
(c) change the capital structure of the corporate debtor, including by way of issuance of additional
securities, creating a new class of securities or buying back or redemption of issued securities in
case the corporate debtor is a company;
(d) record any change in the ownership interest of the corporate debtor;
(e) give instructions to financial institutions maintaining accounts of the corporate debtor for a debit
transaction from any such accounts in excess of the amount as may be decided by the committee of
creditors in their meeting;
(f) undertake any related party transaction;
(g) amend any constitutional documents of the corporate debtor;
(h) delegate its authority to any other person;
(i) dispose of or permit the disposal of shares of any shareholder of the corporate debtor or their
nominees to third parties;
(j) make any change in the management of the corporate debtor or its subsidiary;
(k) transfer rights or financial debts or operational debts under material contracts otherwise than in the
ordinary course of business;
(l) make changes in the appointment or terms of contract of such personnel as specified by the
committee of creditors; or
(m) make changes in the appointment or terms of contract of statutory auditors or internal auditors of
the corporate debtor.
Any such actions taken by the resolution professional without approval of the committee of creditors shall be
considered void.
18. Meeting of Committee of Creditors under section 24

Members of the committee may meet in person or by such electronic means as may be specified. Resolution
professional shall conduct all the meetings, including giving notices of each meeting to members of
Committee of creditors, members of the suspended Board of Directors or the partners of the corporate
persons, as the case may be.
Any creditor who is also a member of committee may appoint an insolvency professional other than
resolution professional to represent such creditor in a meeting of creditors and the fees payable to such
professional will be borne by such creditors.
Resolution professional shall determine voting share as specified by Board, each creditor shall vote
proportionately according to the financial debt owed to such creditor.
19. Preparation of information memorandum under section 29

Resolution professional shall prepare an information memorandum for formulating resolution plan.
The resolution professional shall provide to the resolution applicant access to all relevant information in
physical and electronic form, provided such resolution applicant undertakes:-
to comply with provisions of law for the time being in force relating to confidentiality and insider trading,
to protect any intellectual property of the corporate debtor it may have access to and
not to share relevant information with third parties unless clauses (of this sub-section are complied with.
relevant information means the information required by the resolution applicant to make the resolution plan
for the corporate debtor, which shall include the financial position of the corporate debtor, all information
related to disputes by or against the corporate debtor and any other matter pertaining to the corporate debtor
as may be specified.
20. Submission of resolution plan under section 30

A resolution applicant shall submit resolution plan made on basis of information memorandum to resolution
professional and he will examine and confirm that each resolution plan shall provide the following:-
(a) the payment of insolvency resolution process costs in a manner specified by the Board in priority to
the repayment of other debts of the corporate debtor;
(b) the repayment of the debts of operational creditors in such manner as may be specified by the
Board which shall not be less than the amount to be paid to the operational creditors in the event of
a liquidation of the corporate debtor under section 53;
(c) the management of the affairs of the Corporate debtor after approval of the resolution plan;
(d) the implementation and supervision of the resolution plan;
(e) does not contravene any of the provisions of the law for the time being in force;
(f) Conforms to such other requirements as may be specified by the Board.
21. Approval of Resolution plan by Committee of Creditors

The Committee of creditors may approve a resolution plan by a vote of not less than seventy five percent of
voting share of the financial creditors. Section 5(28) defines voting share as follows:
voting share means the share of the voting rights of a single financial creditor in the committee of
creditors which is based on the proportion of the financial debt owed to such financial creditor in relation
to the financial debt owed by the corporate debtor.
22. Approval of Resolution plan by NCLT

If NCLT is satisfied that the resolution plan as approved by the committee of creditors confirms the above
requirements, it shall by order approve the resolution plan and moratorium period ends here.
It shall be binding on corporate debtor, its employees, members, creditors, guarantors and other
stakeholders involved in resolution plan. If resolution plan not confirm to the requirements above, it may by
order, reject resolution plan.
23. Order under section 31

After the Order of approval passed by NCLT the moratorium order shall cease to have effect and resolution
professional shall forward all records relating to the conduct of corporate insolvency resolution process and
resolution plan to the Board to be recorded on its database.
Any appeal from the order of NCLT approving resolution plan shall be made in the manner and on the
338 PP-CRVI
grounds laid down in sub-section (3) of section 61. They are as follows:
(i) the approved resolution plan is in contravention of the provisions of any law for the time being in
force;
(ii) there has been material irregularity in exercise of the powers by the resolution professional during
the corporate insolvency resolution period;
(iii) the debts owed to operational creditors of the corporate debtor have not been provided for in the
resolution plan in the manner specified by theBoard;
(iv) the insolvency resolution process costs have not been provided for repayment in priority to all other
debts; or
(v) the resolution plan does not comply with any other criteria specified by the Board.
The provisions relating to the Fast track corporate insolvency resolution process,Insolvency resolution
process for individuals/ unlimited partnerships, Voluntary liquidation are not yet notified, Hence not covered
in this chapter.
LESSON ROUND UP
The Insolvency Resolution Process (IRP) for individuals and unlimited liability partnerships varies from that of
companies and LLPs. The Debt Recovery Tribunal (DRT) shall be the Adjudicating Authority with jurisdiction
over individuals and unlimited liability partnership firms. Appeals fromthe order of DRT shall lie to the Debt
Recovery Appellate Tribunal (DRAT). The National Company Law Tribunal (NCLT) shall be the Adjudicating
Authority with jurisdiction over companies, limited liability entities. Appeals from the order of NCLT shall lie to
the National Company Law Appellate Tribunal (NCLAT).
The Code proposes to establish an Insolvency Regulator (The Insolvency and Bankruptcy Board of India) to
exercise regulatory oversight over
Insolvency Professionals,
Insolvency Professional Agencies and
Information Utilities
The Pending proceedings relating to revival of sick companies were transferred from High Court and Board of
Industrial and Financial Reconstruction to National Company Law Tribunal.
An insolvency resolution process can be initiated by either a creditor, or by the debtor, upon an event of default
The Code cover Insolvency of individuals, unlimited liability partnerships, Limited Liability partnerships (LLPs)
and companies.
The Code proposes to regulate insolvency professionals and insolvency professional agencies. Under
Regulators oversight, these agencies will develop professional standards, codes of ethics and exercise a
disciplinary role over errant members leading to the development of a competitive industry for insolvency
professionals.
The Code proposes for information utilities which would collect, collate, authenticate and disseminate financial
information from listed companies and financial and operational creditors of companies. An individual
insolvency database is also proposed to be set up with the goal of providing information on insolvency status of
individuals.
The Code proposes a swift process and timeline of 180 days for dealing with applications for corporate
insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only one time extension.
During insolvency resolution period (of 180/270 days), the management of the debtor is placed in the hands of
an interim resolution professional/ resolution professional.
SELF TEST QUESTIONS

(These are meant for recapitulation only. Answers to these questions are not required to be submitted for
evaluation)
1. Briefly explain the salient features of Insolvency and Bankruptcy Code, 2016.
2. Enumerate various Institutional mechanism under the Insolvency and Bankruptcy Code, 2016 ?
3. Write short notes on
(a) Insolvency and Bankruptcy Board of India (IBBI)
(b) Role of Companies Secretary under the IBC, 2016
4. Write short notes on Insolvency and Bankruptcy Code 2016.
5. Explain the Function of Insolvency Professional Agencies
6. Write a short note on the Committee of Creditors under the Corporate Insolvency Resolution
process?
340 PP-CRVI
Lesson 18
Securitisation
Introduction The banks and financial institutions (FIs) were facing

Scheme of the Act numerous problems in recovery of defaulted loans on
account of delays in disposal of recovery
Constitutional validity of the Act
proceedings. The Government, therefore, enacted
Definitions of terms and expressions the Recovery of Debts and Bankruptcy Act, 1993 and
SARFAESI Act in 2002 for the purpose of
Important provisions
expeditious recovery of Non-Performing Assets
Procedure for Registration (NPAs) of the banks and FIs.
Enforcement of security interest
The Securities and Reconstruction of Financial
Measures for asset reconstruction assets and enforcement of Security Interest Act,
Offences 2002 was amended in 2004 and 2012 respectively.
In 2016, the Indian parliament has passed the
Securities Interest (Enforcement) Rules, 2002.
Enforcement of Security Interests and Recovery of
Debt Laws and Miscellaneous Provisions
(Amendment) Act, 2016 to improve the efficacy of
Indian debt recovery laws.
The objective of the study lesson is to familiarize the

students with the legal requirements stipulated under
the SARFAESI Act.
342 PP-CRVI
INTRODUCTION
In the traditional lending process, a bank makes a loan, maintaining it as an asset on its balance sheet,
collecting principal and interest, and monitoring whether there is any deterioration in borrower's
creditworthiness.
This requires a bank to hold assets till repayment of loan. The funds of the bank are blocked in these loans
and to meet its growing fund requirement a bank has to raise additional funds from the market. Securitisation
is a way of unlocking these blocked funds.
One of the most prominent developments in international finance in recent decades and the one that is likely
to assume even greater importance in future is securitisation. Securitisation is the process of pooling and
repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors.
Basically Securitisation is a method of raising funds by way of selling receivables for money.
The process leads to the creation of financial instruments that represent ownership interest in, or are secured
by a segregated income producing asset or pool of assets. The pool of assets collateralises securities.
These assets are generally secured by personal or real property (e.g. automobiles, real estate, or equipment
loans), but in some cases are unsecured (e.g. credit card debt, consumer loans).
Securitisation is a method of raising funds by way of selling receivables for money.
The Securitisation process
Obligor (s) Ancillary Service Providers
Interest & Credit Enhancement, Liquidity Support,

Principal Forex & Interest Rate Hedging etc.
Original Loan Sale of Asset Issue of Securities
Special Purpose Servicing of

Vehicle Securities Investors
Originator
(Assignee & issuer)
Consideration for Subscription to

Assets Purchased Credit Rating Securities
of Securities
Rating Agency
Structurer
Note: Continuing flow of funds from the Obligor to the SPV is routed through the Originator in its capacity as
Lesson 18 Securitization 343
administrator. Any other party appointed by the SPV/Trustee can also perform the role of administrator. It is
also possible that the SPV receives the amounts directly fro the Obligator.
Source: rbi.org.in
Steps in securitisation:
(i) Acquisition of Financial Assets by Asset Reconstruction Company (i.e SPVs) from the originator.
Here financial assets are loans backed by properties. The originator is banks or FIs who has lent
money to the original borrower.
(ii) the SPV, with the help of an investment banker, issues security receipts which are distributed to
investors; and
(iii) the SPV pays the originator for the financial assets purchased with the proceeds from the sale of
securities.
Parties involved in Securitisation
Primary parties
The Originator(Banks/FIs who has lent loan against properties)
SPVs (Asset Reconstruction Company)
Investors (To whom securities are issued, which is a participative interest against the pool of
receivables which is bought by the SPVs from the originator)
Besides above parties the following are involved in the process of securitizations:
The obligator (i.e. original borrower of the loan)
Rating agency
Administrator etc.
How Securitisation gained importance?
When a borrower, who is under a liability to pay to secured creditor, makes any default in repayment of
secured debt or any instalment thereof, the account of borrower is classified as non-performing asset (NPA).
NPAs constitute a real economic cost to the nation because they reflect the application of scarce capital and
credit funds to unproductive uses. The money locked up in NPAs are not available for productive use and to
the extent that banks seek to make provisions for NPAs or write them off, it is a charge on their profits. High
level of NPAs impact adversely on the financial strength of banks who in the present era of globalization, are
required to conform to stringent International Standards.
The public at large is also adversely affected because bank's main source of funds are deposits placed by
public continued growth in NPA portfolio threatens the repayment capacity of the banks and erode the
confidence reposed by them in the banks.
The banks had to take recourse to the long legal route against the defaulting borrowers beginning from filling
of claims in the courts. A lot of time was usually spent in getting decrees and execution thereof before the
banks could make some recoveries. In the meantime the promoters could seek the protection of BIFR and
344 PP-CRVI
could also dilute the securities available to banks. The Debt Recovery Tribunals (DRTs) set up by the Govt.
also did not prove to be of much help as these get gradually overburdened by the huge volume of cases
referred to them. All along, the banks were feeling greatly handicapped in the absence of any powers for
seizure of assets charged to them.
All these issues gave the passage for evolution of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (SARFAESI Act) is a unique piece of legislation which has far
reaching consequences. This Act is having the overriding power over the other legislation and it shall go in
addition to and not in derogation of certain legislation.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
enacted with a view to regulate securitisation and reconstruction of financial assets and enforcement of
security interest and for matters connected therewith or incidental thereto. The Act enables the banks and
financial institutions to realise long-term assets, manage problems of liquidity, asset liability mis-match and
improve recovery by exercising powers to take possession of securities, sell them and reduce non-
performing assets by adopting measures for recovery or reconstruction. The said Act further provides for
setting up of asset reconstruction companies which are empowered to take possession of secured assets of
the borrower including the right to transfer by way of lease, assignment or sale and realise the secured
assets and take over the management of the business of the borrower.
With increasing levels of non-performing or stressed assets in the Indian financial services sector, reforming
the debt recovery and bankruptcy framework has been a key focus area for the Indian government. The
Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment)
Bill, 2016 was introduced by the Minister of Finance, Mr. Arun Jaitley, in Lok Sabha on May 11, 2016. It
seeks to amend four laws: (i) Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI), (ii) Recovery of Debts due to Banks and Financial Institutions Act,
1993 (RDDBFI), (iii) Indian Stamp Act, 1899 and (iv) Depositories Act, 1996.
Following the recent enactment of the Insolvency and Bankruptcy Code, 2016 (Bankruptcy Code), the Indian
parliament has now passed the Enforcement of Security Interests and Recovery of Debt Laws and
Miscellaneous Provisions (Amendment) Act, 2016 to improve the efficacy of Indian debt recovery laws. The
amendment act introduces a number of changes to the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interests Act, 2002 (SARFAESI Act) and the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 (DRT Act). These changes will however come into effect as and when
the government issues appropriate notifications in the Official Gazette to implement the relevant provisions of
the amendment.
STATEMENT OF OBJECTS AND REASONS OF SARFAESI ACT

It is necessary at the outset, to reiterate the statement of objects and reasons for the SARFAESI Act, which
reads as under:
The financial sector has been one of the key drivers in Indias efforts to achieve success in rapidly
developing its economy. While the banking industry in India is progressively complying with the international
prudential norms and accounting practices, there are certain areas in which the banking and financial sector
do not have a level playing field as compared to other participants in the financial markets in the world. There
is no legal provision for facilitating securitisation of financial assets of banks and financial institutions.
Further, unlike international banks, the banks and financial institutions in India do not have power to take
possession of securities and sell them. Our existing legal framework relating to commercial transactions has
not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow
pace of recovery of defaulting loans and mounting levels of non-performing assets of banks and financial
institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central
Government for the purpose of examining banking sector reforms have considered the need for changes in
the level system in respect of these areas. These Committees, inter alia, have suggested enactment of a
new legislation for securitisation and empowering banks and financial institutions to take possession of the
securities and sell them without the intervention of the court.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance,
2002 was promulgated on the 21st June, 2002 to regulate securitisation and reconstruction of financial
assets and enforcement of security interest and for matters connected therewith or incidental thereto. The
provisions of the Ordinance of liquidity, asset liability mismatches and improves recovery by exercising
powers to take possession of securities, sell them and reduce non-performing assets by adopting measures
for recovery or reconstruction.
The main purpose of the SARFAESI Act is to enable and empower the secured creditors to take possession
of their securities and to deal with them without the intervention of the court and also alternatively to
authorise any securitisation or reconstruction company to acquire financial assets of any bank or financial
institution.
The SRFAESI Act, 2002 has empowered the Banks and Financial Institutions with vast power to enforce the
securities charged to them. The Banks can now issue notices to the defaulters to pay up the dues and if they
fail to do so within 60 days of the date of the notice, the banks can take over the possession of assets like
factory, land and building, plant and machinery etc. charged to them including the right to transfer by way of
lease, assignment or sale and realize the secured assets. In case the borrower refuses peaceful handing
over of the secured assets, the bank can also file an application before the relevant Magistrate for taking
possession of assets. The Banks can also take over the management of business of the borrower. The bank
in addition can appoint any person to manage the secured assets the possession of which has been taken
over by the bank. Banks can package and sell loans via "Securitisation" and the same can be traded in the
market like bonds and shares.
Apex Court Upheld Constitutional Validity of the Securitisation Act
The Securitisation Act, 2002 was challenged in various courts on grounds that it was loaded heavily in favour
of lenders, giving little chance to the borrowers to explain their views once recovery process is initiated under
the legislation. Leading the charge against the said Act was Mardia Chemicals in its plea against notice
served by ICICI Bank. The Government had, however, argued that the legislation would bring about a
financial discipline and reduce the burden of Non Performing Assets (NPAs) of banks and institutions.
In Mardia Chemicals Ltd. v. UOI [2004] 59 CLA 380 (SC), it was urged by the petitioner that
(i) there was no occasion to enact such a draconian legislation to find a short-cut to realise non-
performing assets (NPAs) without their ascertainment when there already existed the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (Recovery of Debt Act) for doing so;
(ii) no provision had been made to take into account lenders liability;
(iii) that the mechanism for recovery under Section 13 does not provide for an adjudicatory forum of
inter se disputes between lender and borrower; and
(iv) that the appeal provisions were illusory because the appeal would be maintainable after possession
of the property or management of the property was taken over or the property sold and the appeal is
not entertainable unless 75 per cent of the amount claimed is deposited with the Debts Recovery
Tribunal (DRT).
346 PP-CRVI
The Honable Supreme Court held that though some of the provisions of the Act 2002 be a bit harsh for
some of the borrowers but on those grounds the impugned provisions of the Act cannot be said to
unconstitutional in the view of the fact that the objective of the Act is to achieve speedier recovery of the
dues declared as NPAs and better availability of capital liquidity and resources to help in growth of economy
of the country and welfare of the people in general which would sub-serve the public interest.
The Supreme Court observed that the Act provides for a forum and remedies to the borrower to ventilate his
grievances against the bank or financial institution, inter alia, with respect to the amount of the demand of the
secured debt. After the notice is sent, the borrower may explain the reasons why the measures may or may
not be taken under Sub-section (4) of Section 13. The creditor must apply its mind to the objections raised in
reply to such notice. There must be meaningful consideration by the Court of the objections raised rather
than to ritually reject them and to proceed to take drastic measures under Sub-section (4) of Section 13. The
court held that such a procedure/mechanism was conducive to the principles of fairness and that such a
procedure was also important from the point of view of the economy of the country and would serve the
purpose in the growth of a healthy economy. It would serve as guidance to secured debtors in general in
conducting their affairs.
The court opined that the fairness doctrine, cannot be stretched too far, such communication is only for the
purposes of the secured debtors knowledge and cannot give an occasion to the secured debtor to resort to
any proceeding, which are not permissible under the provisions of the Act. Thus, a secured debtor is not
allowed to challenge the reasons communicated or challenge the action likely to be taken by the secured
creditor at that point of time unless his right to approach the DRT as provided under section 17 matures on
any measure having been taken under Sub-section (4) of Section 13.
Moreover, another safeguard is also available to a secured borrower within the framework of the Act i.e. to
approach the DRT under Section 17 though such a right accrues only after measures are taken under Sub-
section (1) of Section 13.
The Honble Supreme Court, however, found that the requirement of deposit of 75 per cent of the amount
claimed before entertaining an appeal (petition) under Section 17 is an oppressive, onerous and arbitrary
condition and against all the canons of reasonableness. Held this provision to be invalid and ordered that it
was liable to be struck down.
Definitions
Section 2 of The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (SARFAESI Act) defines various terms used in the Act.
Section 2 (1): In the SARFAESI Act, unless the context otherwise requires,-
(a) "Appellate Tribunal" means a Debts Recovery Appellate Tribunal established under sub-
section (1) of section 8 of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (51 of 1993);
(b) "asset reconstruction" means acquisition by any [asset reconstruction company] of any right
or interest of any bank or financial institution in any financial assistance for the purpose of
realisation of such financial assistance;
[ (ba) "asset reconstruction company" means a company registered with Reserve Bank under
section 3 for the purposes of carrying on the business of asset reconstruction or
1
securitisation, or both;]
1 Inserted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act,
2016, w.e.f. 1-9-2016
(c) "bank" means

(i) a banking company; or
(ii) a corresponding new bank; or
(iii) the State Bank of India; or
(iv) a subsidiary bank; or
(iva) a multi-State co-operative bank; or
(v) such other bank which the Central Government may, by notification, specify for the purposes of
this Act;
(f) "borrower" means any person who has been granted financial assistance by any bank or
financial institution or who has given any guarantee or created any mortgage or pledge as
security for the financial assistance granted by any bank or financial institution and includes
a person who becomes borrower of a [asset reconstruction company] consequent upon
acquisition by it of any rights or interest of any bank or financial institution in relation to such
financial assistance [or who has raised funds through issue of debt securities];
(g) "Central Registry" means the registry set up or cause to be set up under sub-section (1) of
section 20;
[ (ga) "company" means a company as defined in clause (20) of section 2 of the Companies Act,
2
2013 (18 of 2013);]
[ (ha) "debt" shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and includes
(i) unpaid portion of the purchase price of any tangible asset given on hire or financial lease or
conditional sale or under any other contract;
(ii) any right, title or interest on any intangible asset or licence or assignment of such intangible
asset, which secures the obligation to pay any unpaid portion of the purchase price of such
intangible asset or an obligation incurred or credit otherwise extended to enable any
3
borrower to acquire the intangible asset or obtain licence of such asset; ]
(i) "Debts Recovery Tribunal" means the Tribunal established under sub-section (1) of section 3
of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993);
[name changed Recovery of Debts and Bankruptcy Act, 1993]
[ (ia) "debt securities" means debt securities listed in accordance with the regulations made by the
4
Board under the Securities and Exchange Board of India Act, 1992 (15 of 1992); ]
2016, w.e.f. 1-9-2016
3 Substituted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act,
2016, w.e.f. 1-9-2016. Prior to its substitution, clause (ha), as inserted by the Enforcement of Security Interest and Recovery of
Debts Laws (Amendment) Act, 2004, w.r.e.f. 11-11-2004, read as under :
'(ha) "debt" shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (51 of 1993);'
2016, w.e.f. 1-9-2016.
348 PP-CRVI
[ (j) "default" means

(i) non-payment of any debt or any other amount payable by the borrower to any secured
creditor consequent upon which the account of such borrower is classified as non-
performing asset in the books of account of the secured creditor; or
(ii) non-payment of any debt or any other amount payable by the borrower with respect to debt
securities after notice of ninety days demanding payment of dues served upon such
borrower by the debenture trustee or any other authority in whose favour security interest is
5
created for the benefit of holders of such debt securities; ]
(k) "financial assistance" means any loan or advance granted or any debentures or bonds
subscribed or any guarantees given or letters of credit established or any other credit facility
extended by any bank or financial institution [including funds provided for the purpose of
acquisition of any tangible asset on hire or financial lease or conditional sale or under any
other contract or obtaining assignment or licence of any intangible asset or purchase of debt
securities];
(l) "financial asset" means debt or receivables and includes

(i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or
(ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or
(iii) a mortgage, charge, hypothecation or pledge of movable property; or
(iv) any right or interest in the security, whether full or part underlying such debt or
receivables; or
(v) any beneficial interest in property, whether movable or immovable, or in such debt,
receivables, whether such interest is existing, future, accruing, conditional or contingent; or
[(va) any beneficial right, title or interest in any tangible asset given on hire or financial lease
or conditional sale or under any other contract which secures the obligation to pay any
unpaid portion of the purchase price of such asset or an obligation incurred or credit
otherwise provided to enable the borrower to acquire such tangible asset; or
(vb) any right, title or interest on any intangible asset or licence or assignment of such
intangible asset, which secures the obligation to pay any unpaid portion of the purchase
price of such intangible asset or an obligation incurred or credit otherwise extended to
enable the borrower to acquire such intangible asset or obtain licence of the intangible asset;
6
or ]
(vi) any financial assistance;
(m) "financial institution" means

i. a public financial institution within the meaning of section 4A of the Companies Act,
1956 (1 of 1956);
2016, w.e.f. 1-9-2016. Prior to its substitution, clause (j), as amended by the Enforcement of Security Interest and Recovery of
'(j) "default" means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to
any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the
books of account of the secured creditor;'
2016, w.e.f. 1-9-2016.
ii. any institution specified by the Central Government under sub-clause (ii) of clause
(h) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (51 of 1993);
iii. the International Finance Corporation established under the International Finance
Corporation (Status, Immunities and Privileges) Act, 1958 (42 of 1958);
[(iiia) a debenture trustee registered with the Board and appointed for secured debt
securities;
(iiib) asset reconstruction company, whether acting as such or mana-ging a trust
7
created for the purpose of securitisation or asset reconstruction, as the case may be; ]
iv. any other institution or non-banking financial company as defined in clause (f) of
section 45-I of the Reserve Bank of India Act, 1934 (2 of 1934), which the Central
Government may, by notification, specify as financial institution for the purposes of
this Act;
[(ma) "financial lease" means a lease under any lease agreement of tangible asset, other than
negotiable instrument or negotiable document, for transfer of lessor's right therein to the
lessee for a certain time in consideration of payment of agreed amount periodically and
where the lessee becomes the owner of the such assets at the expiry of the term of lease or
8
on payment of the agreed residual amount, as the case may be; ]
(n) "hypothecation" means a charge in or upon any movable property, existing or future, created
by a borrower in favour of a secured creditor without delivery of possession of the movable
property to such creditor, as a security for financial assistance and includes floating charge
and crystallisation of such charge into fixed charge on movable property;
[ (na) "negotiable document" means a document, which embodies a right to delivery of tangible
assets and satisfies the requirements for negotiability under any law for the time being in
9
force including warehouse receipt and bill of lading; ]
(o) "non-performing asset" means an asset or account of a borrower, which has been classified
by a bank or financial institution as sub-standard, [doubtful or loss asset,
a) in case such bank or financial institution is administered or regulated by any
authority or body established, constituted or appointed by any law for the time being
in force, in accordance with the directions or guidelines relating to assets
classifications issued by such authority or body;
b) in any other case, in accordance with the directions or guidelines relating to assets
classifications issued by the Reserve Bank];
(q) "obligor" means a person liable to the originator, whether under a contract or otherwise, to
pay a financial asset or to discharge any obligation in respect of a financial asset, whether
existing, future, conditional or contingent and includes the borrower;
(r) "originator" means the owner of a financial asset which is acquired by a [asset reconstruction
10
company] for the purpose of securitisation or asset reconstruction;
(t) "property" means

i) immovable property;
2016, w.e.f. 1-9-2016.
2016, w.e.f. 1-9-2016
2016, w.e.f. 1-9-2016
10 Substituted for "securitisation company or reconstruction company" by the Enforcement of Security Interest and Recovery of
Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1-9-2016.
350 PP-CRVI
ii) movable property;

iii) any debt or any right to receive payment of money, whether secured or unsecured;
iv) receivables, whether existing or future;
v) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or
any other business or commercial right of similar nature [as may be prescribed by the
11
Central Government in consultation with Reserve Bank];
12
(u) [qualified buyer] " means a financial institution, insurance company, bank, state financial
corporation, state industrial development corporation, trustee or [asset reconstruction
13
company] which has been granted a certificate of registration under sub-section (4) of
section 3 or any asset management company making investment on behalf of mutual fund]
or a foreign institutional investor registered under the Securities and Exchange Board of
India Act, 1992 (15 of 1992) or regulations made thereunder, [any category of non-
institutional investors as may be specified by the Reserve Bank under sub-section (1) of
14
section 7] or any other body corporate as may be specified by the Board;
(z) "securitisation" means acquisition of financial assets by any [asset reconstruction

15
company] from any originator, whether by raising of funds by such [asset reconstruction
16
company] from [qualified buyers] by issue of security receipts representing undivided
interest in such financial assets or otherwise;
(zb) "security agreement" means an agreement, instrument or any other document or

arrangement under which security interest is created in favour of the secured creditor
including the creation of mortgage by deposit of title deeds with the secured creditor;
(zc) "secured asset" means the property on which security interest is created;
[ (zd) "secured creditor" means

I. any bank or financial institution or any consortium or group of banks or financial
institutions holding any right, title or interest upon any tangible asset or intangible
asset as specified in clause (l);
II. debenture trustee appointed by any bank or financial institution; or
III. an asset reconstruction company whether acting as such or managing a trust set
up by such asset reconstruction company for the securitisation or reconstruction, as
the case may be; or
IV. debenture trustee registered with the Board appointed by any company for secured
debt securities; or
V. any other trustee holding securities on behalf of a bank or financial institution, in
whose favour security interest is created by any borrower for due repayment of any
17
financial assistance. ]
2016, w.e.f. 1-9-2016.
12 Substituted for "qualified institutional buyer" by the Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1-9-2016
Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1-9-2016
2016, w.e.f. 4-11-2016
16 Substituted for "qualified institutional buyers" by the Enforcement of Security Interest and Recovery of Debts Laws and
2016, w.e.f. 1-9-2016. Prior to its substitution, clause (zd), as amended by the Enforcement of Security Interest and Recovery of
(ze) "secured debt" means a debt which is secured by any security interest;
[ (zf) "security interest" means right, title or interest of any kind, other than those specified in
section 31, upon property created in favour of any secured creditor and includes
i. any mortgage, charge, hypothecation, assignment or any right, title or interest of any
kind, on tangible asset, retained by the secured creditor as an owner of the property,
given on hire or financial lease or conditional sale or under any other contract which
secures the obligation to pay any unpaid portion of the purchase price of the asset or
an obligation incurred or credit provided to enable the borrower to acquire the
tangible asset; or
ii. such right, title or interest in any intangible asset or assignment or licence of such
intangible asset which secures the obligation to pay any unpaid portion of the
purchase price of the intangible asset or the obligation incurred or any credit
provided to enable the borrower to acquire the intangible asset or licence of
18
intangible asset; ]
(zg) "security receipt" means a receipt or other security, issued by a [asset reconstruction
19 20
company] to any [qualified buyer] pursuant to a scheme, evidencing the purchase or
acquisition by the holder thereof, of an undivided right, title or interest in the financial asset
involved in securitisation;
Asset Reconstruction Companies [ARC]

"Asset Reconstruction Company", means a company registered with Reserve Bank under section 3 of
SARFAESI Act for the purposes of carrying on the business of asset reconstruction or securitisation, or both.
The problem of non-performing loans created due to systematic banking crisis world over has become acute.
Focused measures to help the banking systems to realise its NPAs has resulted into creation of specialised
bodies called asset management companies which in India have been named asset reconstruction
companies (ARCs). The buying of impaired assets from banks or financial institutions by ARCs will make
their balance sheets cleaner and they will be able to use their time, energy and funds for development of
their business. ARCs may be able to mix up their assets, both good and bad, in such a manner to make
them saleable.
The main objective of asset reconstruction company (ARC) is to act as agent for any bank or financial
institution for the purpose of recovering their dues from the borrowers on payment of fees or charges, to act
'(zd) "secured creditor" means any bank or financial institution or any consortium or group of banks or financial
institutions and includes
(i) debenture trustee appointed by any bank or financial institution; or
(ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such
securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or
(iii) any other trustee holding securities on behalf of a bank or financial institution,
in whose favour security interest is created for due repayment by any borrower of any financial assistance;'
2016, w.e.f. 1-9-2016. Prior to its substitution, clause (zf) read as under :
'(zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any
secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in section
31;'
Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1-9-2016.
352 PP-CRVI
as manager of the borrowers asset taken over by banks, or financial institution, to act as the receiver of
properties of any bank or financial institution and to carry on such ancillary or incidental business with the
prior approval of Reserve Bank wherever necessary. If an ARC carries on any business other than the
business of asset reconstruction or securitisation or the business mentioned above, it shall cease to carry on
any such business within one year of doing such other business.
Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial

Institutions
21
Section 3 of SARFAESI Act deals with the Registration of [Asset Reconstruction Companies] .
(1) No asset reconstruction company shall commence or carry on the business of securitisation or asset
reconstruction without
(a) obtaining a certificate of registration granted under this section; and
[(b) having net owned fund of not less than two crore rupees or such other higher amount as the
22
Reserve Bank, may, by notification, specify: ]
Provided that the Reserve Bank may, by notification, specify different amounts of owned fund for different
class or classes of asset reconstruction companies:
Provided further that an asset reconstruction company, existing on the commencement of this Act, shall
make an application for registration to the Reserve Bank before the expiry of six months from such
commencement and notwithstanding anything contained in this sub-section may continue to carry on the
business of securitisation or asset reconstruction until a certificate of registration is granted to it or, as the
case may be, rejection of application for registration is communicated to it.
(2) Every asset reconstruction company shall make an application for registration to the Reserve Bank in
such form and manner as it may specify.
(3) The Reserve Bank may, for the purpose of considering the application for registration of a asset
reconstruction company to commence or carry on the business of securitisation or asset reconstruction, as
the case may be, require to be satisfied, by an inspection of records or books of such asset reconstruction
company, or otherwise, that the following conditions are fulfilled, namely:
(a) that the asset reconstruction company has not incurred losses in any of the three preceding
financial years;
(b) that such asset reconstruction company has made adequate arrangements for realisation of
the financial assets acquired for the purpose of securitisation or asset reconstruction and
shall be able to pay periodical returns and redeem on respective due dates on the
23
investments made in the company by the [qualified buyers] or other persons;
(c) that the directors of asset reconstruction company have adequate professional experience in
matters related to finance, securitisation and reconstruction;
21 Substituted for "securitisation companies or reconstruction companies" by the Enforcement of Security Interest and Recovery of
2016, w.e.f. 1-9-2016. Prior to its substitution, clause (b) read as under :
"(b) having the owned fund of not less than two crore rupees or such other amount not exceeding fifteen per cent of total
financial assets acquired or to be acquired by the securitisation company or reconstruction company, as the Reserve
Bank may, by notification, specify :"
24
(d) [***]
(e) that any of its directors has not been convicted of any offence involving moral turpitude;
[(f) that a sponsor of an asset reconstruction company is a fit and proper person in accordance
with the criteria as may be specified in the guidelines issued by the Reserve Bank for such
25
persons; ]
(g) that asset reconstruction company has complied with or is in a position to comply with
prudential norms specified by the Reserve Bank;
[(h) that asset reconstruction company has complied with one or more conditions specified in the
guidelines issued by the Reserve Bank for the said purpose.]
(4) The Reserve Bank may, after being satisfied that the conditions specified in sub-section (3) are fulfilled,
grant a certificate of registration to the asset reconstruction company to commence or carry on business of
securitisation or asset reconstruction, subject to such conditions, which it may consider, fit to impose.
(5) The Reserve Bank may reject the application made under sub-section (2) if it is satisfied that the
conditions specified in sub-section (3) are not fulfilled:
Provided that before rejecting the application, the applicant shall be given a reasonable opportunity of being
heard.
(6) Every asset reconstruction company, shall obtain prior approval of the Reserve Bank for any substantial
change in its management [including appointment of any director on the board of directors of the asset
26
reconstruction company or managing director or chief executive officer thereof] or change of location of its
registered office or change in its name:
Provided that the decision of the Reserve Bank, whether the change in management of a asset
reconstruction company is a substantial change in its management or not, shall be final.
Explanation.For the purposes of this section, the expression "substantial change in management" means
the change in the management by way of transfer of shares or [change affecting the sponsorship in the
27
company by way of transfer of shares or] amalgamation or transfer of the business of the company.
Cancellation of Certificate of Registration (Section 4)
24 Omitted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act,
2016, w.e.f. 1-9-2016. Prior to its omission, clause (d) read as under :
"(d) that the board of directors of such securitisation company or reconstruction company does not consist of more than
half of its total number of directors who are either nominees of any sponsor or associated in any manner with the
sponsor or any of its subsidiaries;"
25 Substitutedby the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act,
2016, w.e.f. 1-9-2016. Prior to its substitution, clause (f) read as under :
"(f) that a sponsor, is not a holding company of the securitisation company or reconstruction company, as the case may
be, or, does not otherwise hold any controlling interest in such securitisation company or reconstruction company;"
2016, w.e.f. 1-9-2016.
2016, w.e.f. 1-9-2016.
354 PP-CRVI
Section 4 of the SARFAESI Act deals with the Cancellation of certificate of registration.
(1) The Reserve Bank may cancel a certificate of registration granted to a asset reconstruction company, if
such company
(a) ceases to carry on the business of securitisation or asset reconstruction; or
28
(b) ceases to receive or hold any investment from a [qualified buyer] ; or
(c) has failed to comply with any conditions subject to which the certificate of registration has
been granted to it; or
(d) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section
(3) of section 3; or
(e) fails to
I. comply with any direction issued by the Reserve Bank under the provisions of this
Act; or
II. maintain accounts in accordance with the requirements of any law or any direction
or order issued by the Reserve Bank under the provisions of this Act; or
III. submit or offer for inspection its books of account or other relevant documents when
so demanded by the Reserve Bank; or
IV. obtain prior approval of the Reserve Bank required under sub-section (6) of section
3:
Provided that before cancelling a certificate of registration on the ground that the asset reconstruction
company has failed to comply with the provisions of clause (c) or has failed to fulfil any of the conditions
referred to in clause (d) or sub-clause (iv) of clause (e), the Reserve Bank, unless it is of the opinion that the
delay in cancelling the certificate of registration granted under sub-section (4) of section 3 shall be prejudicial
to the public interest or the interests of the investors or the asset reconstruction company, shall give an
opportunity to such company on such terms as the Reserve Bank may specify for taking necessary steps to
comply with such provisions or fulfilment of such conditions.
29
(2) A asset reconstruction company aggrieved by the order of [***] cancellation of certificate of registration
may prefer an appeal, within a period of thirty days from the date on which [such order of cancellation] is
communicated to it, to the Central Government:
Provided that before rejecting an appeal such company shall be given a reasonable opportunity of being
heard.
30
(3) A asset reconstruction company, which is holding investments of[qualified buyers] and whose
application for grant of certificate of registration has been rejected or certificate of registration has been
cancelled shall, notwithstanding such rejection or cancellation be deemed to be a asset reconstruction
company until it repays the entire investments held by it (together with interest, if any) within such period as
the Reserve Bank may direct.
29 Words "rejection of application for registration or" omitted by the Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Act, 2004, w.r.e.f. 11-11-2004.
Acquisition of rights or interest in financial assets (Section 5)
Section 5 of the SARFAESI deals with the Acquisition of rights or interest in financial assets.
(1) Notwithstanding anything contained in any agreement or any other law for the time being in force, any
asset reconstruction company may acquire financial assets of any bank or financial institution
(a) by issuing a debenture or bond or any other security in the nature of debenture, for
consideration agreed upon between such company and the bank or financial institution,
incorporating therein such terms and conditions as may be agreed upon between them; or
(b) by entering into an agreement with such bank or financial institution for the transfer of such
financial assets to such company on such terms and conditions as may be agreed upon
between them.
[(1A) Any document executed by any bank or financial institution under sub-section (1) in favour of the asset
reconstruction company acquiring financial assets for the purposes of asset reconstruction or securitisation
shall be exempted from stamp duty in accordance with the provisions of section 8F of the Indian Stamp Act,
1899 (2 of 1899):
Provided that the provisions of this sub-section shall not apply where the acquisition of the financial assets
31
by the asset reconstruction company is for the purposes other than asset reconstruction or securitisation. ]
(2) If the bank or financial institution is a lender in relation to any financial assets acquired under sub-section
(1) by the asset reconstruction company, such asset reconstruction company shall, on such acquisition, be
deemed to be the lender and all the rights of such bank or financial institution shall vest in such company in
relation to such financial assets.
[(2A) If the bank or financial institution is holding any right, title or interest upon any tangible asset or
intangible asset to secure payment of any unpaid portion of the purchase price of such asset or an obligation
incurred or credit otherwise provided to enable the borrower to acquire the tangible asset or assignment or
licence of intangible asset, such right, title or interest shall vest in the asset reconstruction company on
32
acquisition of such assets under sub-section (1). ]
(3) Unless otherwise expressly provided by this Act, all contracts, deeds, bonds, agreements, powers-of-
attorney, grants of legal representation, permissions, approvals, consents or no-objections under any law or
otherwise and other instruments of whatever nature which relate to the said financial asset and which are
subsisting or having effect immediately before the acquisition of financial asset under sub-section (1) and to
which the concerned bank or financial institution is a party or which are in favour of such bank or financial
institution shall, after the acquisition of the financial assets, be of as full force and effect against or in favour
of the asset reconstruction company, as the case may be, and may be enforced or acted upon as fully and
effectually as if, in the place of the said bank or financial institution, asset reconstruction company, as the
case may be, had been a party thereto or as if they had been issued in favour of asset reconstruction
company, as the case may be.
(4) If, on the date of acquisition of financial asset under sub-section (1), any suit, appeal or other proceeding
of whatever nature relating to the said financial asset is pending by or against the bank or financial institution,
save as provided in the third proviso to sub-section (1) of section 15 of the Sick Industrial Companies
(Special Provisions) Act, 1985 (1 of 1986) the same shall not abate, or be discontinued or be, in any way,
2016, w.e.f. 1-9-2016
2016, w.e.f. 1-9-2016.
356 PP-CRVI
prejudicially affected by reason of the acquisition of financial asset by the asset reconstruction company, as
the case may be, but the suit, appeal or other proceeding may be continued, prosecuted and enforced by or
against the asset reconstruction company, as the case may be.
[(5) On acquisition of financial assets under sub-section (1), the asset reconstruction company, may with the
consent of the originator, file an application before the Debts Recovery Tribunal or the Appellate Tribunal or
any court or other Authority for the purpose of substitution of its name in any pending suit, appeal or other
proceedings and on receipt of such application, such Debts Recovery Tribunal or the Appellate Tribunal or
court or Authority shall pass orders for the substitution of the asset reconstruction company in such pending
33
suit, appeal or other proceedings.]
Transfer of pending applications to any one of Debts Recovery Tribunals in certain cases
(Section 5A)
34
(1) If any financial asset, of a borrower acquired by a asset reconstruction company , comprise of
secured debts of more than one bank or financial institution for recovery of which such banks or
financial institutions has filed applications before two or more Debts Recovery Tribunals, the asset
35
reconstruction company may file an application to the Appellate Tribunal having jurisdiction over
any of such Tribunals in which such applications are pending for transfer of all pending applications
to any one of the Debts Recovery Tribunals as it deems fit.
(2) On receipt of such application for transfer of all pending applications under sub-section (1), the
Appellate Tribunal may, after giving the parties to the application an opportunity of being heard,
pass an order for transfer of the pending applications to any one of the Debts Recovery Tribunals.
(3) Notwithstanding anything contained in the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993, any order passed by the Appellate Tribunal under sub-section (2) shall be
binding on all the Debts Recovery Tribunals referred to in sub-section (1) as if such order had been
passed by the Appellate Tribunal having jurisdiction on each such Debts Recovery Tribunal.
(4) Any recovery certificate, issued by the Debts Recovery Tribunal to which all the pending
applications are transferred under sub-section (2), shall be executed in accordance with the provi-
sions contained in sub-section (23) of section 19 and other provisions of the Recovery of Debts Due
to Banks and Financial Institutions Act, 1993 shall, accordingly, apply to such execution.
Notice to obligor and discharge of obligation of such obligor (Section 6)

Section 6 deals with the Notice to obligor and discharge of obligation of such obligor.
(1) The bank or financial institution may, if it considers appropriate, give a notice of acquisition of financial
assets by any asset reconstruction company, to the concerned obligor and any other concerned person and
to the concerned registering authority (including Registrar of Companies) in whose jurisdiction the mortgage,
charge, hypothecation, assignment or other interest created on the financial assets had been registered.
(2) Where a notice of acquisition of financial asset under sub-section (1) is given by a bank or financial
institution, the obligor, on receipt of such notice, shall make payment to the concerned asset reconstruction
33 Inserted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012, w.e.f. 15-1-2013.
company, as the case may be, and payment made to such company in discharge of any of the obligations in
relation to the financial asset specified in the notice shall be a full discharge to the obligor making the
payment from all liability in respect of such payment.
(3) Where no notice of acquisition of financial asset under sub-section (1) is given by any bank or financial
institution, any money or other properties subsequently received by the bank or financial institution, shall
constitute monies or properties held in trust for the benefit of and on behalf of the asset reconstruction
company, as the case may be, and such bank or financial institution shall hold such payment or property
which shall forthwith be made over or delivered to such asset reconstruction company, as the case may be,
or its agent duly authorised in this behalf.
Issue of security by raising of receipts or funds by asset reconstruction company

(Section 7)
Section 7 of the SARFAESI Act deals with the issue of security by raising of receipts or funds by oid(0);'asset
reconstruction company.
(1) Without prejudice to the provisions contained in the Companies Act, 2013, the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992),
any asset reconstruction company, may, after acquisition of any financial asset under sub-section (1) of
section 5, offer security receipts to qualified buyers [or such other category of investors including non-
institutional investors as may be specified by the Reserve Bank in consultation with the Board, from time to
36
time,] for subscription in accordance with the provisions of those Acts.
(2) A asset reconstruction company may raise funds from the qualified buyers by formulating schemes for
acquiring financial assets and shall keep and maintain separate and distinct accounts in respect of each
such scheme for every financial asset acquired out of investments made by a qualified buyer and ensure that
realisations of such financial asset is held and applied towards redemption of investments and payment of
returns assured on such investments under the relevant scheme.
[(2A)(a) The scheme for the purpose of offering security receipts under sub-section (1) or raising funds under
sub-section (2), may be in the nature of a trust to be managed by the asset reconstruction company, and the
asset reconstruction company shall hold the assets so acquired or the funds so raised for acquiring the
assets, in trust for the benefit of the qualified buyers holding the security receipts or from whom the funds are
raised.
(b) The provisions of the Indian Trusts Act, 1882 (2 of 1882) shall, except in so far as they are inconsistent
37
with the provisions of this Act, apply with respect to the trust referred to in clause (a) above.]
(3) In the event of non-realisation under sub-section (2) of financial assets, the ;' qualified buyers of a asset
reconstruction company, holding security receipts of not less than seventy-five per cent of the total value of the
security receipts issued under a scheme by such company, shall be entitled to call a meeting of all the qualified
buyers and every resolution passed in such meeting shall be binding on the company.
(4) The qualified buyers shall, at a meeting called under sub-section (3), follow the same procedure, as
nearly as possible as is followed at meetings of the board of directors of the asset reconstruction company,
as the case may be.
36 Substituted for "(other than by offer to public)" by the Enforcement of Security Interest and Recovery of Debts Laws and
358 PP-CRVI
Exemption from registration of security receipt (Section 8)

Section 8 deals with the exemption from registration of security receipt.
Notwithstanding anything contained in sub-section (1) of section 17 of the Registration Act, 1908 (16 of
1908),
(a) any security receipt issued by the [asset reconstruction company], as the case may be,
under sub-section (1) of section 7, and not creating, declaring, assigning, limiting or
extinguishing any right, title or interest, to or in immovable property except insofar as it
entitles the holder of the security receipt to an undivided interest afforded by a registered
instrument; or
(b) any transfer of security receipts,
shall not require compulsory registration.

38
Measures for Asset reconstruction (Section 9)
Section 9. deals with the measures for Asset Reconstruction.
(1) Without prejudice to the provisions contained in any other law for the time being in force, an asset
reconstruction company may, for the purposes of asset reconstruction, provide for any one or more of the
following measures, namely:
(a) the proper management of the business of the borrower, by change in, or take over of, the
management of the business of the borrower;
(b) the sale or lease of a part or whole of the business of the borrower;
(c) rescheduling of payment of debts payable by the borrower;
(d) enforcement of security interest in accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower;
(f) taking possession of secured assets in accordance with the provisions of this Act;
(g) conversion of any portion of debt into shares of a borrower company:
Provided that conversion of any part of debt into shares of a borrower company shall be deemed always to
have been valid, as if the provisions of this clause were in force at all material times.
(2) The Reserve Bank shall, for the purposes of sub-section (1), determine the policy and issue necessary
directions including the direction for regulation of management of the business of the borrower and fees to be
charged.
(3) The asset reconstruction company shall take measures under sub-section (1) in accordance with policies
and directions of the Reserve Bank determined under sub-section (2). ]
Other functions of asset reconstruction company (Section 10)

Section 10 deals with the other functions of asset reconstruction company.
(1) Any asset reconstruction company registered under section 3 may

(a) act as an agent for any bank or financial institution for the purpose of recovering their dues
2016, w.e.f. 1-9-2016.
from the borrower on payment of such fee or charges as may be mutually agreed upon
between the parties;
(b) act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as
may be mutually agreed upon between the parties;
(c) act as receiver if appointed by any court or tribunal :
Provided that no asset reconstruction company shall act as a manager if acting as such gives rise to any
pecuniary liability.
(2) Save as otherwise provided in sub-section (1), no asset reconstruction company which has been granted
a certificate of registration under sub-section (4) of section 3, shall commence or carry on, without prior
approval of the Reserve Bank, any business other than that of securitisation or asset reconstruction :
Provided that a asset reconstruction company which is carrying on, on or before the commencement of this
Act, any business other than the business of securitisation or asset reconstruction or business referred to in
sub-section (1), shall cease to carry on any such business within one year from the date of commencement
of this Act.
Explanation.For the purposes of this section, asset reconstruction company does not include its subsidiary.
Resolution of disputes (Section 11)
Section 11 deals with the resolution of disputes. It provides that where any dispute relating to
securitisation or reconstruction or non-payment of any amount due including interest arises amongst any of
the parties, namely, the bank, or financial institution, or asset reconstruction company or qualified buyer,
such dispute shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act,
1996 (26 of 1996), as if the parties to the dispute have consented in writing for determination of such dispute
by conciliation or arbitration and the provisions of that Act shall apply accordingly.
Power of Reserve Bank to determine policy and issue directions (Section 12, 12A and 12B)
Section 12 deals with the power of Reserve Bank to determine policy and issue directions.
(1) If the Reserve Bank is satisfied that in the public interest or to regulate financial system of the country to
its advantage or to prevent the affairs of any asset reconstruction company from being conducted in a
manner detrimental to the interest of investors or in any manner prejudicial to the interest of such asset
reconstruction company, it is necessary or expedient so to do, it may determine the policy and give directions
to all or any asset reconstruction company in matters relating to income recognition, accounting standards,
making provisions for bad and doubtful debts, capital adequacy based on risk weights for assets and also
relating to deployment of funds by the asset reconstruction company, as the case may be, and such
company shall be bound to follow the policy so determined and the directions so issued.
(2) Without prejudice to the generality of the power vested under sub-section (1), the Reserve Bank may give
directions to any asset reconstruction company generally or to a class of asset reconstruction companies or
to any asset reconstruction company in particular as to
(a) the type of financial asset of a bank or financial institution which can be acquired and
procedure for acquisition of such assets and valuation thereof;
(b) the aggregate value of financial assets which may be acquired by any asset reconstruction
company;
[ (c) the fee and other charges which may be charged or incurred for management of financial
assets acquired by any asset reconstruction company;
360 PP-CRVI
39
(d) transfer of security receipts issued to qualified buyers. ]
Section 12A deals with the power of Reserve Bank to call for statements and information.
It states that the Reserve Bank may at any time direct a asset reconstruction company to furnish it within
such time as may be specified by the Reserve Bank, with such statements and information relating to the
business or affairs of such asset reconstruction company (including any business or affairs with which such
company is concerned) as the Reserve Bank may consider necessary or expedient to obtain for the
purposes of this Act.
[Section 12B deals with the power of Reserve Bank to carry out audit and inspection.
(1) The Reserve Bank may, for the purposes of this Act, carry out or caused to be carried out audit and
inspection of an asset reconstruction company from time to time.
(2) It shall be the duty of an asset reconstruction company and its officers to provide assistance and co-
operation to the Reserve Bank to carry out audit or inspection under sub-section (1).
(3) Where on audit or inspection or otherwise, the Reserve Bank is satisfied that business of an asset
reconstruction company is being conducted in a manner detrimental to public interest or to the interests of
investors in security receipts issued by such asset reconstruction company, the Reserve Bank may, for
securing proper management of an asset reconstruction company, by an order
(a) remove the Chairman or any director or appoint additional directors on the board of directors
of the asset reconstruction company; or
(b) appoint any of its officers as an observer to observe the working of the board of directors of
such asset reconstruction company:
Provided that no order for removal of Chairman or director under clause (a) shall be made except after
giving him an opportunity of being heard.
(4) It shall be the duty of every director or other officer or employee of the asset reconstruction company to
produce before the person, conducting an audit or inspection under sub-section (1), all such books, accounts
and other documents in his custody or control and to provide him such statements and information rela-ting
to the affairs of the asset reconstruction company as may be required by such person within the stipulated
40
time specified by him. ]
Enforcement of Security interest by a Creditors (Section 13)

(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882,
any security interest created in favour of any secured creditor may be enforced, without the intervention of
the court or tribunal, by such creditor in accordance with the provisions of this Act.
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any
default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is
classified by the secured creditor as non-performing asset, then, the secured creditor may require the
borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the
39 Clauses (c) and (d) inserted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions
(Amendment) Act, 2016, w.e.f. 1-9-2016.
2016, w.e.f. 1-9-2016.
date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-
section (4) :
[Provided that
(i) the requirement of classification of secured debt as non-performing asset under this sub-
section shall not apply to a borrower who has raised funds through issue of debt securities;
and
(ii) in the event of default, the debenture trustee shall be entitled to enforce security interest in
the same manner as provided under this section with such modifications as may be
necessary and in accordance with the terms and conditions of security documents executed
41
in favour of the debenture trustee. ]
(3) The notice shall give details of the amount payable by the borrower and the secured assets intended to
be enforced by the secured creditor in the event of non-payment of secured debts by the borrower.
(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or raises any
objection, the secured creditor shall consider such representation or objection and if the secured creditor
comes to the conclusion that such representation or objection is not acceptable or tenable, he shall
communicate within fifteen days of receipt of such representation or objection the reasons for non-
acceptance of the representation or objection to the borrower:
Provided that the reasons so communicated or the likely action of the secured creditor at the stage of
communication of reasons shall not confer any right upon the borrower to prefer an application to the Debts
Recovery Tribunal under section 17 or the Court of District Judge under section 17A.
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the
secured creditor may take recourse to one or more of the following measures to recover his secured debt,
namely :
(a) take possession of the secured assets of the borrower including the right to transfer by way
of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by
way of lease, assignment or sale for realising the secured asset :
Provided that the right to transfer by way of lease, assignment or sale shall be exercised
only where the substantial part of the business of the borrower is held as security for the
debt :
Provided further that where the management of whole of the business or part of the
business is severable, the secured creditor shall take over the management of such
business of the borrower which is relatable to the security for the debt;
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets
the possession of which has been taken over by the secured creditor;
(d) require at any time by notice in writing, any person who has acquired any of the secured
assets from the borrower and from whom any money is due or may become due to the
borrower, to pay the secured creditor, so much of the money as is sufficient to pay the
secured debt.
Case Law
Powers under Companies Act cannot be wielded by Company Judge to interfere with proceedings
by a secured creditor who has opted to stay outside winding up process to realize its secured
41 Inserted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016,
w.e.f. 1-9-2016.
362 PP-CRVI
interests as per provisions of SARFAESI Act:
Pegasus Assets Reconstruction (P.) Ltd. v. Haryana Concast Ltd, CIVIL APPEAL NOS. 3646 OF 2011,
9293-9294 OF 2014 AND 14736 TO 14738 OF 2015, DATED DECEMBER 29, 2015, [2015] 64
taxmann.com 394 (SC)
Section 283 of the Companies Act, 2013/Section 456 of the Companies Act, 1956, read with section 13 of
the Securitisation And Reconstruction of Financial Assets And Enforcement of Security Interest Act, 2002.
The Supreme court in the matter of Winding up and Custody of companys property opined that
SARFAESI Act is a complete code in itself and there is no lacuna or ambiguity in it to warrant reading
something more into it or to borrow anything from Companies Act. The Court mentioned that as per section
13 of SARFAESI Act, a secured creditor has right to enforce its security interest without intervention of court
or tribunal and the powers under Companies Act cannot be wielded by Company Judge to interfere with
proceedings by a secured creditor who has opted to stay outside winding up process to realize its secured
interests as per provisions of SARFAESI Act.
(5) Any payment made by any person to the secured creditor shall give such person a valid discharge as if
he has made payment to the borrower.
(5A) Where the sale of an immovable property, for which a reserve price has been specified, has been
postponed for want of a bid of an amount not less than such reserve price, it shall be lawful for any officer of
the secured creditor, if so authorised by the secured creditor in this behalf, to bid for the immovable property
on behalf of the secured creditor at any subsequent sale.
(5B) Where the secured creditor, referred to in sub-section (5A), is declared to be the purchaser of the
immovable property at any subsequent sale, the amount of the purchase price shall be adjusted towards the
amount of the claim of the secured creditor for which the auction of enforcement of security interest is taken
by the secured creditor, under sub-section (4) of section 13.
(5C) The provisions of section 9 of the Banking Regulation Act, 1949 shall, as far as may be, apply to the
immovable property acquired by secured creditor under sub-section (5A).
(6) Any transfer of secured asset after taking possession thereof or takeover of management, by the secured
creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in
relation to, the secured asset transferred as if the transfer had been made by the owner of such secured
asset.
(7) Where any action has been taken against a borrower, all costs, charges and expenses which, in the
opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall
be recoverable from the borrower and the money which is received by the secured creditor shall, in the
absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such
costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue
of the money so received shall be paid to the person entitled thereto in accordance with his rights and
interests.
[(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses
incurred by him is tendered to the secured creditor at any time before the date of publication of notice for
public auction or inviting quotations or tender from public or private treaty for transfer by way of lease,
assignment or sale of the secured assets,
(i) the secured assets shall not be transferred by way of lease assignment or sale by the
secured creditor; and
(ii) in case, any step has been taken by the secured creditor for transfer by way of lease or
assignment or sale of the assets before tendering of such amount under this sub-section, no
further step shall be taken by such secured creditor for transfer by way of lease or
42
assignment or sale of such secured assets. ]
43
(9) [Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of] financing of a
financial asset by more than one secured creditors or joint financing of a financial asset by secured creditors,
no secured creditor shall be entitled to exercise any or all of the rights conferred on him under or pursuant to
sub-section (4) unless exercise of such right is agreed upon by the secured creditors representing not less
than sixty per cent in value of the amount outstanding as on a record date and such action shall be binding
on all the secured creditors :
Provided that in the case of a company in liquidation, the amount realised from the sale of secured assets
shall be distributed in accordance with the provisions of Act:
Provided further that in the case of a company being wound up on or after the commencement of this Act,
the secured creditor of such company, who opts to realise his security instead of relinquishing his security
and proving his debt under the Act, 1956, may retain the sale proceeds of his secured assets after depositing
the workmen's dues with the liquidator in accordance with the provisions of the Act:
Provided also that the liquidator referred to in the second proviso shall intimate the secured creditor the
workmen's dues in accordance with the provisions of the 1956 (1 of 1956) and in case such workmen's dues
cannot be ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that
section to the secured creditor and in such case the secured creditor may retain the sale proceeds of the
secured assets after depositing the amount of such estimated dues with the liquidator:
Provided also that in case the secured creditor deposits the estimated amount of workmen's dues, such
creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the excess amount, if
any, deposited by the secured creditor with the liquidator:
Provided also that the secured creditor shall furnish an undertaking to the liquidator to pay the balance of
the workmen's dues, if any.
Explanation.For the purposes of this sub-section,

(a) "record date" means the date agreed upon by the secured creditors representing not less
than [sixty per cent] in value of the amount outstanding on such date;
(b) "amount outstanding" shall include principal, interest and any other dues payable by the
borrower to the secured creditor in respect of secured asset as per the books of account of
the secured creditor.
(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured assets,
2016, w.e.f. 1-9-2016.
43 Substituted for "In the case of" by the Insolvency and Bankruptcy Code, 2016, w.e.f. 15-11-2016.
364 PP-CRVI
the secured creditor may file an application in the form and manner as may be prescribed to the Debts
Recovery Tribunal having jurisdiction or a competent court, as the case may be, for recovery of the balance
amount from the borrower.
(11) Without prejudice to the rights conferred on the secured creditor under or by this section, the secured
creditor shall be entitled to proceed against the guarantors or sell the pledged assets without first taking any
of the measures specified in clauses (a) to (d) of sub-section (4) in relation to the secured assets under this
Act.
(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers
authorised in this behalf in such manner as may be prescribed.
(13) No borrower shall, after receipt of notice from the secured creditor transfer by way of sale, lease or
otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the
notice, without prior written consent of the secured creditor.
In the case of Nik-Nish Retail Pvt. Ltd & Anr. Versus Union Bank & Ors. G.A. 1380 of
2012 in W.P. 6 of 2010 25 June, 2012, Dipankar Datta, J, the Calcutta High Court held
that the scheme of the Act envisages grant of 60 days time to the defaulter for
clearance of the liability or to raise objection. Even if the defaulting party falls short of
paying Rs. 1/- of the amount specified in the demand notice within the permitted
period, its account would still be a 'non- performing asset' and continue to be treated as such and the
secured creditor is, in the circumstances, entitled to initiate further action in terms of provisions of the Act
including taking measures to take possession of the secured assets after the period of 60 days has expired if
no objection is received in the meantime or the objection to the demand notice has been overruled. Question
of waiver does not and cannot arise simply because certain payments had been credited in the cash credit
account. The period of 60 days is the time limited for clearing the liability and if the liability does not stand
cleared, notwithstanding part payment the secured creditor is well within its right to exercise power conferred
by Section 13(4) of the Act.
Assistance by Chief Metropolitan Magistrate or the District Magistrate

Section 14 of the SARFAESI Act provides for assistance for taking possession of secured asset from the
Chief Metropolitan Magistrate or the District Magistrate.
(1) Where the possession of any secured asset is required to be taken by the secured creditor or if any of the
secured asset is required to be sold or transferred by the secured creditor under the provisions of this Act,
the secured creditor may, for the purpose of taking possession or control of any such secured asset, request,
in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such
secured asset or other documents relating thereto may be situated or found, to take possession thereof, and
the Chief Metropolitan Magistrate or, as the case may be, the District Magistrate shall, on such request being
made to him-
a) take possession of such asset and documents relating thereto; and
b) forward such asset and documents to the secured creditor.
Provided that any application by the secured creditor shall be accompanied by an affidavit duly affirmed by
the authorised officer of the secured creditor, declaring that
(i) the aggregate amount of financial assistance granted and the total claim of the Bank as on the date
of filing the application;
(ii) the borrower has created security interest over various properties and that the Bank or Financial
Institution is holding a valid and subsisting security interest over such properties and the claim of the
Bank or Financial Institution is within the limitation period;
(iii) the borrower has created security interest over various properties giving the details of properties
referred to in sub-clause (ii) above;
(iv) the borrower has committed default in repayment of the financial assistance granted aggregating
the specified amount;
(v) consequent upon such default in repayment of the financial assistance the account of the borrower
has been classified as a nonperforming asset;
(vi) affirming that the period of sixty days notice as required by the provisions of sub-section (2) of
section 13, demanding payment of the defaulted financial assistance has been served on the
borrower;
(vii) the objection or representation in reply to the notice received from the borrower has been
considered by the secured creditor and reasons for non-acceptance of such objection or
representation had been communicated to the borrower;
(viii) the borrower has not made any repayment of the financial assistance in spite of the above notice
and the Authorised Officer is, therefore, entitled to take possession of the secured assets under the
provisions of sub-section (4) of section 13 read with section 14 of the principal Act;
(ix) that the provisions of the Act and the rules made thereunder had been complied with.
Provided further that on receipt of the affidavit from the Authorised Officer, the District Magistrate or the
Chief Metropolitan Magistrate, as the case may be, shall after satisfying the contents of the affidavit pass
suitable orders for the purpose of taking possession of the secured assets [within a period of thirty days from
44
the date of application] :
[Provided further that if no order is passed by the Chief Metropolitan Magistrate or District Magistrate
within the said period of thirty days for reasons beyond his control, he may, after recording reasons in writing
45
for the same, pass the order within such further period but not exceeding in aggregate sixty days: ]
Provided also that the requirement of filing affidavit stated in the first proviso shall not apply to proceeding
pending before any District Magistrate or the Chief Metropolitan Magistrate, as the case may be, on the date
of commencement of this Act.]
(1A) The District Magistrate or the Chief Metropolitan Magistrate may authorise any officer subordinate to
him,
(i) to take possession of such assets and documents relating thereto; and
(ii) to forward such assets and documents to the secured creditor.
(2) For the purpose of securing compliance with the provisions of sub-section (1), the Chief Metropolitan
Magistrate or the District Magistrate may take or cause to be taken such steps and use, or cause to be used,
such force, as may, in his opinion, be necessary.
2016, w.e.f. 1-9-2016
2016, w.e.f. 1-9-2016
366 PP-CRVI
(3) No act of the Chief Metropolitan Magistrate or the District Magistrate any officer authorised by the Chief
Metropolitan Magistrate or District Magistrate done in pursuance of this section shall be called in question in
any court or before any authority.
Manner and effect of takeover of Management

Section 15 of the SARFAESI Act provides for the manner and effect of takeover of management.
(1) When the management of business of a borrower is taken over by a asset reconstruction company under
clause (a) of section 9 or, as the case may be, by a secured creditor under clause (b) of sub-section (4) of
section 13], the secured creditor may, by publishing a notice in a newspaper published in English language
and in a newspaper published in an Indian language in circulation in the place where the principal office of
the borrower is situated, appoint as many persons as it thinks fit
(a) in a case in which the borrower is a company as defined in the Companies Act, 1956 (1 of
1956), to be the directors of that borrower in accordance with the provisions of that Act; or
(b) in any other case, to be the administrator of the business of the borrower.
(2) On publication of a notice under sub-section (1),

(a) in any case where the borrower is a company as defined in the Companies Act, 1956 (1 of
1956), all persons holding office as directors of the company and in any other case, all
persons holding any office having power of superintendence, direction and control of the
business of the borrower immediately before the publication of the notice under sub-section
(1), shall be deemed to have vacated their offices as such;
(b) any contract of management between the borrower and any director or manager thereof
holding office as such immediately before publication of the notice under sub-section (1),
shall be deemed to be terminated;
(c) the directors or the administrators appointed under this section shall take such steps as may
be necessary to take into their custody or under their control all the property, effects and
actionable claims to which the business of the borrower is, or appears to be, entitled and all
the property and effects of the business of the borrower shall be deemed to be in the custody
of the directors or administrators, as the case may be, as from the date of the publication of
the notice;
(d) the directors appointed under this section shall, for all purposes, be the directors of the
company of the borrower and such directors or as the case may be, the administrators
appointed under this section, shall alone be entitled to exercise all the powers of the
directors or as the case may be, of the persons exercising powers of superintendence,
direction and control, of the business of the borrower whether such powers are derived from
the memorandum or articles of association of the company of the borrower or from any other
source whatsoever.
(3) Where the management of the business of a borrower, being a company as defined in the Companies
Act, 1956 (1 of 1956), is taken over by the secured creditor, then, notwithstanding anything contained in the
said Act or in the memorandum or articles of association of such borrower,
(a) it shall not be lawful for the shareholders of such company or any other person to nominate
or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such company shall be given
effect to unless approved by the secured creditor;
(c) no proceeding for the winding up of such company or for the appointment of a receiver in
respect thereof shall lie in any court, except with the consent of the secured creditor.
(4) Where the management of the business of a borrower had been taken over by the secured creditor, the
secured creditor shall, on realisation of his debt in full, restore the management of the business of the
borrower to him:
[Provided that if any secured creditor jointly with other secured creditors or any asset reconstruction
company or financial institution or any other assignee has converted part of its debt into shares of a borrower
company and thereby acquired controlling interest in the borrower company, such secured creditors shall not
46
be liable to restore the management of the business to such borrower. ]
The Change in or takeover of the Management of the business is subject to The Change in or takeover of
the Management of the business of the borrower by Securitisation Companies and Reconstruction
Companies (Reserve Bank) Guidelines 2010.
The Reserve Bank of India vide its circular No. RBI/2009-2010/418 DNBS/ PD (SC/RC) No. 17
/26.03.001/2009-10 April 21, 2010 issued Guidelines on Change in or Take Over of the Management of the
Business of the Borrower by Securitisation Companies and Reconstruction Companies (Reserve Bank)
Guidelines, 2010.
1. Short Title and Commencement
(a) These guidelines shall be known as "The Change in or Take Over of the Management of the business of
the borrower by Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines,
2010".
(b) These guidelines shall come into force with effect from April 21, 2010.
Explanation: For the purpose of these guidelines: (i) change in management means effecting change by
the borrower at the instance of SC/RC in the person who has responsibility for the whole or substantially
whole of the management of the business of the borrower and / or other relevant personnel.
(ii) The term Takeover of management" means taking over of the responsibility for the management of the
business of the borrower with or without effecting change in management personnel of the borrower by the
SC/RC.
2. Object of the Guidelines: The objective of these guidelines is to ensure fairness, transparency,
nondiscrimination and non arbitrariness in the action of Securitisation Companies or Reconstruction
Companies and to build in a system of checks and balances while effecting change in or take over of the
management of the business of the borrower by the SC/RCs under Section 9(a) of the SARFAESI Act. The
SC/RCs shall follow these guidelines while exercising the powers conferred on them under Section 9(a) of
the SARFAESI Act, 2002.
3. Powers of SC/RC and Scope of the Guidelines: A SC/RC may resort to change in or take over of the
management of the business of the borrower for the purpose of realization of its dues from the borrower
subject to the provisions of these guidelines. The SC/RCs resorting to take over of management of the
business of the borrower shall do so after complying with the manner of takeover of the management in
accordance with the provisions of Section 15 of the SARFAESI Act. On realization of its dues in full, the
2016, w.e.f. 1-9-2016.
368 PP-CRVI
SC/RC shall restore the management of the business to the borrower as provided in Section 15(4) of the
SARFAESI Act.
4. Eligibility conditions to exercise power for change in or take over of management: In the
circumstances set forth in paragraph 5 (a) A SC/RC may effect change in or take over the management of
the business of the borrower, where the amount due to it from the borrower is not less than 25% of the total
assets owned by the borrower; and 3 (b) Where the borrower is financed by more than one secured creditor
(including SC/RC), secured creditors (including SC/RC) holding not less than 75% of the outstanding security
receipts agree to such action. Explanation : Total Assets means total assets as disclosed in its latest
audited Balance Sheet immediately preceding the date of taking action.
5. Grounds for effecting change in or takeover of management: Subject to the eligibility conditions set
forth in paragraph 4, SC/RC shall be entitled to effect change in management or take over the management
of business of the borrower on any of the following grounds : (a) the borrower makes a willful default in
repayment of the amount due under the relevant loan agreement/s; (b) the SC/RC is satisfied that the
management of the business of the borrower is acting in a manner adversely affecting the interest of the
creditors (including SC/RC) or is failing to take necessary action to avoid any events which would adversely
affect the interest of the creditors; (c) SC/RC is satisfied that the management of the business of the
borrower is not competent to run the business resulting in losses/ non repayment of dues to SC/RC or there
is a lack of professional management of the business of the borrower or the key managerial personnel of the
business of the borrower have not been appointed for more than one year from the date of such vacancy
which would adversely affect the financial health of the business of the borrower or the interests of the
SC/RC as a secured creditor; (d) the borrower has without the prior approval of the secured creditors
(including SC/RC), sold, disposed of, charged, encumbered or alienated 10% or more (in aggregate) of its
assets secured to the SC/RC 4 (e) there are reasonable grounds to believe that the borrower would be
unable to pay its debts as per terms of repayment accepted by the borrower ; (f) the borrower has entered
into any arrangement or compromise with creditors without the consent of the SC/RC which adversely affects
the interest of the SC/RC or the borrower has committed any act of insolvency; (g) the borrower discontinues
or threatens to discontinue any of its businesses constituting 10% or more of its turnover; (h) all or a
significant part of the assets of the borrower required for or essential for its business or operations are
damaged due to the actions of the borrower, (i) the general nature or scope of the business, operations,
management, control or ownership of the business of the borrower are altered to an extent, which in the
opinion of the SC/RC, materially affects the ability of the borrower to repay the loan; (j) the SC/RC is satisfied
that serious dispute/s have arisen among the promoters or directors or partners of the business of the
borrower, which could materially affect the ability of the borrower to repay the loan; (k) failure of the borrower
to acquire the assets for which the loan has been availed and utilization of the funds borrowed for other than
stated purposes or disposal of the financed assets and misuse or misappropriation of the proceeds; (l)
fraudulent transactions by the borrower in respect of the assets secured to the creditor/s. Explanation A: For
the purpose of this paragraph, willful default in repayment of amount due, includes - 5 (a) non-payment of
dues despite adequate cash flow and availability of other resources, or (b) 'routing of transactions through
banks which are not lenders/ consortium members' so as to avoid payment of dues, or (c) siphoning off funds
to the detriment of the defaulting unit, or misrepresentation / falsification of records pertaining to the
transactions with the SC/RC Explanation B: The decision as to whether the borrower is a willful defaulter or
not, shall be made by the SC/RC keeping in view the track record of the borrower and not on the basis of an
isolated transaction/incident which is not material. The default to be categorized as willful must be intentional,
deliberate and calculated.
6. Policy regarding change in or take over of management: (A) Every SC / RC shall frame policy
guidelines regarding change in or take over of the management of the business of the borrower, with the
approval of its Board of Directors and the borrowers shall be made aware of such policy of the SC/RC. (B)
Such policy shall generally provide for the following: (i) The change in or take over of the management of the
business of the borrower should be done only after the proposal is examined by an Independent Advisory
Committee to be appointed by the SC/RC consisting of professionals having technical / finance / legal
background who after assessment of the financial position of the borrower, time frame available for recovery
of the debt from the borrower, future prospects of the business of the borrower and other relevant aspects
shall recommend to the SC/RC that it may resort to change in or take over of the management of the
business of the borrower and that such action would be necessary for effective running of the business
leading to recovery of its dues; (ii) The Board of Directors including at least two independent directors of the
SC/RC should deliberate on the recommendations of the 6 Independent Advisory Committee and consider
the various options available for the recovery of dues before deciding whether under the existing
circumstances the change in or take over of the management of the business of the borrower is necessary
and the decision shall be specifically included in the minutes. (iii) The SC/RC shall carry out due diligence
exercise and record the details of the exercise, including the findings on the circumstances which had led to
default in repayment of the dues by the borrower and why the decision to change in or take over of the
management of the business of the borrower has become necessary. (iv) The SC/RC shall identify suitable
personnel / agencies, who can take over the management of the business of the borrower by formulating a
plan for operating and managing the business of the borrower effectively, so that the dues of the SC/RC may
be realized from the borrower within the time frame. (v) Such plan will also include procedure to be adopted
by the SC/RC at the time of restoration of the management of the business to the borrower in accordance
with paragraph 3 above, borrowers rights and liabilities at the time of change in or take over of management
by the SC/RC and at the time of restoration of management back to the borrower, rights and liabilities of the
new management taking over management of the business of the borrower at the behest of SC/RC. It should
be clarified to the new management by the SC/RC that the scope of their role is limited to recovery of dues of
the SC/RC by managing the affairs of the business of the borrower in a prudent manner. Explanation: To
ensure independence of members of Independent Advisory Committee (IAC), such members should not be
connected with the affairs of the SC/RC in 7 any manner and should not receive any pecuniary benefit from
the SC/RC except for services rendered for acting as member of IAC.
7. Procedure for change in or take over of management: (a) The SC/RC shall give a notice of 60 days to
the borrower indicating its intention to effect change in or take over the management of the business of the
borrower and calling for objections, if any. (b) The objections, if any, submitted by the borrower shall be
initially considered by the IAC and thereafter the objections along with the recommendations of the IAC shall
be submitted to the Board of Directors of the SC/RC. The Board of Directors of SC/RC shall pass a reasoned
order within a period of 30 days from the date of expiry of the notice period, indicating the decision of the
SC/RC regarding the change in or take over of the management of the business of the borrower, which shall
be communicated to the borrower.
8. Reporting SC/RCs shall report to the Bank all cases where they have taken action to cause change in or
take over the management of the business of the borrower for realization of its dues from the borrower in
terms of circular DNBS (PD) CC. No. 12 / SCRC / 10.30.000/ 2008-2009 dated September 26, 2008.
No compensation to directors for loss of office (Section 16)

Section 16 states that no compensation is payable to directors for loss of office.
(1) Notwithstanding anything to the contrary contained in any contract or in any other law for the time being
in force, no managing director or any other director or a manager or any person in charge of management of
the business of the borrower shall be entitled to any compensation for the loss of office or for the premature
termination under this Act of any contract of management entered into by him with the borrower.
370 PP-CRVI
(2) Nothing contained in sub-section (1) shall affect the right of any such managing director or any other
director or manager or any such person in charge of management to recover from the business of the
borrower, moneys recoverable otherwise than by way of such compensation.
Application against measures to recover secured debts (Section 17)

[Section 17 deals with the application against measures to recover secured debts.
17. (1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section (4) of
section 13 taken by the secured creditor or his authorised officer under this Chapter, may make an
application along with such fee, as may be prescribed, to the Debts Recovery Tribunal having jurisdiction in
the matter within forty-five days from the date on which such measure had been taken :
Provided that different fees may be prescribed for making the application by the borrower and the person
other than the borrower.
Explanation.For the removal of doubts, it is hereby declared that the communi-cation of the reasons to the
borrower by the secured creditor for not having accepted his representation or objection or the likely action of
the secured creditor at the stage of communication of reasons to the borrower shall not entitle the person
(including borrower) to make an application to the Debts Recovery Tribunal under this sub-section.
(1A) An application under sub-section (1) shall be filed before the Debts Recovery Tribunal within the local
limits of whose jurisdiction
(a) the cause of action, wholly or in part, arises;
(b) where the secured asset is located; or
(c) the branch or any other office of a bank or financial institution is maintaining an account in
which debt claimed is outstanding for the time being. ]
(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-section (4) of
section 13 taken by the secured creditor for enforcement of security are in accordance with the provisions of
this Act and the rules made thereunder.
(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and evidence
produced by the parties, comes to the conclusion that any of the measures referred to in sub-section (4) of
section 13, taken by the secured creditor are not in accordance with the provisions of this Act and the rules
made thereunder, and require restoration of the management or restoration of possession, of the secured
assets to the borrower or other aggrieved person, it may, by order,
(a) declare the recourse to any one or more measures referred to in sub-section (4) of section
13 taken by the secured creditor as invalid; and
(b) restore the possession of secured assets or management of secured assets to the borrower
or such other aggrieved person, who has made an application under sub-section (1), as the
case may be; and
(c) pass such other direction as it may consider appropriate and necessary in relation to any of
the recourse taken by the secured creditor under sub-section (4) of section 13. ]
(4) If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub-section (4)
of section 13, is in accordance with the provisions of this Act and the rules made thereunder, then,
notwithstanding anything contained in any other law for the time being in force, the secured creditor shall be
entitled to take recourse to one or more of the measures specified under sub-section (4) of section 13 to
recover his secured debt.
(4A) Where
(i) any person, in an application under sub-section (1), claims any tenancy or leasehold rights
upon the secured asset, the Debt Recovery Tribunal, after examining the facts of the case
and evidence produced by the parties in relation to such claims shall, for the purposes of
enforcement of security interest, have the jurisdiction to examine whether lease or
tenancy,
a. has expired or stood determined; or
b. is contrary to section 65A of the Transfer of Property Act, 1882 (4 of 1882); or
c. is contrary to terms of mortgage; or
d. is created after the issuance of notice of default and demand by the Bank under
sub-section (2) of section 13 of the Act; and
(ii) the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed in
secured asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-
clause (d) of clause (i), then notwithstanding anything to the contrary contained in any other
law for the time being in force, the Debt Recovery Tribunal may pass such order as it deems
fit in accordance with the provisions of this Act.
(5) Any application made under sub-section (1) shall be dealt with by the Debts Recovery Tribunal as
expeditiously as possible and disposed of within sixty days from the date of such application :
Provided that the Debts Recovery Tribunal may, from time to time, extend the said period for reasons to be
recorded in writing, so, however, that the total period of pendency of the application with the Debts Recovery
Tribunal, shall not exceed four months from the date of making of such application made under sub-section (1).
(6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four months as
specified in sub-section (5), any part to the application may make an application, in such form as may be
prescribed, to the Appellate Tribunal for directing the Debts Recovery Tribunal for expeditious disposal of the
application pending before the Debts Recovery Tribunal and the Appellate Tribunal may, on such application,
make an order for expeditious disposal of the pending application by the Debts Recovery Tribunal.
(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far may be, dispose of
application in accordance with the provisions of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 (51 of 1993) and the rules made thereunder.]
Appeal to Appellate Tribunal (Section 18)

18. (1) Any person aggrieved, by any order made by the Debts Recovery Tribunal under section 17, may
prefer an appeal along with such fee, as may be prescribed to the Appellate Tribunal within thirty days from
the date of receipt of the order of Debts Recovery Tribunal :
Provided that different fees may be prescribed for filing an appeal by the borrower or by the person other
than the borrower:
Provided further that no appeal shall be entertained unless the borrower has deposited with the Appellate
Tribunal fifty per cent of the amount of debt due from him, as claimed by the secured creditors or determined
by the Debts Recovery Tribunal, whichever is less:
372 PP-CRVI
Provided also that the Appellate Tribunal may, for the reasons to be recorded in writing, reduce the amount
to not less than twenty-five per cent of debt referred to in the second proviso.
(2) Save as otherwise provided in this Act, the Appellate Tribunal shall, as far as may be, dispose of the
appeal in accordance with the provisions of the Recovery of Debts Due to Banks and Financial
InstitutionsAct, 1993 (51 of 1993) and rules made thereunder.
Validation of fees levied
Section 18A: Any fee levied and collected for preferring, before the commencement of the Enforcement of
Security Interest and Recovery of Debts Laws (Amendment) Act, 2004, an appeal to the Debts Recovery
Tribunal or the Appellate Tribunal under this Act, shall be deemed always to have been levied and collected
in accordance with law as if the amendments made to sections 17 and 18 of this Act by sections 10 and 12
of the said Act were in force at all material times.
Appeal to High Court in certain cases
Section 18B: Any borrower residing in the State of Jammu and Kashmir and aggrieved by any order made
by the Court of District Judge under section 17A may prefer an appeal, to the High Court having jurisdiction
over such Court, within thirty days from the date of receipt of the order of the Court of District Judge :
Provided that no appeal shall be preferred unless the borrower has deposited, with the Jammu and Kashmir
High Court, fifty per cent of the amount of the debt due from him as claimed by the secured creditor or
determined by the Court of District Judge, whichever is less :
Provided further that the High Court may, for the reasons to be recorded in writing, reduce the amount to
not less than twenty-five per cent of the debt referred to in the first proviso.]
Right to lodge a caveat
Section 18C deals with the right to lodge a caveat
(1) Where an application or an appeal is expected to be made or has been made under sub-section (1) of
section 17 or section 17A or sub-section (1) of section 18 or section 18B, the secured creditor or any person
claiming a right to appear before the Tribunal or the Court of District Judge or the Appellate Tribunal or the
High Court, as the case may be, on the hearing of such application or appeal, may lodge a caveat in respect
thereof.
(2) Where a caveat has been lodged under sub-section (1),

(a) the secured creditor by whom the caveat has been lodged (hereafter in this section referred
to as the caveator) shall serve notice of the caveat by registered post, acknowledgement
due, on the person by whom the application has been or is expected to be made under sub-
section (1);
(b) any person by whom the caveat has been lodged (hereafter in this section referred to as the
caveator) shall serve notice of the caveat by registered post, acknowledgement due, on the
person by whom the application has been or is expected to be made under sub-section (1).
(3) Where after a caveat has been lodged under sub-section (1), any application or appeal is filed before the
Tribunal or the court of District Judge or the Appellate Tribunal or the High Court, as the case may be, the
Tribunal or the District Judge or the Appellate Tribunal or the High Court, as the case may be, shall serve a
notice of application or appeal filed by the applicant or the appellant on the caveator.
(4) Where a notice of any caveat has been served on the applicant or the Appellant, he shall periodically
furnish the caveator with a copy of the application or the appeal made by him and also with copies of any
paper or document which has been or may be filed by him in support of the application or the appeal.
(5) Where a caveat has been lodged under sub-section (1), such caveat shall not remain in force after the
expiry of the period of ninety days from the date on which it was lodged unless the application or appeal
referred to in sub-section (1) has been made before the expiry of the said period.
Right of borrower to receive compensation and costs in certain cases (Section 19)
Section 19 provides that if the Debts Recovery Tribunal or the Court of District Judge, on an application
made under section 17 or section 17A or the Appellate Tribunal or the High Court on an appeal preferred
under section 18 or section 18A, holds that the possession of secured assets by the secured creditor is not in
accordance with the provisions of this Act and rules made thereunder and directs the secured creditors to
93
return such secured assets to the [concerned borrowers or any other aggrieved person, who has filed the
application under section 17 or section 17A or appeal under section 18 or section 18A, as the case may be,
the borrower or such other person] shall be entitled to the payment of such compensation and costs as may
be determined by such Tribunal or Court of District Judge or Appellate Tribunal or the High Court referred to
in section 18B.
Setting up of Central Registry (Section 20)

Section 20 deals with the setting up of Central Registry.
(1) The Central Government may, by notification, set-up or cause to be set-up from such date as it may
specify in such notification, a registry to be known as the Central Registry with its own seal for the purposes
of registration of transaction of securitisation and reconstruction of financial assets and creation of security
interest under this Act.
(2) The head office of the Central Registry shall be at such place as the Central Government may specify
and for the purpose of facilitating registration of transactions referred to in sub-section (1), there may be
established at such other places as the Central Government may think fit, branch offices of the Central
Registry.
(3) The Central Government may, by notification, define the territorial limits within which an office of the
Central Registry may exercise its functions.
(4) The provisions of this Act pertaining to the Central Registry shall be in addition to and not in derogation of
any of the provisions contained in the Registration Act, 1908 (16 of 1908), the Companies Act, 1956 (1 of
1956), the Merchant Shipping Act, 1958 (44 of 1958), the Patents Act, 1970 (39 of 1970), the Motor Vehicles
Act, 1988 (59 of 1988), and the Designs Act, 2000 (16 of 2000) or any other law requiring registration of
charges and shall not affect the priority of charges or validity thereof under those Acts or laws.
Section 20A deals with the Integration of registration systems with Central Registry.
(1) The Central Government may, for the purpose of providing a Central database, in consultation with State
Governments or other authorities opera-ting registration system for recording rights over any property or
creation, modification or satisfaction of any security interest on such property, integrate the registration
records of such registration systems with the records of Central Registry established under section 20, in
such manner as may be prescribed.
Explanation.For the purpose of this sub-section, the registration records includes records of registration
374 PP-CRVI
under the Companies Act, 2013 (18 of 2013), the Registration Act, 1908 (16 of 1908), the Merchant Shipping
Act, 1958 (44 of 1958), the Motor Vehicles Act, 1988 (59 of 1988), the Patents Act, 1970 (39 of 1970), the
Designs Act, 2000 (16 of 2000) or other such records under any other law for the time being in force.
(2) The Central Government shall after integration of records of various registration systems referred to in
sub-section (1) with the Central Registry, by notification, declare the date of integration of registration
systems and the date from which such integrated records shall be available; and with effect from such date,
security interests over properties which are registered under any registration system referred to in sub-
section (1) shall be deemed to be registered with the Central Registry for the purposes of this Act.
Section 20B delas with the Delegation of powers.
It provides that the Central Government may, by notification, delegate its powers and functions under this
Chapter, in relation to establishment, operations and regulation of the Central Registry to the Reserve Bank,
subject to such terms and conditions as may be prescribed.
Central Registrar (Section 21)
Section 21 deals with the Central Registrar.

(1) The Central Government may, by notification, appoint a person for the purpose of registration of
transactions relating to securitisation, reconstruction of financial assets and security interest created over
properties, to be known as the Central Registrar.
(2) The Central Government may appoint such other officers with such designations as it thinks fit for the
purpose of discharging, under the superintendence and direction of the Central Registrar, such functions of
the Central Registrar under this Act as he may, from time to time, authorise them to discharge.
Register of Securitisation, reconstruction and security interest transactions
Section 22 deals with the Register of securitisation, reconstruction and security interest transactions.
(1) For the purposes of this Act, a record called the Central Register shall be kept at the head office of the
Central Registry for entering the particulars of the transactions relating to
(a) securitisation of financial assets;
(b) reconstruction of financial assets; and
(c) creation of security interest.
(2) Notwithstanding anything contained in sub-section (1), it shall be lawful for the Central Registrar to keep
the records wholly or partly in computer, floppies, diskettes or in any other electronic form subject to such
safeguards as may be prescribed.
(3) Where such register is maintained wholly or partly in computer, floppies, diskettes or in any other
electronic form, under sub-section (2), any reference in this Act to entry in the Central Register shall be
construed as a reference to any entry as maintained in computer or in any other electronic form.
(4) The register shall be kept under the control and management of the Central Registrar.
Filing of Particulars
Filing of transactions of securitisation, reconstruction and creation of security interest.
47
23. [ (1) ] The particulars of every transaction of securitisation, asset reconstruction or creation of security
47 Renumbered as sub-section (1) by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
Provisions (Amendment) Act, 2016, w.e.f. a date yet to be notified.
interest shall be filed, with the Central Registrar in the manner and on payment of such fee as may be
48
prescribed [***] :
49
[***]
50
[Provided [***] that the Central Government may, by notification, require registration of all transactions of
securitisation, or asset reconstruction or creation of security interest which are subsisting on or before the
date of establishment of the Central Registry under sub-section (1) of section 20 within such period and on
payment of such fees as may be prescribed.]
[(2) The Central Government may, by notification, require the registration of transaction relating to different
types of security interest created on different kinds of property with the Central Registry.
(3) The Central Government may, by rules, prescribe forms for registration for different types of security
51
interest under this section and fee to be charged for such registration. ]
Modification of security interest registered under this Act.
Section 24 provides that whenever the terms or conditions, or the extent or operation, of any security interest
registered under this Chapter are or is modified, it shall be the duty of the ;'asset reconstruction company or
the secured creditor, as the case may be, to send to the Central Registrar, the particulars of such
modification, and the provisions of this Chapter as to registration of a security interest shall apply to such
modification of such security interest.
Satisfaction of Security interest (Section 25)

Section 25 deals with the Asset reconstruction companyor secured creditor to report satisfaction of
security interest.
(1) The asset reconstruction company or the secured creditor as the case may be, shall give intimation to the
Central Registrar of the payment or satisfaction in full, of any security interest relating to the asset
reconstruction company or the secured creditor and requiring registration under this Chapter, within thirty
days from the date of such payment or satisfaction.
(1A) On receipt of intimation under sub-section (1), the Central Registrar shall order that a memorandum of
satisfaction shall be entered in the Central Register.
(2) If the concerned borrower gives an intimation to the Central Registrar for not recording the payment or
satisfaction referred to in sub-section (1), the Central Registrar shall on receipt of such intimation, cause a
notice to be sent to the asset reconstruction company or the secured creditor calling upon it to show cause
within a time not exceeding fourteen days specified in such notice, as to why payment or satisfaction should
not be recorded as intimated to the Central Registrar.
48 Words ", within thirty days after the date of such transaction or creation of security, by the securitisation company or
reconstruction company or the secured creditor, as the case may be" omitted by the Enforcement of Security Interest and
Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. a date yet to be notified.
2016, w.e.f. a date yet to be notified.
50 Word "further" omitted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions
(Amendment) Act, 2016, w.e.f. a date yet to be notified.
376 PP-CRVI
(3) If no cause is shown, the Central Registrar shall order that a memorandum of satisfaction shall be
entered in the Central Register.
(4) If cause is shown, the Central Registrar shall record a note to that effect in the Central Register, and shall
inform the borrower that he has done so.
Right to Inspect
Section 26 deals with the right to inspect particulars of securitisation, reconstruction and security interest
transactions.
(1) The particulars of securitisation or reconstruction or security interest entered in the Central Register of
such transactions kept under section 22 shall be open during the business hours for inspection by any
person on payment of such fee as may be prescribed.
(2) The Central Register referred to in sub-section (1) maintained in electronic form, shall also be open
during the business hours for the inspection by any person through electronic media on payment of such fee
as may be prescribed.
Section 26A deals with the rectification by Central Government in matters of registration,
modification and satisfaction, etc.
(1) The Central Government, on being satisfied

(a) that the omission to file with the Registrar the particulars of any transaction of securitisation,
asset reconstruction or security interest or modification or satisfaction of such transaction or;
the omission or mis-statement of any particular with respect to any such transaction or
modification or with respect to any satisfaction or other entry made in pursuance of section
23 or section 24 or section 25 of the principal Act was accidental or due to inadvertence or
some other sufficient cause or it is not of a nature to prejudice the position of creditors; or
(b) that on other grounds, it is just and equitable to grant relief,
may, on the application of a secured creditor or asset reconstruction company or any other person interested
on such terms and conditions as it may seem to the Central Government just and expedient, direct that the
time for filing of the particulars of the transaction for registration or modification or satisfaction shall be
extended or, as the case may require, the omission or mis-statement shall be rectified.
(2) Where the Central Government extends the time for the registration of transaction of security interest or
securitisation or asset reconstruction or modification or satisfaction thereof, the order shall not prejudice any
rights acquired in respect of the property concerned or financial asset before the transaction is actually
registered.
52
Section 26B deals with the registration by secured creditors and other creditors.
(1) The Central Government may by notification, extend the provisions of Chapter IV relating to Central
Registry to all creditors other than secured creditors as defined in clause (zd) of sub-section (1) of section 2,
for creation, modification or satisfaction of any security interest over any property of the borrower for the
purpose of securing due repayment of any financial assistance granted by such creditor to the borrower.
52 Chapter IVA, consisting of sections 26B to 26E, inserted by the Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. a date yet to be notified.
(2) From the date of notification under sub-section (1), any creditor including the secured creditor may file
particulars of transactions of creation, modification or satisfaction of any security interest with the Central
Registry in such form and manner as may be prescribed.
(3) A creditor other than the secured creditor filing particulars of transactions of creation, modification and
satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right
of enforcement of securities under this Act.
Section 26C deals with the Effect of the registration of transactions, etc.
(1) Without prejudice to the provisions contained in any other law, for the time being in force, any registration
of transactions of creation, modification or satisfaction of security interest by a secured creditor or other
creditor or filing of attachment orders under this Chapter shall be deemed to constitute a public notice from
the date and time of filing of particulars of such transaction with the Central Registry for creation, modification
or satisfaction of such security interest or attachment order, as the case may be.
(2) Where security interest or attachment order upon any property in favour of the secured creditor or any
other creditor are filed for the purpose of registration under the provisions of Chapter IV and this Chapter, the
claim of such secured creditor or other creditor holding attachment order shall have priority over any
subsequent security interest created upon such property and any transfer by way of sale, lease or
assignment or licence of such property or attachment order subsequent to such registration, shall be subject
to such claim:
Provided that nothing contained in this sub-section shall apply to transactions carried on by the borrower in
the ordinary course of business.
(4) Every authority or officer of the Central Government or any State Government or local authority, entrusted
with the function of recovery of tax or other Government dues and for issuing any order for attachment of any
property of any person liable to pay the tax or Government dues, shall file with the Central Registry such
attachment order with particulars of the assessee and details of tax or other Government dues from such
date as may be notified by the Central Government, in such form and manner as may be prescribed.
(5) If any person, having any claim against any borrower, obtains orders for attachment of property from any
court or other authority empowered to issue attachment order, such person may file particulars of such
attachment orders with Central Registry in such form and manner on payment of such fee as may be
prescribed.
Section 26D delas with the right of enforcement of securities.
Notwithstanding anything contained in any other law for the time being in force, from the date of
commencement of the provisions of this Chapter, no secured creditor shall be entitled to exercise the rights
of enforcement of securities under Chapter III unless the security interest created in its favour by the
borrower has been registered with the Central Registry.
Section 26E deals with the Priority to secured creditors.
Notwithstanding anything contained in any other law for the time being in force, after the registration of
security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all
revenues, taxes, cesses and other rates payable to the Central Government or State Government or local
authority.
Explanation.For the purposes of this section, it is hereby clarified that on or after the commencement of the
378 PP-CRVI
Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings
are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt
shall be subject to the provisions of that Code.]
Penalties
27. If a default is made
(a) in filing under section 23, the particulars of every transaction of any securitisation or asset
9
reconstruction or security interest created by a [asset reconstruction company] or secured
creditor; or
(b) in sending under section 24, the particulars of the modification referred to in that section; or
(c) in giving intimation under section 25,
every company and every officer of the company or the secured creditor and every officer of the secured
creditor who is in default shall be punishable with fine which may extend to five thousand rupees for every
day during which the default continues:
Provided that provisions of this section shall be deemed to have been omitted from the date of coming into
force of the provisions of this Chapter and section 23 as amended by the Enforcement of Security Interest
53
and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. ]
Penalties for non-compliance of direction of Reserve Bank

54
As per Section 28 of the Act, if any securitisation company or reconstruction company fails to comply with
any direction issued by the Reserve Bank under Section 12 or Section 12A, such company and every officer
of the company who is in default, shall be punishable with fine which may extend to five lakh rupees and in
the case of a continuing offence, with an additional fine which may extend to ten thousand rupees for every
day during which the default continues.
Offences
Any person who contravenes the provisions of this Act or of any rules made thereunder shall be punishable
with imprisonment for a term which may extend to one year, or with fine, or with both.
Non-Applicability in certain cases

Section 31 deals with the provisions of this Act not to apply in certain cases.
The provisions of this Act shall not apply to

(a) a lien on any goods, money or security given by or under the Indian Contract Act, 1872 (9 of
1872) or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the time being in force;
(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act, 1872 (9
of 1872);
(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the Aircraft Act,
1934 (24 of 1934);
54 Omittedby the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act,
2016, w.e.f. a date yet to be notified. Prior to its omission, section 28, as amended by the Enforcement of Security Interest and
Recovery of Debts Laws (Amendment) Act, 2004, w.r.e.f. 11-11-2004, read as under :
(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the
Merchant Shipping Act, 1958 (44 of 1958);
55
(e) [***]
(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of 1930);
(g) any properties not liable to attachment (excluding the properties specifically charged with
the debt recoverable under this Act) or sale under the first proviso to sub-section (1) of
section 60 of the Code of Civil Procedure, 1908 (5 of 1908);
(h) any security interest for securing repayment of any financial asset not exceeding one lakh
rupees;
(i) any security interest created in agricultural land;
(j) any case in which the amount due is less than twenty per cent of the principal amount and
interest thereon.
Civil Court Not to have jurisdiction

Section 34 provides that no civil court shall have jurisdiction to entertain any suit or proceeding in respect of
any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by or under this Act to
determine and no injunction shall be granted by any court or other authority in respect of any action taken or
to be taken in pursuance of any power conferred by or under this Act or under the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (51 of 1993).
In the case of BPV Classic Tea Factory (P.) Ltd. v. Corporation Bank, [2008] 87
SCL 14 (MAD.) It was held that SARFAESI Act, 2002 is a special Act while Companies
Act, 1956, is a general law and, therefore, with regard to enforcement of a security
asset under section 34, provisions as contained in 2002 Act alone would apply with
regard to sale of an immovable property by secured creditor and same cannot be
challenged before company court under provisions of 1956 Act.
Limitation Act (Section 36)

Limitation Act, 1963 is applicable to the claims made under this Act. Accordingly, no secured creditor shall be
entitled to take all or any of the measures under Sub-section (4) of Section 13, unless his claim in respect of
the financial asset is made within the period of limitation prescribed under the Limitation Act, 1963.
Applicability of other Acts
Section 35 provides that the provisions of this Act shall have effect, notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or any instrument having effect by virtue of
any such law.
In accordance with Section 37, the provisions of this Act or the rules made thereunder shall be in addition to
and not in derogation of, the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the
Securities and Exchange Board of India Act, 1992, the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 or any other law for the time being in force.
2016, w.e.f. 1-9-2016. Prior to its omission, clause (e) read as under :
"(e) any conditional sale, hire-purchase or lease or any other contract in which no security interest has been created;"
380 PP-CRVI
Rule making power

Power of Central Government to make rules.
38. (1) The Central Government may, by notification and in the Electronic Gazette as defined in clause (s) of
section 2 of the Information Technology Act, 2000 (21 of 2000), make rules for carrying out the provisions of
this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all
or any of the following matters, namely :
56
[ (a) other business or commercial rights of similar nature under clause (t) of section 2;]
[(aa)] the form and manner in which an application may be filed under sub-section (10) of section
57
13 ;
(b) the manner in which the rights of a secured creditor may be exercised by one or more of his
officers under sub-section (12) of section 13;
[(ba) the fee for making an application to the Debts Recovery Tribunal under sub-section (1) of
section 17;
(bb) the form of making an application to the Appellate Tribunal under sub-section (6) of section
17;
(bc) the fee for preferring an appeal to the Appellate Tribunal under sub-section (1) of
section 18;]
[ (bca) the manner of integration of records of various registration systems with the records of
Central Registry under sub-section (1) of section 20A;
(bcb) the terms and conditions of delegation of powers by the Central Government to the Reserve
Bank under section 20B. ]
(c) the safeguards subject to which the records may be kept under sub-section (2) of section 22;
(d) the manner in which the particulars of every transaction of securitisation shall be filed under
section 23 and fee for filing such transaction;
[ (da) the form for registration of different types of security interests and fee thereof under sub-
58
section (3) of section 23; ]
(e) the fee for inspecting the particulars of transactions kept under section 22 and entered in the
Central Register under sub-section (1) of section 26;
(f) the fee for inspecting the Central Register maintained in electronic form under sub-section
(2) of section 26;
[ (fa) the form and the manner for filing particulars of transactions under sub-section (2) of section
26B;
(fb) the form and manner of filing attachment orders with the Central Registry and the date under
sub-section (4) of section 26B;
(fc) the form and manner of filing particulars of attachment order with the Central Registry and
59
the fee under sub-section (5) of section 26B. ]
2016, w.e.f. 1-9-2016.
57 Clause (a) renumbered as clause (aa) by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
Provisions (Amendment) Act, 2016, w.e.f. 1-9-2016.
2016, w.e.f. 1-9-2016.
2016, w.e.f. 1-9-2016.
(g) any other matter which is required to be, or may be, prescribed, in respect of which provision
is to be, or may be, made by rules.
(3) Every rule made under this Act shall be laid, as soon as may be after it is made, before each House of
Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in
two or more successive sessions, and if, before the expiry of the session immediately following the session
or the successive sessions aforesaid, both Houses agree in making any modification in the rule or both
Houses agree that the rule should not be made, the rule shall thereafter have effect only in such modified
form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be
without prejudice to the validity of anything previously done under that rule.
SECURITY INTEREST (ENFORCEMENT) RULES, 2002.

Demand notice
Rule 3 (1) provides that the service of demand notice as referred to in sub-section (2) of section 13 of the
60
SRFAESI Act shall be made by delivering [including hand delivery] or transmitting at the place where the
borrower or his agent, empowered to accept the notice or documents on behalf of the borrower, actually and
voluntarily resides or carries on business or personally works for gain, by registered post with
acknowledgement due, addressed to the borrower or his agent empowered to accept the service or by
Speed Post or by courier or by any other means of transmission of documents like fax message or electronic
mail service.
Provided that where authorised officer has reason to believe that the borrower or his agent is avoiding the
service of the notice or that for any other reason, the service cannot be made as aforesaid, the service shall
be effected by affixing a copy of the demand notice on the outer door or some other conspicuous part of the
house or building in which the borrower or his agent ordinarily resides or carries on business or personally
works for gain and also by publishing the contents of the demand notice in two leading newspapers, one in
vernacular language, having sufficient circulation in that locality.
(2) Where the borrower is a body corporate, the demand notice shall be served on the registered office or
any of the branches of such body corporate as specified under sub-rule (1).
(3) Any other notice in writing to be served on the borrower or his agent by authorised officer, shall be served
in the same manner as provided in this rule.
(4) Where there are more than one borrower, the demand notice shall be served on each borrower.
[(5) The demand notice may invite attention of the borrower to provisions of sub-section (8) of section 13 of
61
the Act, in respect of time available to the borrower, to redeem the secured assets. ]
Reply to Representation of the borrower (Rule 3A)

(a) After issue of demand notice under sub-section (2) of section 13, if the borrower makes any
representation or raises any objection to the notice, the Authorized Officer shall consider such
representation or objection and examine whether the same is acceptable or tenable.
(b) If on examining the representation made or objection raised by the borrower, the secured creditor is
satisfied that there is a need to make any changes or modifications in the demand notice, he shall
60 Inserted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016
61 Sub-rule (5) inserted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
382 PP-CRVI
modify the notice accordingly and serve a revised notice or pass such other suitable orders as
62
deemed necessary, within [fifteen days] from the date of receipt of the representation or objection.
(c) If on examining the representation made or objection raised, the Authorized Officer comes to the
conclusion that such representation or objection is not acceptable or tenable, he shall communicate
63
within [fifteen days] of receipt of such representation or objection, the reasons for non-acceptance
of the representation or objection, to the borrower
Procedure after issue of notice (Rule 4)
If the amount mentioned in the demand notice is not paid within the time specified therein, the authorised
officer shall proceed to realise the amount by adopting any one or more of the measures specified in sub-
section (4) of section 13 of the Act for taking possession of movable property, namely:
(1) Where the possession of the secured assets to be taken by the secured creditor are movable
property in possession of the borrower, the authorised officer shall take possession of such movable
property in the presence of two witnesses after a Panchnama drawn and signed by the witnesses
as nearly as possible in Appendix I to these rules.
(2) After taking possession under sub-rule (1) above, the authorised officer shall make or cause to be
made an inventory of the property as nearly as possible in the form given in Appendix II to these
rules and deliver or cause to be delivered, a copy of such inventory to the borrower or to any person
entitled to receive on behalf of borrower.
[ (2A) The borrower shall be intimated by a notice, enclosing the panchnama drawn in Appendix I
and the inventory made in Appendix II.
(2B) All notices under these rules may also be served upon the borrower through electronic
64
mode of service, in addition to the modes specified under rule 3. ]
(3) The authorised officer shall keep the property taken possession under sub-rule (1) either in his own
custody or in the custody of any person authorised or appointed by him, who shall take as much
care of the property in his custody as an owner of ordinary prudence would, under the similar
circumstances, take of such property:
Provided that if such property is subject to speedy or natural decay, or the expense of keeping such
property in custody is likely to exceed its value, the authorised officer may sell it at once.
(4) The authorised officer shall take steps for preservation and protection of secured assets and insure
them, if necessary, till they are sold or otherwise disposed of.
(5) In case any secured asset is:
(a) a debt not secured by negotiable instrument; or
(b) a share in a body corporate;
(c) other movable property not in the possession of the borrower except the property deposited in
or in the custody of any court or any like authority, the authorised officer shall obtain possession
or recover the debt by service of notice as under :
(i) in the case of a debt, prohibiting the borrower from recovering the debt or any interest
62 Substituted for "seven days" by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
63 Substituted for "seven days" by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
64 Sub-rules (2A) and (2B) inserted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
thereon and the debtor from making payment thereof and directing the debtor to make
such payment to the authorised officer; or
(ii) in the case of the shares in a body corporate, directing the borrower to transfer the same to
the secured creditor and also the body corporate from not transferring such shares in
favour of any person other than the secured creditor. A copy of the notice so sent may be
endorsed to the concerned body corporates Registrar to the issue or share transfer
agents, if any;
(iii) in the case of other movable property (except as aforesaid), calling upon the borrowers
and the person in possession to hand over the same to the authorised officer and the
authorised officer shall take custody of such movable property in the same manner as
provided in sub-rules (1) to (3) above;
(iv) movable secured assets other than those covered in this rule shall be taken possession of
by the authorised officer by taking possession of the documents evidencing title to such
secured assets.
Valuation of movable secured assets (Rule 5)

After taking possession under sub-rule (1) of rule 4 and in any case before sale, the authorised officer shall
obtain the estimated value of the movable secured assets and thereafter, if considered necessary, fix in
consultation with the secured creditor, the reserve price of the assets to be sold in realisation of the dues of
the secured creditor.
Sale of movable secured assets (Rule 6)

(1) The authorised officer may sell the movable secured assets taken possession under sub-rule (1) of rule 4
in one or more lots by adopting any of the following methods to secure maximum sale price for the assets, to
be so sold
(a) obtaining quotations from parties dealing in the secured assets or otherwise interested in buying
such assets; or
(b) inviting tenders from the public; or
65
(c) holding public auction including through e-auction mode ; or
(d) by private treaty.
(2) The authorised officer shall serve to the borrower a notice of thirty days for sale of the movable secured
assets under sub-rule (1):
Provided that if the sale of such secured assets is being, effected by either inviting tenders from the public or
by holding public auction, the secured creditor shall cause a public notice in two leading newspapers, one in
vernacular language, having sufficient circulation in that locality by setting out the terms of sale, which may
include,
(a) details about the borrower and the secured creditor;
(b) description of movable secured assets to be sold with identification marks or numbers, if any, on
65 Clause (c) substituted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016. Prior to its substitution,
said clause read as under :
"(c) holding public auction; or"
384 PP-CRVI
them;
(c) reserve price, if any, and the time and manner of payment;
(d) time and place of public auction or the time after which sale by any other mode shall be completed;
(e) depositing earnest money as may be stipulated by the secured creditor;
(f) any other thing which the authorised officer considers it material for a purchaser to know in order to
judge the nature and value of movable secured assets.
[Provided further that if sale of movable property by any one of the methods specified under sub-rule (1)
fails and the sale is required to be conducted again, the authorised officer shall serve, affix and publish
66
notice of sale of not less than fifteen days to the borrower for any subsequent sale.]
(3) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled
67
[between the secured creditors and the proposed purchaser] .
Issue of certificate of sale (Rule 7)
(1) Where movable secured assets is sold, sale price of each lot shall be paid as per the terms of the public
notice or on the terms as may be settled between the parties, as the case may be and in the event of default
of payment, the movable secured assets shall be liable to be ordered for sale again.
(2) On payment of sale price, the authorised officer shall issue a certificate of sale in the prescribed form as
given in Appendix III to these rules specifying the movable secured assets sold, price paid and the name of
the purchaser and thereafter the sale shall become absolute. The certificate of sale so issued shall be prima
facie evidence of title of the purchaser.
[(2A) All notices under these rules may also be served upon the borrower through electronic mode of
68
service, in addition to the modes prescribed under sub-rule (1) and sub-rule (2) of rule 8.]
(3) Where the movable secured assets are those referred in sub-clauses (iii) to (v) of clause (1) of sub-
section (1) of section 2 of the Act, the provisions contained in these rules and rule 7 dealing with the sale of
movable secured assets shall, mutatis mutandis, apply to such assets.
Sale of immovable secured assets (Rule 8)
(1) Where the secured asset is an immovable property, the authorised officer shall take or cause to be taken
possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules,
to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the
property.
(2) The possession notice as referred to in sub-rule (1) shall also be published as soon as possible but in any
case not later than seven days from the date of taking possession, in two leading newspapers in two leading
newspapers, one in vernacular language having sufficient circulation in that locality, by the authorised officer.
(3) In the event of possession of immovable property is actually taken by the authorised officer, such
66 Second proviso inserted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
67 Substituted for "between the parties in writing" by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
68 Sub-rule (2A) inserted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
property shall be kept in his own custody or in the custody of any person authorised or appointed by him,
who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the
similar circumstances, take of such property.
(4) The authorised officer shall take steps for preservation and protection of secured assets and insure them,
if necessary, till they are sold or otherwise disposed of.
(5) Before effecting sale of the immovable property referred to in sub-rule (1) of rule 9, the authorised officer
shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor,
fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by
any of the following methods:
(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested
in buying the such assets; or
(b) by inviting tenders from the public;

69
(c) by holding public auction [including through e-auction mode] ; or
(d) by private treaty.
[Provided that in case of sale of immovable property in the State of Jammu and Kashmir, the provisions of
Jammu and Kashmir Transfer of Property Act, 1977 shall apply to the person who acquires such property in
70
the State. ]
(6) The authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable
secured assets, under sub-rule (5) :
Provided that if the sale of such secured asset is being effected by either inviting tenders from the public or
by holding public auction, the secured creditor shall cause a public notice in two leading newspapers one in
vernacular language having sufficient circulation in the locality by setting out the terms of sale, which shall
include,
(a) the description of the immovable property to be sold, including the details of the encumbrances
known to the secured creditor;
(b) the secured debt for recovery of which the property is to be sold;
(c) reserve price, below which the property may not be sold;
(d) time and place of public auction or the time after which sale by any other mode shall be completed;
(e) depositing earnest money as may be stipulated by the secured creditor;
(f) any other thing which the authorised officer considers it material for a purchaser to know in order to
judge the nature and value of the property.
69 Clause (c) substituted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016. Prior to its substitution,
said clause read as under :
"(c) by holding public auction; or"
70 Inserted by the Security Interest (Enforcement) (Amendment) Rules, 2012, w.e.f. 12-7-2012.
386 PP-CRVI
In the case of Pvt. Ltd. & Ors vs Union Of India & Ors on 14 November, 2011 writ
petition no. 1956 of 2011 decided on 14 November 2011 Dr. D.Y. Chandrachud,
A.A. Sayed JJ in the High Court of judicature at Bombay held that Rule 8(6) of the
Rules of 2002 provides the necessary safeguard if the action is taken in arbitrary
and unreasonable manner and if the valuation of the property is not properly fixed.
The whole object of Rule 8 (6) of the Rules of 2002 appears to be that the borrower gets clear thirty days'
notice before the sale takes place. During this period, the borrower can raise objections and can also point
out before the appropriate forum as regards the correct and true valuation of the property. The essential
purpose of sub-rule (5) of Rule 8 of the Rules of 2002 is to see that there is proper valuation by an approved
valuer, who would be considered as an expert, and the view of the secured creditor on the aspect of fixation
of reserved price is taken into consideration by the authorized officer. Just because the borrower is excluded
from Rule 8 (5) of the Rules of 2002 or has no voice at the time when the valuation is fixed and the reserved
price is also fixed, by itself will not render Rule 8 (5) unconstitutional.
(7) Every notice of sale shall be affixed on a conspicuous part of the immovable property and may, if the
authorised officer deems it fit, put on the web-site of the secured creditor on the Internet.
(8) Sale by any method other than public auction or public tender, shall be on such terms as may be settled
71
[between the secured creditor and the proposed purchaser in writing] .
Time of sale, issue of sale certificate and delivery of possession, etc. (Rule 9)
[ (1) No sale of immovable property under these rules, in first instance shall take place before the expiry of
thirty days from the date on which the public notice of sale is published in newspapers as referred to in the
proviso to sub-rule (6) of rule 8 or notice of sale has been served to the borrower:
Provided further that if sale of immovable property by any one of the methods specified by sub-rule (5) of
rule 8 fails and sale is required to be conducted again, the authorised officer shall serve, affix and publish
72
notice of sale of not less than fifteen days to the borrower, for any subsequent sale.]
(2) The sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or
tender or quotation or offer to the authorised officer and shall be subject to confirmation by the secured
creditor:
Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the
73
reserve price, specified under sub-rule (5) of [rule 8] :
Provided further that if the authorised officer fails to obtain a price higher than the reserve price, he may, with
the consent of the borrower and the secured creditor effect the sale at such price.
[(3) On every sale of immovable property, the purchaser shall immediately, i.e. on the same day or not later
than next working day, as the case may be, pay a deposit of twenty five per cent of the amount of the sale
71 Substituted for "between the parties in writing" by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
72 Sub-rule (1) substituted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016. Prior to its
substitution, said sub-rule read as under :
"(1) No sale of immovable property under these rules shall take place before the expiry of thirty days from the date on which the
public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) or notice of sale has been served to
the borrower."
73 Substituted for "rule 9" by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016.
price, which is inclusive of earnest money deposited, if any, to the authorised officer conducting the sale and
74
in default of such deposit, the property shall be sold again.]
(4) The balance amount of purchase price payable shall be paid by the purchaser to the authorised officer on
or before the fifteenth day of confirmation of sale of the immovable property or such extended period [as
may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding
75
three months] .
(5) In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited and the
property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the
sum for which it may be subsequently sold.
(6) On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the
authorised officer exercising the power of sale shall issue a certificate of sale of the immovable property in
favour of the purchaser in the form given in Appendix V to these rules.
(7) Where the immovable property sold is subject to any encumbrances, the authorised officer may, if he
thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and
any interest due thereon together with such additional amount that may be sufficient to meet the
contingencies or further cost, expenses and interest as may be determined by him.
Provided that it after meeting the cost of removing encumbrances and contingencies there is any surplus
available out of the money deposited by the purchaser such surplus shall be paid to the purchaser within
fifteen day, from date of finalisation of the sale.
(8) On such deposit of money for discharge of the encumbrances, the authorised officer [shall issue or cause
the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and
take steps to make the payment accordingly.
(9) The authorised officer shall deliver the property to the purchaser free from encumbrances known to the
secured creditor on deposit of money as specified in sub-rule (7) above.
(10) The certificate of sale issued under sub-rule (6) shall specifically mention that whether the purchaser has
purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.
Appointment of Manager (Rule 10)
(1) The Board of Directors or Board of Trustees, as the case may be, may appoint in consultation with the
borrower any person (hereinafter referred to as the Manager) to manage the secured assets the possession
of which has been taken over by the secured creditor.
Provided that the manager so appointed shall not be a person who is, or has been, adjudicated insolvent, or
has suspended payment or has compounded with his creditors, or who is, or has been, convicted by a
criminal court of an offence involving moral turpitude.
(2) The Manager appointed by the Board of Directors or Board of Trustees, as the case may be, shall be
deemed to be an agent of the borrower and the borrower shall be solely responsible for the commission or
74 Sub-rule (3) substituted by the Security Interest (Enforcement) (Amendment) Rules, 2016, w.e.f. 3-11-2016. Prior to its
substitution, said sub-rule read as under:
"(3) On every sale of immovable property, the purchaser shall immediately pay a deposit of twenty five per cent of the amount of
the sale price, to the authorised officer conducting the sale and in default of such deposit, the property shall forthwith be sold
again."
75 Substituted for "as may be agreed upon in writing between the parties" by the Security Interest (Enforcement) (Amendment)
Rules, 2016, w.e.f. 3-11-2016.
388 PP-CRVI
omission of acts of the Manager unless such commission or omission are due to improper intervention of the
secured creditor or the authorised officer.
(3) The Manager shall have power by notice in writing to recover any money from any person who has
acquired any of the secured assets from the borrower, which is due to may become due to the borrower.
(4) The Manager shall give such person who has made payment under sub-rule (3) a valid discharge as if he
has made payments to the borrower.
(5) The Manager shall apply all the monies received by him in accordance with the provisions contained in
sub-section (7) of section 13 of the [Act].
Procedure for recovery of shortfall of secured debt (Rule 11)

(1) An application for recovery of balance amount by any secured creditor pursuant to sub-section (10) of
section 13 of the Act shall be presented to the Debts Recovery Tribunal in the form annexed as Appendix VI
to these rules by the authorised officer or his agent or by a duly authorised legal practitioner, to the Registrar
of the Bench within whose jurisdiction his case falls or shall be sent by registered post addressed to the
Registrar of Debts Recovery Tribunal.
(2) The provisions of the Debts Recovery Tribunal (Procedure) Rules, 1993 made under Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 (51 of 1993), shall mutatis mutandis apply to any
application filed by under sub-rule (1).
(3) An application under sub-rule (1) shall be accompanied with fee as provided in rule 7 of the Debts
Recovery Tribunal (Procedure) Rules, 1993.
Application to the Tribunal/Appellate Tribunal (Rule 12)

(1) Any application to the Debt Recovery Tribunal under sub-section (1) of section 17 shall be, as nearly as
possible, in the form given in Appendix VII to the Rules.
(2) Any application to the Appellate Tribunal under sub-section (6) of section 17 of the Act shall be, as nearly
as possible, in the form given in Appendix VIII to the said Rules. Any appeal to the Appellate Tribunal under
section 18 of the Act shall be, as nearly as possible, in the form given in Appendix IX to the said Rules.
GOLF TECHNOLOGIES (P). LTD & ANR v. AXIS BANJ LTD & ORS (DEL)
SARFAESI Act section 13 and 17 jurisdiction of civil court- recovery proceedings initiated by bank
against the defaulting borrower- borrower filed civil suit alleging fraud played by the bank- whether
maintainable
ISSUE
The plaintiffs case is that the letter dated 31.12.2012 was not issued by them and that it was fraudulently
created by the Bank, hence the transfer of monies from the plaintiffs account to M/s. Tulip Telecom Limited
was wrong and the said amount was depleted from their account only to classify it as an NPA. This
according to the plaintiffs amounts to fraud and would form the basis of the maintainability of the present suit.
This is a suit challenging the measures taken by defendant Bank under Section 13 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest. The ground alleged in the suit is
fraud by the bank played upon the plaintiffs.
On 21.4.2015, after summons were issued, the Bank took a preliminary objection to the maintainability of the
suit on the ground that the appropriate remedy available to the plaintiffs is under Section 17 of the Act and
that it was always open to the plaintiffs to have approached the Debts Recovery Tribunal (for short DRT)
concerned for the reliefs sought in the present suit. Accordingly, the learned counsels for the parties were
heard on the issue of maintainability of the suit.
Decision held Suit Dismissed
Grounds for Dismissal
As per Mardia Chemicals (supra), jurisdiction of civil courts can be invoked only when the action of the
secured creditor is alleged to be fraudulent or his claim so absurd and untenable.The plaint does not aver
any complicated facts leading to the case of fraud or how the measures adopted by the Bank are
fraudulent/absurd/ untenable. There is nothing in the plaint which would lead to the conclusion that the
plaintiffs case falls under the exception carved out by Mardia Chemicals (supra), i.e., the plaintiffs
grievances ought to be determined in a suit.
There is no force in the contention of advanced on behalf of the plaintiffs that the DRT is not empowered
to determine the issues sought to be agitated in the present suit. It is not as if the remedy provided under
Section 17 of the Act is illusory. The expression evidence produced by the parties occurring in Section
17(3) would include all such which can be produced by the plaintiffs to show that the measures taken by the
Bank under Section 13 were not in conformity with the provisions of the Act. Is has been so held in V.Thulasi
(supra).
In the context of the preceding discussion this Court is of the view that the ground of fraud raised by the
plaintiff can be duly addressed in proceedings under Section 17 of the SARFAESI Act, 2002 and the said
plea of fraud, in the peculiar facts and circumstances of the case, does not fall in the exception carved out in
Mardia Chemicals (supra).
Therefore, the suit is not maintainable and is accordingly, dismissed.
LESSON ROUND UP
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 enacted with a view to regulate securitisation and reconstruction of financial assets and
enforcement of security interest and for matters connected therewith or incidental thereto.
Any security interest created in favour of any secured creditor may be enforced, without the
intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act.
Any borrower or any other person aggrieved by the action of the secured creditors can file an
appeal to the concerned Debt Recovery Tribunal (DRT).
Any person aggrieved by the order of DRT, may prefer an appeal to the Appellate Tribunal within
thirty days from the date of receipt of the order of Debt Recovery Tribunal.
In exercise of the powers conferred by subsection (1) and CL (b) of sub-section (2) of Sec. 38
read with sub-sections (4), (10) and (12) of Sec. 13 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, the Central Government notified
Security Interest (Enforcement) Rules, 2002.
Rule 8(6) of the Rules of 2002 provides the necessary safeguard if the action is taken in arbitrary
and unreasonable manner and if the valuation of the property is not properly fixed. The whole
object of Rule 8 (6) of the Rules of 2002 appears to be that the borrower gets clear thirty days'
notice before the sale takes place. During this period, the borrower can raise objections and can
also point out before the appropriate forum as regards the correct and true valuation of the
property.
390 PP-CRVI
SELF TEST QUESTIONS

1. Write short notes on the following:
(a) Non-performing Assets
(b) Securitization Companies
(c) Securitization
(d) Bank
2. What measures are given to Asset Securitization Companies under the SRFAESI Act, 2002.
3. Comment on constitutional validity of the Rule 8 of Security Interest (Enforcement) Rules, 2002.
4. Explain the Right to lodge a caveat under SARFAESI Act, 2002.
5. Explain the overriding power of SARFAESI Act, 2002 over Companies Act with decided case law.
Lesson 19
Debt Recovery
Need and object of the Act The banks and financial institutions (FIs) were
facing numerous problems in recovery of
Important Definitions
defaulted loans on account of delays in disposal
About Establishment of Tribunals and of recovery proceedings. In order to ensure
Appellate Tribunal speedy adjudication of the matters relating to
Procedure aspects involved recovery of debts due to banks and financial
institutions, the Recovery of Debts and
Powers of Tribunal Bankruptcy Act, 1993 was passed. It provides a
Recovery of debt determined by procedure which is different from the existing
Tribunal Code of Civil Procedure. To ensure expeditious
adjudication and recovery of dues of banks and
Effective non-legal remedies for
financial institutions, remove legal anomalies
improving recovery management
and strengthen the Recovery Tribunals.
Act having overriding effect.
This chapter contains overview of the Act,
establishment of Tribunals and procedure
thereof etc. The objective of the study lesson is
to familiarize the students with the legal
requirements stipulated under the Recovery of
Debts and Bankruptcy Act, 1993.
Recovery of Debts and Bankruptcy Act, 1993 is an Act to provide for the establishment of Tribunals for
expeditious adjudication and recovery of debts due to banks and financial institutions and for matters
connected therewith or incidental thereto.
392 PP-CRVI
NEED AND OBJECT
Recovery of Debts [and Bankruptcy]1 Act, 1993 was passed by the Parliament of India, with a view to
provide for the establishment of Tribunals for expeditious adjudication and recovery of debts due to
banks and financial institutions, [insolvency resolution and bankruptcy of individuals and partnership
firms]2 and for matters connected therewith or incidental thereto. It extends to the whole of India except
the State of Jammu and Kashmir. It shall be deemed to have come into force on the 24th day of June,
1993.
Sub-section 1(4) provides that [Save as otherwise provided, the provisions of this Act]3 shall not apply
where the amount of debt due to any bank or financial institution or to a consortium of banks or financial
institutions is less than ten lakh rupees or such other amount, being not less than one lakh rupees, as
the Central Government may, by notification, specify.
The Act provides a procedure that is distinct from the existing Code of Civil Procedure in order to
ensure a speedy adjudication. The Act also provides for the setting up of a separate set of tribunals to
hear such matters and these tribunals are termed as Debt Recovery Tribunals (DRTs).
With a view to help financial institutions recover their bad debts quickly and efficiently, the Government
of India has constituted thirty three Debt Recovery Tribunals and five Debt Recovery Appellate
Tribunals all over the country.
Each Debts Recovery Tribunal is presided over by a Presiding Officer. The Presiding Officer is
generally a judge of the rank of District and Sessions Judge. A Presiding Officer of a Debts Recovery
Tribunal is assisted by a number of officers of other ranks, but none of them need necessarily have a
judicial background. Therefore, the Presiding Officer of a Debt Recovery Tribunal is the sole judicial
authority to hear and pass any judicial order.
Each Debts Recovery Tribunal has two Recovery Officers. The work amongst the Recovery Officers is
allocated by the Presiding Officer. Though a Recovery Officer need not be a judicial Officer, but the
orders passed by a Recovery Officer are judicial in nature, and are appealable before the Presiding
Officer of the Tribunal.
The Debts Recovery Tribunals are fully empowered to pass comprehensive orders like in Civil Courts.
The Tribunals can hear cross suits, counter claims and allow set offs. However, they cannot hear claims
of damages or deficiency of services or breach of contract or criminal negligence on the part of the
lenders.
The Debts Recovery Tribunals can appoint Receivers, Commissioners, pass ex-parte orders, ad-interim
orders, interim orders apart from powers to review its own decision and hear appeals against orders
passed by the Recovery Officers of the Tribunals.
The recording of evidence by Debts Recovery Tribunals is somewhat unique. All evidences are taken
by way of an affidavit. Cross examination is allowed only on request by the defense, and that too if the
1. Substituted for "Due to Banks and Financial Institutions" by the Insolvency and Bankruptcy Code, 2016, w.e.f. a date yet to
be notified.
2. Inserted by the Insolvency and Bankruptcy Code, 2016, w.e.f. a date yet to be notified.
3. Substituted for "The provisions of this Act" by the Insolvency and Bankruptcy Code, 2016, w.e.f. a date yet to be notified.
Lesson 19 Debt Recovery 393
Tribunal feels that such a cross examination is in the interest of justice. Frivolous cross examination
may be denied. There are a number of other unique features in the proceedings before the Debts
Recovery Tribunals all aimed at expediting the proceedings.
Any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial
institution or by a consortium of banks or financial institutions during the course of any business activity
undertaken by the bank or the financial institution or the consortium under any law for the time being in
force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a
decree or order of any civil court or any arbitration award or otherwise or under a mortgage and
subsisting on, and legally recoverable on, the date of the application.
Constitutional validity of the Recovery of Debts [and Bankruptcy] Act, 1993
In case of Union of India v. Delhi High Court Bar Association, (2002) 4 SCC 275,
the petitioners have challenged the constitutional validity of the Recovery of Debts
Due to Banks and Financial Institutions Act, 1993 on the ground that the Act is
unreasonable and is violative of Art. 14 of the Constitution and that it is beyond
the legislative competence of the Parliament to enact such a law. This Act had
been challenged for depriving a person of legal remedies in ordinary civil courts.
However, the Supreme Court held that there is no such right that the dispute
should be adjudicated only by a civil court, and the replacement of the jurisdiction of civil courts by
independent and specialized tribunals is completely legal and constitutional.
Important Definitions
Section 2 of the Recovery of Debts [and Bankruptcy]4 Act, 1993 (the Act) defines various terms used
in the Act, as given under:
Section 2(a) Appellate Tribunal means an Appellate Tribunal established under sub-section (1) of
Section 8.
Section 2(d) Bank means

(i) banking company;
(ii) a corresponding new bank;
(iii) State Bank of India;
(iv) a subsidiary bank; or
(v) a Regional Rural Bank;
(vi) a multiState co-operative bank5.
Section 2(e) - Banking Company shall have the meaning assigned to it in clause (c) of section
5 of the Banking Regulation Act, 1949.
Section 2(ea) - Chairperson means a chairperson of an Appellate Tribunal appointed under
Section 9.
4. Substituted for "Due to Banks and Financial Institutions" by the Insolvency and Bankruptcy Code, 2016, w.e.f. a date yet to be
notified.
5. Inserted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012, w.e.f. 15-1-2013.
394 PP-CRVI
Section 2(g): Debts means any liability (inclusive of interest) which is claimed as due from any person
by a bank or a financial institution or by a consortium of banks or financial institutions during the course
of any business activity undertaken by the bank or the financial institution or the consortium under any
law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or
whether payable under a decree or order of any civil court or any arbitration award or otherwise or
under a mortgage and subsisting on, and legally recoverable on, the date of the application [and
includes any liability towards debt securities which remains unpaid in full or part after notice of ninety
days served upon the borrower by the debenture trustee or any other authority in whose favour security
interest is created for the benefit of holders of debt securities or;]6
Section 2(ga):"debt securities" means debt securities listed in accordance with regulations made by the
Securities and Exchange Board of India under the Securities and Exchange Board of India Act, 1992
(15 of 1992);7
Section 2(h) Financial institution means
(i) a public financial institution within the meaning of Section 4A of the Companies Act, 1956;
(ia) the securitisation company or reconstruction company which has obtained a certificate of
registration under sub-section (4) of section 3 of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002)
(ii) such other institution as the Central Government may, having regard to its business activity
and the area of its operation in India, by notification, specify.
Section 2(ja) Presiding officer means the presiding officer of the Debts Recovery Tribunal
appointed under Sub-section (1) of Section 4.
Section 2(jb) property means
(a) immovable property;
(b) movable property;
(c) any debt or any right to receive payment of money, whether secured or unsecured;
(d) receivables, whether existing or future; and
(e) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any
other business or commercial right of similar nature, as may be prescribed by the Central
Government in consultation with Reserve Bank.
Under Section 2(la) "secured creditor" shall have the meaning as assigned to it in clause (zd) of sub-
section (1) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002)8;
Section 2(lb) security interest "security interest" means mortgage, charge, hypothecation,
assignment or any other right, title or interest of any kind whatsoever upon property, created in favour of
any bank or financial institution and includes
(a) such right, title or interest upon tangible asset, retained by the bank or financial institution as
6 Inserted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment)
Act, 2016, w.e.f. 1-9-2016
Act, 2016, w.e.f. 1-9-2016
Act, 2016, w.e.f. 1-9-2016.
owner of the property, given on hire or financial lease or conditional sale which secures the
obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred
or any credit provided to enable the borrower to acquire the tangible asset; or
(b) such right, title or interest in any intangible asset or licence of any intangible asset, which
secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or
the obligation incurred or any credit extended to enable the borrower to acquire the intangible
asset or licence of intangible asset; ]
Section 2(o) Tribunal means the Tribunal established under Sub-section (1) of Section 3.
ESTABLISHMENT OF TRIBUNAL
Section 3 of the Act deals with the establishment of tribunal.
(1) The Central Government shall, by notification, establish one or more Tribunals, to be known as the
Debts Recovery Tribunal, to exercise the jurisdiction, powers and authority conferred on such Tribunal
by or under this Act.
[(1A) The Central Government shall by notification establish such number of Debts Recovery Tribunals
and its benches as it may consider necessary, to exercise the jurisdiction, powers and authority of the
Adjudicating Authority conferred on such Tribunal by or under the Insolvency and Bankruptcy Code,
2016. ]9
(2) The Central Government shall also specify, in the notification referred to in sub-section (1), the
areas within which the Tribunal may exercise jurisdiction for entertaining and deciding the applications
filed before it.
The details of the Tribunals constituted as of now
Debt Recovery Appellate Tribunals (DRATs)
DRAT Allahabad, DRAT Chennai, DRAT Delhi, DRAT Kolkata, DRAT Mumbai.
Debt Recovery Tribunals

DRT-I Ahmedabad, DRT-II Ahmedabad, DRT Allahabad, DRT Aurangabad, DRT Bangalore, DRT-I
Chandigarh, DRT-II Chandigarh, DRT-1 Chennai, DRT-2 Chennai, DRT Coimbatore, DRT Cuttak, DRT
Ernakulam, DRT Guwahati, DRT Hyderabad, DRT Jabalpur, DRT Jaipur, DRT-1 Kolkata, DRT-2
Kolkata, DRT-3 Kolkata, DRT Lucknow, DRT-1 Mumbai, DRT-2 Mumbai, DRT-3 Mumbai, DRT Nagpur,
DRT-1 New Delhi, DRT-2 New Delhi, DRT-3 New Delhi, DRT Patna, DRT Pune, DRT Visakhapatnam,
DRT Ranchi, DRT Madurai.
Composition of Tribunal
Section 4 of the Act deals with the Composition of Tribunal.
(1) A Tribunal shall consist of one person only (hereinafter referred to as the Presiding Officer) to be
appointed, by notification, by the Central Government.
[(2) Notwithstanding anything contained in sub-section (1), the Central Government may
9 Inserted by the Insolvency and Bankruptcy Code, 2016, w.e.f. a date yet to be notified.
396 PP-CRVI
(a) authorise the Presiding Officer of any other Tribunal established under any other law for the
time being in force to discharge the function of the Presiding Officer of a Debt Recovery
Tribunal under this Act in addition to his being the Presiding Officer of that Tribunal; or
(b) authorise the judicial Member holding post as such in any other Tribunal, established under
any other law for the time being in force, to discharge the functions of the Presiding Officer
of Debts Recovery Tribunal under this Act, in addition to his being the judicial Member of
10
that Tribunal. ]
Qualifications for appointment of Presiding Officer and Term
Section 5 provides that a person shall not be qualified for appointment as the Presiding Officer of a
Tribunal unless he is, or has been, or is qualified to be, a District Judge.
Section 6 provides that the [Presiding Officer of a Tribunal shall hold office for a term of five years from
the date on which he enters upon his office and shall be eligible for reappointment. Provided that no
person shall hold office as the Presiding Officer of a Tribunal after he has attained the age of sixty-five
years.]11
Section 7 deals with the Staff of Tribunal. Sub-section (1) provides that the Central Government shall
provide the Tribunal with one or more Recovery Officers and such other officers and employees as that
government may think fit. Sub-section (2) states that the Recovery Officers and other officers and
employees of a Tribunal shall discharge their functions under the general superintendence of the
Presiding Officer. Sub-section (3) provides that the salaries and allowances and other conditions of
service of the Recovery Officers and other officers and employees of a Tribunal shall be such as may
be prescribed.
ESTABLISHMENT OF APPELLATE TRIBUNAL
Section 8 (1) The Central Government shall, by notification, establish one or more Appellate Tribunals,
to be known as the Debts Recovery Appellate Tribunal, to exercise the jurisdiction, powers and
authority conferred on such Tribunal by or under this Act:
[Provided that the Central Government may authorise the Chairperson of any other Appellate Tribunal,
established under any other law for the time being in force, to discharge the functions of the
Chairperson of the Debts Recovery Appellate Tribunal under this Act in addition to his being the
Chairperson of that Appellate Tribunal. ]12
[ (1A) The Central Government shall, by notification, establish such number of Debt Recovery Appellate
Tribunals to exercise jurisdiction, powers and authority to entertain appeal against the order made by
the Adjudicating Authority under Part III of the Insolvency and Bankruptcy Code, 2016. ]13
10 Substitutedby the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment)
Act, 2016, w.e.f. 1-9-2016. Prior to its substitution, sub-section (2) read as under :
"(2) Notwithstanding anything contained in sub-section (1), the Central Government may authorise the Presiding Officer of
one Tribunal to discharge also the functions of the Presiding Officer of another Tribunal."
11 Substituted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions
Act, 2016, w.e.f. 1-9-2016.
(2) The Central Government shall also specify in the notification referred to in sub-section (1) the
Tribunals in relation to which the Appellate Tribunal may exercise jurisdiction.
[(3) Notwithstanding anything contained in sub-sections (1) and (2), the Central Government may
authorise the Chairperson of one Appellate Tribunal to discharge also the functions of the Chairperson
of other Appellate Tribunal.]14
Composition of Appellate Tribunal, Qualifications and its Term
Section 9 of the Act provides that an Appellate Tribunal shall consist of one person only (hereinafter
referred to as the Chairperson of the Appellate Tribunal) to be appointed, by notification, by the Central
Government.
Section 10 of the Act deals with the qualifications for appointment of Chairperson of the Appellate
Tribunal. It provides that a person shall not be qualified for appointment as the Chairperson of an
Appellate Tribunal unless he:
(a) is, or has been, or is qualified to be, a Judge of a High Court; or
(b) has been a member of the Indian Legal Service and has held a post in Grade I of that service
for at least three years; or
(c) has held office as the Presiding Officer of a Tribunal for at least three years.
Section 11 provides that the Chairperson of an Appellate Tribunal shall hold office for a term of five
years from the date on which he enters upon his office and shall be eligible for reappointment:
Provided that no person shall hold office as the Chairperson of a Appellate Tribunal after he has
attained the age of seventy years. ]15
JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS
Section 17. (1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and
authority to entertain and decide applications from the banks and financial institutions for recovery of
debts due to such banks and financial institutions.
[ (1A) Without prejudice to sub-section (1),
(a) the Tribunal shall exercise, on and from the date to be appointed by the Central
Government, the jurisdiction, powers and authority to entertain and decide applications
under Part III of Insolvency and Bankruptcy Code, 2016.
16
(b) the Tribunal shall have circuit sittings in all district headquarters. ]
(2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and
authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal
under this Act.
[(2A) Without prejudice to sub-section (2), the Appellate Tribunal shall exercise, on and from the date to
be appointed by the Central Government, the jurisdiction, powers and authority to entertain appeals
14 Inserted by the Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2000, w.r.e.f. 17-1-2000.
398 PP-CRVI
against the order made by the Adjudicating Authority under Part III of the Insolvency and Bankruptcy
Code, 2016. ] 17
Section 17A. (1) The Chairperson of an Appellate Tribunal shall exercise general power of
superintendence and control over the Tribunals under his jurisdiction including the power of appraising
the work and recording the annual confidential reports of Presiding Officers.
(1A) For the purpose of exercise of general powers of superintendence and control over Tribunals
under sub-section (1), the Chairperson may
(i) direct the Tribunals to furnish, in such form, at such intervals and within such time,
information relating to pending cases both under this Act and the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of
2002), or under any other law for the time being in force, number of cases disposed of,
number of new cases filed and such other information as may be considered necessary by
the Chairperson;
(ii) convene meetings of the Presiding Officers of Tribunals periodically to review their
performance.
(1B) Where on assessment of the performance of any Presiding Officer of the Tribunal or otherwise, the
Chairperson is of the opinion that an inquiry is required to be initiated against such Presiding Officer for
misbehaviour or incapacity, he shall submit a report to the Central Government recommending action
against such Presiding Officer, if any, under section 15, and for reasons to be recorded in writing for the
same. ]18
(2) The Chairperson of an Appellate Tribunal having jurisdiction over the Tribunals may, on the
application of any of the parties or on his own motion after notice to the parties, and after hearing them,
transfer any case from one Tribunal for disposal to any other Tribunal.]
CASE LAW:
Debt Recovery Tribunal constituted under DRT Act has jurisdiction to entertain an appeal as per section 17
against action initiated under section 13(4) even if amount involved is less than Rs. 10 lakhs
State Bank of Patiala v. Mukesh Jain, CIVIL APPEAL NO. 210 OF 2007, DATED NOVEMBER 8, 2016,
[2016] 76 taxmann.com 132 (SC),
Section 17, read with sections 13 and 34, of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 and section 1 of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993.
In this case the Supreme Court on the matter of right to appeal opined that provisions of section 1(4) of DRT
Act which limits jurisdiction of Tribunal to `10 lakh deals with original jurisdiction of Tribunal under provisions
of DRT Act and not with appellate jurisdiction. Thus, Debt Recovery Tribunal constituted under DRT Act has
jurisdiction to entertain an appeal as per section 17 against action initiated under section 13(4) even if
amount involved is less than `10 lakhs.
Act, 2016, w.e.f. 1-9-2016.
Bar of Jurisdiction:
Section 18: On and from the appointed day, no court or other authority shall have, or be entitled to
exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising
jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in section 17:
[Provided that any proceedings in relation to the recovery of debts due to any multi-State co-operative
bank pending before the date of commencement of the Enforcement of Security Interest and Recovery
of Debts Laws (Amendment) Act, 2012 under the Multi-State Co-operative Societies Act, 2002 (39 of
2002) shall be continued and nothing contained in this section shall, after such commencement, apply
to such proceedings.]19
APPLICATION TO THE TRIBUNAL
Section 19 of the Act deals with the Application to the Tribunal.
(1) Where a bank or a financial institution has to recover any debt from any person, it may make an
application to the Tribunal within the local limits of whose jurisdiction
(a) [the branch or any other office of the bank or financial institution is maintaining an account in
which debt claimed is outstanding, for the time being; or]20
(aa) [the defendant, or each of the defendants where there are more than one, at the time of
making the application, actually and voluntarily resides, or carries on business, or personally
works for gain; or]21
(b) any of the defendants where there are more than one, at the time of making the application,
actually and voluntarily resides, or carries on business, or personally works for gain; or
(c) the cause of action, wholly or in part, arises :
Provided that the bank or financial institution may, with the permission of the Debts Recovery Tribunal,
on an application made by it, withdraw the application, whether made before or after the Enforcement of
Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 for the purpose of taking action
under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (54 of 2002), if no such action had been taken earlier under that Act :
Provided further that any application made under the first proviso for seeking permission from the
Debts Recovery Tribunal to withdraw the application made under sub-section (1) shall be dealt with by it
as expeditiously as possible and disposed of within thirty days from the date of such application :
Provided also that in case the Debts Recovery Tribunal refuses to grant permission for withdrawal of
the application filed under this sub-section, it shall pass such orders after recording the reasons
therefor.]
(1A) Every bank being, multi-State co-operative bank referred to in sub-clause (vi) of clause (d) of
section 2, may, at its option, opt to initiate proceedings under the Multi-State Co-operative Societies
Act, 2002 (39 of 2002) to recover debts, whether due before or after the date of commencement of the
19 Inserted by the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012, w.e.f. 15-1-2013.
Act, 2016, w.e.f. 4-11-2016.
21 Clause (a) renumbered as clause (aa) by the Enforcement of Security Interest and Recovery of Debts Laws and
400 PP-CRVI
Enforcement of the Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 from any
person instead of making an application under this Chapter.
(1B) In case, a bank being, multi-State co-operative bank referred to in sub-clause (vi) of clause (d) of
section 2 has filed an application under this Chapter and subsequently opts to withdraw the application
for the purpose of initiating proceeding under the Multi-State Co-operative Societies Act, 2002 (39 of
2002) to recover debts, it may do so with the permission of the Tribunal and every such application
seeking permission from the Tribunal to withdraw the application made under sub-section (1A) shall be
dealt with by it as expeditiously as possible and disposed of within thirty days from the date of such
application:
Provided that in case the Tribunal refuses to grant permission for withdrawal of the application filed
under this sub-section, it shall pass such orders after recording the reasons therefor.]
(2) Where a bank or a financial institution, which has to recover its debt from any person, has filed an
application to the Tribunal under sub-section (1) and against the same person another bank or financial
institution also has a claim to recover its debt, then, the later bank or financial institution may join the
applicant bank or financial institution at any stage of the proceedings, before the final order is passed,
by making an application to that Tribunal.
(3) [Every application under sub-section (1) or sub-section (2) shall be in such form, and shall be
accompanied with true copies of all documents relied on in support of the claim along with such fee, as
may be prescribed]22 :
Provided that the fee may be prescribed having regard to the amount of debt to be recovered :
Provided further that nothing contained in this sub-section relating to fee shall apply to cases
transferred to the Tribunal under sub-section (1) of section 31.
[ExplanationFor the purposes of this section, documents includes statement of account or any entry
in banker's book duly certified under the Bankers' Books Evidence Act, 1891 (18 of 1891)]23
(3A) [Every applicant in the application filed under sub-section (1) or sub-section (2) for recovery of
debt, shall
(a) state particulars of the debt secured by security interest over properties or assets belonging
to any of the defendants and the estimated value of such securities;
(b) if the estimated value of securities is not sufficient to satisfy the debt claimed, state
particulars of any other properties or assets owned by any of the defendants, if any; and
(c) if the estimated value of such other assets is not sufficient to recover the debt, seek an order
directing the defendant to disclose to the Tribunal particulars of other properties or assets
owned by the defendants.] 24
[(3B) If any application filed before the Tribunal for recovery of any debt is settled prior to the
commencement of the hearing before that Tribunal or at any stage of the proceedings before the final order
Act, 2016, w.e.f. 4-11-2016.
Act, 2016, w.e.f. 4-11-2016.
is passed, the applicant may be granted refund of the fees paid by him at such rates as may be
prescribed.]25
[(4) On receipt of application under sub-section (1) or sub-section (2), the Tribunal shall issue summons
with following directions to the defendant
(i) to show cause within thirty days of the service of summons as to why relief prayed for
should not be granted;
(ii) direct the defendant to disclose particulars of properties or assets other than properties and
assets specified by the applicant under clauses (a) and (b) of sub-section (3A); and
(iii) to restrain the defendant from dealing with or disposing of such assets and properties
disclosed under clause (c) of sub-section (3A) pending the hearing and disposal of the
application for attachment of properties]26
[(4A) Notwithstanding anything contained in section 65A of the Transfer of Property Act, 1882 (4 of
1882), the defendant, on service of summons, shall not transfer by way of sale, lease or otherwise
except in the ordinary course of his business any of the assets over which security interest is created
and other properties and assets specified or disclosed under sub-section (3A), without the prior
approval of the Tribunal:
Provided that the Tribunal shall not grant such approval without giving notice to the applicant bank or
financial institution to show cause as to why approval prayed for should not be granted:
Provided further that defendant shall be liable to account for the sale proceeds realised by sale of
secured assets in the ordinary course of business and deposit such sale proceeds in the account
maintained with the bank or financial institution holding security interest over such assets.]27
[(5)(i) The defendant shall within a period of thirty days from the date of service of summons, present a
written statement of his defence including claim for set-off under sub-section (6) or a counter-claim
under sub-section (8), if any, and such written statement shall be accompanied with original documents
or true copies thereof with the leave of the Tribunal, relied on by the defendant in his defence:
Provided that where the defendant fails to file the written statement within the said period of thirty
days, the Presiding Officer may, in exceptional cases and in special circumstances to be recorded in
writing, extend the said period by such further period not exceeding fifteen days to file the written
statement of his defence;
(ii) where the defendant makes a disclosure of any property or asset pursuant to orders passed by the
Tribunal, the provisions of sub-section (4A) of this section shall apply to such property or asset;
(iii) in case of non-compliance of any order made under clause (ii) of sub-section (4), the Presiding
Officer may, by an order, direct that the person or officer who is in default, be detained in civil prison for
a term not exceeding three months unless in the meantime the Presiding Officer directs his release:
25 Sub-section (3A) renumbered as sub-section (3B) by the Enforcement of Security Interest and Recovery of Debts Laws and
Act, 2016, w.e.f. 4-11-2016.
402 PP-CRVI
Provided that the Presiding Officer shall not pass an order under this clause without giving an
opportunity of being heard to such person or officer.
Explanation.For the purpose of this section, the expression 'officer who is in default' shall mean such
officer as defined in clause (60) of section 2 of the Companies Act, 2013 (18 of 2013)]28
[(5A) On receipt of the written statement of defendant or on expiry of time granted by the Tribunal to file
the written statement, the Tribunal shall fix a date of hearing for admission or denial of documents
produced by the parties to the proceedings and also for continuation or vacation of the interim order
passed under sub-section (4).
(5B) Where a defendant makes an admission of the full or part of the amount of debt due to a bank or
financial institution, the Tribunal shall order such defendant to pay the amount, to the extent of the
admission within a period of thirty days from the date of such order failing which the Tribunal may issue
a certificate in accordance with the provisions of sub-section (22) to the extent of the amount of debt
due admitted by the defendant.]29
(6) Where the defendant claims to set-off against the applicant's demand any ascertained sum of
money legally recoverable by him from such applicant, the defendant may, at the first hearing of the
application, but not afterwards unless permitted by the Tribunal, present a written statement
containing the particulars of the debt sought to be set-off [along with original documents and other
evidence relied on in support of claim of set-off in relation to any ascertained sum of money, against
the applicant].
(7) The written statement shall have the same effect as a plaint in a cross-suit so as to enable the
Tribunal to pass a final order in respect of both the original claim and of the set-off.
(8) A defendant in an application may, in addition to his right of pleading a set-off under sub-section (6),
set up, by way of counter-claim against the claim of the applicant, any right or claim in respect of a
cause of action accruing to the defendant against the applicant either before or after the filing of the
application but before the defendant has delivered his defense or before the time limited for delivering
his defence has expired, whether such counter-claim is in the nature of a claim for damages or not.
(9) A counter-claim under sub-section (8) shall have the same effect as a cross-suit so as to enable the
Tribunal to pass a final order on the same application, both on the original claim and on the counter-
claim.
(10) The applicant shall be at liberty to file a written statement in answer to the counter-claim of the
defendant within such period [as may be prescribed]30.
[(10A) Every application under sub-section (3) or written statement of defendant under sub-section (5)
or claim of set-off under sub-section (6) or a counter-claim under sub-section (8) by the defendant, or
written statement by the applicant in reply to the counter-claim, under sub-section (10) or any other
pleading whatsoever, shall be supported by an affidavit sworn in by the applicant or defendant verifying
30 Substituted for "as may be fixed by the Tribunal" by the Enforcement of Security Interest and Recovery of Debts Laws and
all the facts and pleadings, the statements pleading documents and other documentary evidence
annexed to the application or written statement or reply to set-off or counter-claim, as the case may be:
Provided that if there is any evidence of witnesses to be led by any party, the affidavits of such
witnesses shall be filed simultaneously by the party with the application or written statement or replies
filed under sub-section (10A).
(10B) If any of the facts or pleadings in the application or written statement are not verified in the
manner provided under sub-section (10A), a party to the proceedings shall not be allowed to rely on
such facts or pleadings as evidence or any of the matters set out therein.]31
[(11) Where a defendant sets up a counter-claim in the written statement and in reply to such claim the
applicant contends that the claim thereby raised ought not to be disposed of by way of counter-claim
but in an independent action, the Tribunal shall decide such issue along with the claim of the applicant
for recovery of the debt.]32
(12) [***]33
(13) (A) Where, at any stage of the proceedings, [the Tribunal on an application made by the applicant
along with particulars of property to be attached and estimated value thereof, or otherwise is satisfied]34
that the defendant, with intent to obstruct or delay or frustrate the execution of any order for the
recovery of debt that may be passed against him,
(i) is about to dispose of the whole or any part of his property; or

(ii) is about to remove the whole or any part of his property from the local limits of the jurisdiction
of the Tribunal; or
(iii) is likely to cause any damage or mischief to the property or affect its value by misuse or
creating third party interest,
the Tribunal may direct the defendant, within a time to be fixed by it, either to furnish security, in such
sum as may be specified in the order, to produce and place at the disposal of the Tribunal, when
required, the said property or the value of the same, or such portion thereof as may be sufficient to
satisfy the certificate for the recovery of debt, or to appear and show cause why he should not furnish
security.
(B) Where the defendant fails to show cause why he should not furnish security, or fails to furnish the
security required, within the time fixed by the Tribunal, the Tribunal may order the attachment of the
whole or such portion of the properties claimed by the applicant as the properties secured in his favour
or otherwise owned by the defendant as appears sufficient to satisfy any certificate for the recovery of
debt.
Act, 2016, w.e.f. 4-11-2016.
33 Omitted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment)
Act, 2016, w.e.f. 4-11-2016.
34 Substituted for "the Tribunal is satisfied, by affidavit or otherwise" by the Enforcement of Security Interest and Recovery of
Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 4-11-2016
404 PP-CRVI
(14) [***]35
(15) The Tribunal may also in the order direct the conditional attachment of the whole or any portion of
the property specified under [sub-section (13]36.
(16) If an order of attachment is made without complying with the provisions of sub-section (13), such
attachment shall be void.
(17) In the case of disobedience of an order made by the Tribunal under sub-sections (12), (13) and
(18) or breach of any of the terms on which the order was made, the Tribunal may order the properties
of the person guilty of such disobedience or breach to be attached and may also order such person to
be detained in the civil prison for a term not exceeding three months, unless in the meantime the
Tribunal directs his release.
(18) Where it appears to the Tribunal to be just and convenient, the Tribunal may, by order,
(a) appoint a receiver of any property, whether before or after grant of certificate for recovery of
debt;
(b) remove any person from the possession or custody of the property;
(c) commit the same to the possession, custody or management of the receiver;
(d) confer upon the receiver all such powers, as to bringing and defending suits in the courts or
filing and defending applications before the Tribunal and for the realization, management,
protection, preservation and improvement of the property, the collection of the rents and
profits thereof, the application and disposal of such rents and profits, and the execution of
documents as the owner himself has, or such of those powers as the Tribunal thinks fit; and
(e) appoint a Commissioner for preparation of an inventory of the properties of the defendant or
for the sale thereof.
[(19) Where a certificate of recovery is issued against a company as defined under the Companies Act,
2013 (18 of 2013) and such company is under liquidation, the Tribunal may by an order direct that the
sale proceeds of secured assets of such company be distributed in the same manner as provided in
section 326 of the Companies Act, 2013 or under any other law for the time being in force.]37
[(20) The Tribunal may, after giving the applicant and the defendant, an opportunity of being heard, in
respect of all claims, set-off or counter-claim, if any, and interest on such claims, within thirty days from
the date of conclusion of the hearings, pass interim or final order as it deems fit which may include
order for payment of interest from the date on which payment of the amount is found due up to the date
of realisation or actual payment.]38
35 Omitted by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment)
Act, 2016, w.e.f. 4-11-2016
36 Substituted for "sub-section (14)" by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
Provisions (Amendment) Act, 2016, w.e.f. 4-11-2016..
[(20A) Where it is proved to the satisfaction of the Tribunal that the claim of the applicant has been
adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties or
where the defendant has repaid or agreed to repay the claim of the applicant, the Tribunal shall pass
orders recording such agreement, compromise or satisfaction of the claim.]
[(20AA) While passing the final order under sub-section (20), the Tribunal shall clearly specify the
assets of the borrower over which security interest is created in favour of any bank or financial
institution and direct the Recovery Officers to distribute the sale proceeds of such assets as provided in
sub-section (20AB).
(20AB) Notwithstanding anything to the contrary contained in any law for the time being in force, the
proceeds from sale of secured assets shall be distributed in the following orders of priority, namely:
(i) the costs incurred for preservation and protection of secured assets, the costs of valuation,
public notice for possession and auction and other expenses for sale of assets shall be paid
in full;
(ii) debts owed to the bank or financial institution.
ExplanationFor the purposes of this sub-section, it is hereby clarified that on or after the
commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency
and bankruptcy proceedings are pending in respect of secured assets of the borrower, the distribution
of proceeds from sale of secured assets shall be subject to the order of priority as provided in that
Code.]39
[(21) (i) The Tribunal shall send a copy of its final order and the recovery certificate, to the applicant and
defendant.
(ii) The applicant and the defendant may obtain copy of any order passed by the Tribunal on payment
on such fee as may be prescribed.]40
[(22) The Presiding Officer shall issue a certificate of recovery along with the final order, under sub-
section (20), for payment of debt with interest under his signature to the Recovery Officer for recovery
of the amount of debt specified in the certificate.]41
[(22A) Any recovery certificate issued by the Presiding Officer under sub-section (22) shall be deemed
to be decree or order of the Court for the purposes of initiation of winding up proceedings against a
company registered under the Companies Act, 2013 (18 of 2013) or Limited Liability Partnership
registered under the Limited Liability Partnership Act, 2008 (9 of 2008) or insolvency proceedings
against any individual or partnership firm under any law for the time being in force, as the case may
be.]42
(23) Where the Tribunal, which has issued a certificate of recovery, is satisfied that the property is
Act, 2016, w.e.f. 4-11-2016.
Act, 2016, w.e.f. 4-11-2016.
406 PP-CRVI
situated within the local limits of the jurisdiction of two or more Tribunals, it may send the copies of the
certificate of recovery for execution to such other Tribunals where the property is situated :
Provided that in a case where the Tribunal to which the certificate of recovery is sent for execution
finds that it has no jurisdiction to comply with the certificate of recovery, it shall return the same to the
Tribunal which has issued it.
(24) The application made to the Tribunal under sub-section (1) or sub-section (2) shall be dealt with by
it as expeditiously as possible and [every effort shall be made by it to complete the proceedings in two
hearings, and] to dispose of the application finally within one hundred and eighty days from the date of
receipt of the application.
(25) The Tribunal may make such orders and give such directions as may be necessary or expedient to
give effect to its orders or to prevent abuse of its process or to secure the ends of justice.]43
APPELLATE TRIBUNAL UNDER INSOLVENCY CODE
19A. The application made to Tribunal for exercising the powers of the Adjudicating Authority under the
Insolvency and Bankruptcy Code, 2016 shall be dealt with in the manner as provided under that Code. ]
Filing of recovery applications, documents and written statements in electronic form.
19A. (1) Notwithstanding anything to the contrary contained in this Act, and without prejudice to the
provisions contained in section 6 of the Information Technology Act, 2000 (21 of 2000), the Central
Government may by rules provide that from such date and before such Tribunal and Appellate Tribunal,
as may be notified,
(a) application or written statement or any other pleadings and the documents to be annexed
thereto required to be filed shall be submitted in the electronic form and authenticated with
digital signature of the applicant, defendant or any other petitioner in such form and manner as
may be prescribed;
(b) any summons, notice or communication or intimation as may be required to be served or
delivered under this Act, may be served or delivered by transmission of pleadings and
documents by electronic form and authenticated in such manner as may be prescribed.
(2) Any interim or final order passed by the Tribunal or Appellate Tribunal displayed on the website of
such Tribunal or Appellate Tribunal shall be deemed to be a public notice of such order and
transmission of such order by electronic mail to the registered address of the parties to the proceeding
shall be deemed to be served on such party.
(3) The Central Government may by rules provide that the electronic form for the purpose specified in
this section shall be exclusive, or in the alternative or in addition to the physical form, therefor.
(4) The Tribunal or the Appellate Tribunal notified under sub-section (1), for the purpose of adopting
electronic filing, shall maintain its own website or common website with other Tribunals and Appellate
Tribunal or such other universally accessible repositories of electronic information and ensure that all
orders or directions issued by the Tribunal or Appellate Tribunal are displayed on the website of the
Tribunal or Appellate Tribunal, in such manner as may be prescribed.
43 Substituted for "endeavour shall be made by it" by the Enforcement of Security Interest and Recovery of Debts Laws and
Explanation.For the purpose of this section,

(a) 'digital signature' means the digital signature as defined under clause (p) of section 2 of the
Information Technology Act, 2000 (21 of 2000);
(b) 'electronic form' with reference to an information or a document means the electronic form
as defined under clause (r) of section 2 of the Information Technology Act, 2000 (21 of
2000).]
APPEAL TO THE APPELLATE TRIBUNAL
Section 20 deals with the Appeal to the Appellate Tribunal.
(1) Save as provided in sub-section (2), any person aggrieved by an order made, or deemed to have
been made, by a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal having
jurisdiction in the matter.
(2) No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of
the parties.
(3) Every appeal under sub-section (1) shall be filed within a period of [thirty days]44 from the date on
which a copy of the order made, or deemed to have been made, by the Tribunal is received by him and
it shall be in such form and be accompanied by such fee as may be prescribed :
Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of [thirty
days]45 if it is satisfied that there was sufficient cause for not filing it within that period.
(4) On receipt of an appeal under sub-section (1) [or under sub-section (1) of section 181 of the
Insolvency and Bankruptcy Code, 2016]46, the Appellate Tribunal may, after giving the parties to the
appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against.
(5) The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and
to the concerned Tribunal.
(6) The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt with by it as
expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six
months from the date of receipt of the appeal.
Section 21 provides that where an appeal is preferred by any person from whom the amount of debt is
due to a bank or a financial institution or a consortium of banks or financial institutions, such appeal
shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate
Tribunal [fifty per cent] of the amount of debt so due from him as determined by the Tribunal under
section 19:
Provided that the Appellate Tribunal may, for reasons to be recorded in writing, reduce the amount to
44 Substituted for "forty-five days" by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
45 Substituted for "forty-five days" by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous
408 PP-CRVI
be deposited by such amount which shall not be less than twenty-five per cent of the amount of such
debt so due to be deposited under this section.
POWERS OF THE TRIBUNAL AND THE APPELLATE TRIBUNAL
Section 22 deals with the procedure and powers of the Tribunal and the Appellate Tribunal. Sub-section (1)
provides that the Tribunal and the Appellate Tribunal shall not be bound by the procedure laid down by the
Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice. The proceedings
before the Debt Recovery Appellate Tribunal is governed by Debt Recovery Appellate Tribunal (Procedures)
Rules, 1993. In addition, Section 22 of the Act permits the Tribunal and the Appellate Tribunal to regulate
their own procedure including the places at which they shall have their sittings.
Sub-section (2) provides that the Tribunal and the Appellate Tribunal shall have, for the purposes of
discharging their functions under this Act, the same powers as are vested in a civil court under the
Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any order passed by it ex
parte;
(h) any other matter which may be prescribed.
Sub-section (3) provides that any proceeding before the Tribunal or the Appellate Tribunal shall be
deemed to be a judicial proceeding within the meaning of Sections 193 and 228, and for the purposes
of Section 196, of the Indian Penal Code, 1860 and the Tribunal or the Appellate Tribunal shall be
deemed to be a civil court for all the purposes of Section 195 and Chapter XXVI of the Code of Criminal
Procedure, 1973.
Sub-section (4) provides that [for the purpose of proof of any entry in the 'bankers books', the provisions
of the Bankers' Books Evidence Act, 1891 (18 of 1891) shall apply to all the proceedings before the
Tribunal or Appellate Tribunal. ]47
Secton 22A provides that the Central Government may, for the purpose of this Act, by rules, lay down
uniform procedure consistent with the provisions of this Act for conducting the proceedings before the
Tribunals and Appellate Tribunals. ]48
RIGHT TO LEGAL REPRESENTATION AND PRESENTING OFFICERS
Section 23(1) provides that a Bank or a Financial Institution making an application to a Tribunal or an
appeal to an Appellate Tribunal may authorise one or more legal practitioners or any of its officers to act
Act, 2016, w.e.f. 1-9-2016.
Act, 2016, w.e.f. 1-9-2016
as Presenting Officers and every person so authorised by it may present its case before the Tribunal or
the Appellate Tribunal.
Sub-section (2) states that the defendant may either appear in person or authorise one or more legal
practitioners or any of his or its officers to present his or its case before the Tribunal or the Appellate
Tribunal.
Limitations
Section 24 states that the provisions of the Limitation Act, 1963, shall, as far as may be, apply to an
application made to a Tribunal.
RECOVERY OF DEBT DETERMINED BY TRIBUNAL
Modes of recovery of debts
Section 25 states that the Recovery Officer shall, on receipt of the copy of the certificate under sub-
section (7) of section 19, proceed to recover the amount of debt specified in the certificate by one or
more of the following modes, namely:
(a) attachment and sale of the movable or immovable property of the defendant;
[(aa) taking possession of property over which security interest is created or any other property of the
defendant and appointing receiver for such property and to sell the same; ]49
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties of the defendant;
[(d) any other mode of recovery as may be prescribed by the Central Government. ]50
Validity of certificate and amendment thereof
Section 26 deals with the Validity of certificate and amendment thereof.
(1) It shall not be open to the defendant to dispute before the Recovery Officer the correctness of the
amount specified in the certificate, and no objection to the certificate on any other ground shall also be
entertained by the Recovery Officer.
(2) Notwithstanding the issue of a certificate to a Recovery Officer, the Presiding Officer shall have
power to withdraw the certificate or correct any clerical or arithmetical mistake in the certificate by
sending an intimation to the Recovery Officer.
(3) The Presiding Officer shall intimate to the Recovery Officer any order withdrawing or cancelling a
certificate or any correction made by him under sub-section (2).
Stay of proceedings under certificate and amendment or withdrawal thereof
Section 27 deals with the Stay of proceedings under certificate and amendment of withdrawal
thereof.
Act, 2016, w.e.f. 1-9-2016
Act, 2016, w.e.f. 1-9-2016
410 PP-CRVI
[(1) Notwithstanding that a certificate has been issued to the Recovery Officer for the recovery of any
amount, the Presiding Officer, may by an order, grant time for payment of the amount, provided the
defendant makes a down payment of not less than twenty-five per cent of the amount specified in the
recovery certificate and gives an unconditional undertaking to pay the balance within a reasonable time,
which is acceptable to the applicant bank or financial institution holding recovery certificate.
(1A) The Recovery Officer shall, after receipt of the order passed under sub-section (1), stay the
proceedings until the expiry of the time so granted.
(1B) Where defendant agrees to pay the amount specified in the Recovery Certificate and proceeding
are stayed by the Recovery Officer, the defendant shall forfeit right to file appeal against the orders of
the Tribunal.
(1C) Where the defendant commits any default in payment of the amount under sub-section (1), the
stay of recovery proceedings shall stand withdrawn and the Recovery Officer shall take steps for
recovery of remaining amount of debt due and payable. ]51
(2) Where a certificate for the recovery of amount has been issued, the Presiding Officer shall keep the
Recovery Officer informed of any amount paid or time granted for payment, subsequent to the issue of
such certificate to the Recovery Officer.
(3) Where the order giving rise to a demand of amount for recovery of debt has been modified in
appeal, and, as a consequence thereof the demand is reduced, the Presiding Officer shall stay the
recovery of such part of the amount of the certificate as pertains to the said reduction for the period for
which the appeal remains pending.
4) Where a certificate for the recovery of debt has been received by the Recovery Officer and
subsequently the amount of the outstanding demands is reduced [or enhanced] as a result of an
appeal, the Presiding Officer shall, when the order which was the subject-matter of such appeal has
become final and conclusive, amend the certificate or withdraw it, as the case may be.
Other modes of recovery
Section 28 prescribes the Other modes of recovery.
(1) Where a certificate has been issued to the Recovery Officer under sub-section (7) of section 19, the
Recovery Officer may, without prejudice to the modes of recovery specified in section 25, recover the
amount of debt by any one or more of the modes provided under this section.
(2) If any amount is due from any person to the defendant, the Recovery Officer may require such
person to deduct from the said amount, the amount of debt due from the defendant under this Act and
such person shall comply with any such requisition and shall pay the sum so deducted to the credit of
the Recovery Officer :
Provided that nothing in this sub-section shall apply to any part of the amount exempt from attachment
in execution of a decree of a civil court under section 60 of the Code of Civil Procedure, 1908 (5 of
1908).
(3)(i) The Recovery Officer may, at any time or from time to time, by notice in writing, require any
51 Sub-sections (1), (1A), (1B) and (1C) substituted for sub-section (1) the Enforcement of Security Interest and Recovery of
person from whom money is due or may become due to the defendant or to any person who holds or
may subsequently hold money for or on account of the defendant, to pay to the Recovery Officer either
forthwith upon the money becoming due or being held or within the time specified in the notice (not
being before the money becomes due or is held) so much of the money as is sufficient to pay the
amount of debt due from the defendant or the whole of the money when it is equal to or less than that
amount.
(ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold
any money for or on account of the defendant jointly with any other person and for the purposes of this
sub-section, the shares of the joint holders in such amount shall be presumed, until the contrary is
proved, to be equal.
(iii) A copy of the notice shall be forwarded to the defendant at his last address known to the Recovery
Officer and in the case of a joint account to all the joint holders at their last addresses known to the
Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under this
sub-section shall be bound to comply with such notice, and, in particular, where any such notice is
issued to a post office, bank, financial institution, or an insurer, it shall not be necessary for any pass
book, deposit receipt, policy or any other document to be produced for the purpose of any entry,
endorsement or the like to be made before the payment is made notwithstanding any rule, practice or
requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice under this sub-section has been
issued arising after the date of the notice shall be void as against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath
that the sum demanded or the part thereof is not due to the defendant or that he does not hold any
money for or on account of the defendant, then, nothing contained in this sub-section shall be deemed
to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered
that such statement was false in any material particular, such person shall be personally liable to the
Recovery Officer to the extent of his own liability to the defendant on the date of the notice, or to the
extent of the defendant's liability for any sum due under this Act, whichever is less.
(vii) The Recovery Officer may, at any time or from time to time amend or revoke any notice under this
sub-section or extend the time for making any payment in pursuance of such notice.
(viii) The Recovery Officer shall grant a receipt for any amount paid in compliance with a notice issued
under this sub-section, and the person so paying shall be fully discharged from his liability to the
defendant to the extent of the amount so paid.
(ix) Any person discharging any liability to the defendant after the receipt of a notice under this sub-
section shall be personally liable to the Recovery Officer to the extent of his own liability to the
defendant so discharged or to the extent of the defendant's liability for any debt due under this Act,
whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance
thereof to the Recovery Officer, he shall be deemed to be a defendant in default in respect of the
amount specified in the notice and further proceedings may be taken against him for the realisation of
the amount as if it were a debt due from him, in the manner provided in sections 25, 26 and 27 and the
notice shall have the same effect as an attachment of a debt by the Recovery Officer in exercise of his
powers under section 25.
412 PP-CRVI
(4) The Recovery Officer may apply to the court in whose custody there is money belonging to the
defendant for payment to him of the entire amount of such money, or if it is more than the amount of
debt due, an amount sufficient to discharge the amount of debt so due.
[(4A) The Recovery Officer may, by order, at any stage of the execution of the certificate of recovery,
require any person, and in case of a company, any of its officers against whom or which the certificate
of recovery is issued, to declare on affidavit the particulars of his or its assets.]
(5) The Recovery Officer may recover any amount of debt due from the defendant by distraint and sale
of his movable property in the manner laid down in the Third Schedule to the Income-tax Act, 1961 (43
of 1961).
APPLICATION OF CERTAIN PROVISIONS OF INCOME-TAX ACT
Section 29 of the Act provides that the provisions of the Second and Third Schedules to the Income-tax
Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962, as in force from time to time shall,
as far as possible, apply with necessary modifications as if the said provisions and the rules referred to
the amount of debt due under this Act instead of to the Income-tax. Provided that any reference under
the said provisions and the rules to the assessee shall be construed as a reference to the defendant
under the Act.
In the case of Union of India and another v. Delhi High Court Bar Association and
others (2002) 4 SCC 275, the three-Judge Bench, while dealing with the
constitutional validity of the RDB Act, Supreme Court observed that By virtue of
Section 29 of the Act, the provisions of the Second and Third Schedules to the
Income Tax Act, 1961 and the Income and the Income Tax (Certificate
Proceedings) Rules, 1962, have become applicable for the realization of the dues by
the Recovery Officer. Detailed procedure for recovery is contained in these
Schedules to the Income Tax Act, including provisions relating to arrest and
detention of the defaulter. It cannot, therefore, be said that the Recovery Officer
would act in an arbitrary manner.
Furthermore, Section 30, after amendment by the Amendment Act, 2000, gives a right to any person
aggrieved by an order of the Recovery Officer, to prefer an appeal to the Tribunal. Thus now an
appellate forum has been provided against any orders of the Recovery Officer which may not be in
accordance with the law. There is, therefore, sufficient safeguard which has been provided in the event
of the Recovery Officer acting in an arbitrary or an unreasonable manner.
APPEAL AGAINST THE ORDER OF RECOVERY OFFICER
Any person aggrieved by an order of the Recovery Officer made under this Act may, within thirty days
from the date on which a copy of the order is issued to him, prefer an appeal to the Tribunal. On receipt
of an appeal, the Tribunal may, after giving an opportunity to the appellant to be heard, and after
making such inquiry as it deems fit, confirm, modify or set aside the order made by the Recovery Officer
in exercise of his powers under Sections 25 to 28 (both inclusive).
In the cases of Pravin Gada v. Central Bank of India [2013] 176 Comp Cas
101(SC), Allahabad Bank v. Canara Bank [2000] 101 Comp Cas 64(SC) and
Rajsthan Financial Corporation v. Official Liquidator[2005] Com Cas 387(SC),
Supreme Court held that anyone who is aggrieved by any act done by the
Recovery Officer can prefer an appeal. The Debts Recovery Tribunal has the
powers under the 1993 Act to make an enquiry as it deems fit and confirm, modify
or set aside the order made by the Recovery Officer in exercise of powers under
sections 25 to 28 of the 1993 Act. Thus, the auction, sale and challenge are
completely codified under the 1993 Act, regard being had to the special nature of
the legislation.
The official liquidator has a role under the 1956 Act. He protects the interests of the workmen and the
creditors and, hence his association at the time of auction and sale is appropriate. He has been
conferred locus to put forth his stand in these matters. Since it is the Debts Recovery Tribunal which
would have the exclusive jurisdiction when a matter is agitated before the Debts Recovery Tribunal, the
official liquidator does not have a choice either to approach the Debts Recovery Tribunal or the
company court. The language of the 1993 Act, being clear, provides that any person aggrieved can
prefer an appeal. The official liquidator whose association is mandatorily required is indubitably a
person aggrieved relating to the action taken by the Recovery Officer which would include the manner
in which the auction is conducted or the sale is confirmed. Under these circumstances, the official
liquidator cannot have recourse to the doctrine of election. He has only one remedy, i.e., to challenge
the order passed by the Recovery Officer before the Debts Recovery Tribunal and further appeal under
the 1993 Act and not approach the company court to set aside the auction or confirmation of sale when
a sale has been confirmed by the Recovery Officer under the 1993 Act.
Section 30A states that where an appeal is preferred against any order of the Recovery Officer, under
section 30, by any person from whom the amount of debt is due to a bank or financial institution or
consortium of banks or financial institutions, such appeal shall not be entertained by the Tribunal unless
such person has deposited with the Tribunal fifty per cent of the amount of debt due as determined by
the Tribunal.
TRANSFER OF PENDING CASES

Section 31 deals with the Transfer of pending cases.
(1) Every suit or other proceeding pending before any court immediately before the date of
establishment of a Tribunal under this Act, being a suit or proceeding the cause of action whereon it is
based is such that it would have been, if it had arisen after such establishment, within the jurisdiction of
such Tribunal, shall stand transferred on that date to such Tribunal :
Provided that nothing in this sub-section shall apply to any appeal pending as aforesaid before any
court:
Provided further that any recovery proceedings in relation to the recovery of debts due to any multi-
State co-operative bank pending before the date of commencement of the Enforcement of Security
Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-State Co-operative
Societies Act, 2002 (39 of 2002), shall be continued and nothing contained in this section shall apply to
such proceedings.]
(2) Where any suit or other proceeding stands transferred from any court to a Tribunal under sub-
414 PP-CRVI
section (1),
(a) the court shall, as soon as may be after such transfer, forward the records of such suit or other
proceeding to the Tribunal; and
(b) the Tribunal may, on receipt of such records, proceed to deal with such suit or other
proceeding, so far as may be, in the same manner as in the case of an application made under
section 19 from the stage which was reached before such transfer or from any earlier stage as
the Tribunal may deem fit.
Transfer of Pending Cases- Section 31 of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993:
Indian Bank v. Manilal Govindji Khona, CIVIL APPEAL NO. 1416 OF 2015 FEBRUARY
3, 2015, [2015] 56 taxmann.com 133 (SC)
In a recovery suit filed by appellant-bank against respondent, High Court passed

consent decree for suit amount. Respondent tendered amount in terms of decree which
was refused by appellant. Thereafter, High Court directed Court receiver by its order,
dated 3-12-1999, to sell mortgaged property of respondent. Accordingly, auction was
held at which appellant purchased mortgaged property and Court receiver issued sale
certificate.
The Supreme Court opined that in view of fact that DRT had been established in
Mumbai and proceedings before High Court were automatically transferred to it in view
of section 31, it was impermissible in law for High Court to direct Court receiver to sell
property of respondent in public auction by executing Court decree, which action of
Court receiver was void ab initio in law.
POWER OF TRIBUNAL TO ISSUE CERTIFICATE OF RECOVERY IN CASE OF DECREE OR ORDER
Section 31A specify the power of Tribunal to issue certificate of recovery in case of decree or order.
(1) Where a decree or order was passed by any court before the commencement of the Recovery of
Debts Due to Banks and Financial Institutions (Amendment) Act, 2000 and has not yet been executed,
then, the decree-holder may apply to the Tribunal to pass an order for recovery of the amount.
(2) On receipt of an application under sub-section (1), the Tribunal may issue a certificate for recovery
to a Recovery Officer.
(3) On receipt of a certificate under sub-section (2), the Recovery Officer shall proceed to recover the
amount as if it was a certificate in respect of a debt recoverable under this Act.
PRIORITY TO SECURED CREDITORS
Section 31B provides that notwithstanding anything contained in any other law for the time being in
force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets
over which security interest is created, shall have priority and shall be paid in priority over all other
debts and Government dues including revenues, taxes, cesses and rates due to the Central
Government, State Government or local authority.
ExplanationFor the purposes of this section, it is hereby clarified that on or after the commencement
of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy
proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in
payment of debt shall be subject to the provisions of that Code.
ACT TO HAVE OVER-RIDING EFFECT
Section 34 provides that save as provided under subsection (2), the provisions of this Act shall have
effect notwithstanding anything inconsistent herewith contained in any other law for the time being in
force or in any instrument having effect by virtue of any law other than this Act.
Sub-section (2) states that the provisions of this Act or the rules made there-under shall be in addition
to, and not in derogation of, the Industrial Finance Corporation Act, 1948, the State Financial
Corporations Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank of India
Act, 1984, the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small
Industries Development Bank of India Act, 1989 (39 of 1989)].
In the case of Official Liquidator, U.P and Uttarakhand v. Allahabad Bank and Others
[2013] 177 Comp Cas 426 (SC) Supreme Court observed that Section 34 of the RDB
Act would have overriding effect. The RDB Act is a comprehensive Code dealing
with all the facets pertaining to adjudication, appeal and realization of the dues
payable to the banks and financial institutions. The Debt Recovery Tribunal has
exclusive jurisdiction exclusive jurisdiction to sell the properties in proceeding
instituted by bank or financial institution, but at the time of auction sale, it is required
to associate the Official Liquidator.
LESSON ROUND UP
Recovery of Debts and Bankruptcy Act, 1993 is an Act to provide for the establishment of
Tribunals for expeditious adjudication and recovery of debts due to banks and financial
institutions and for matters connected therewith or incidental thereto.
The Act was passed to provide for the speedy adjudication of matters relating to recovery of
debts due to banks and financial institutions.
The RDB Act is a comprehensive Code dealing with all the facets pertaining to adjudication,
appeal and realization of the dues payable to the banks and financial institutions.
Section 19 of the Act deals with the procedure for making application to the Tribunal.
Section 20 of the Act deals with provisions for an appeal to an Appellate Tribunal having
jurisdiction in the matter.
The Tribunal and the Appellate Tribunal have the same powers as are vested in a Civil Court
under the Code of Civil Procedure, 1908.
The Recovery Officer may proceed to recover the amount of debt by any of the specified modes
under Section 25 of the Act.
Any person who is aggrieved by an order of Recovery Officer may prefer an appeal to the
Tribunal. The Debts Recovery Tribunal has the powers under the RDBFI Act, 1993 to make an
enquiry as it deems fit and confirm, modify or set aside the order made by the Recovery Officer.
The auction, sale and challenge are completely codified under the Act, regard being had to the
special nature of the legislation.
The provisions of the Limitation Act, 1963, shall, as far as may be, apply to an application made
to a Tribunal.
416 PP-CRVI
SELF TEST QUESTIONS

1. State the philosophy behind enactment of Recovery of Debts due to Banks and Financial
Institutions Act, 1993.
2. Explain the procedure for filing application to the Tribunal under the Act.
3. Appellate Tribunal vestes power of a Civil Court under the Act. Discuss.
4. State overriding effect of the DRB Act with decided case law.
Lesson 20
WINDING UP
Introduction Corporate Collapse implies business failure of the

company, which may occur due to inadequate capital,
Is winding up and dissolution are
fraudulent business practices, management inexperience
synonymous?
and incompetence, failure to respond to change,
Winding up under the Companies Act, 2013 recession, obsolescence, excessive gearing etc.
Winding up by Tribunal : Grounds
In the words of Prof. L.C.B. Gower, Winding-up of a
Petition for the winding up company is the process whereby its life is ended and
Powers of the Tribunal its property administered for the benefit of its creditors
and members. A liquidator is appointed and he takes
Directions for filing statement of affairs control of the company, collects its debts and finally
Company Liquidators and their appointments distributes any surplus among the members in
accordance with their rights. The main purpose of
Removal and replacement of liquidators
winding up of a company is to realize the assets and
Submission of the reports by the Company pay the debts of the company expeditiously and fairly
Liquidator and directions of the Tribunal in accordance with the law.
Advisory Committees
The Companies Act, 2013 provides for effective time
Submission of periodical reports to the bound winding up process. It also provides for aspects
Tribunal such as new grounds of winding up by NCLT, report of
Powers and duties of the company liquidator company liquidator, more powers to company
liquidator, valuation of assets by registered valuer,
Audit of Company liquidators accounts professional assistance, concurrence of creditors for
Overriding Preferential Payments voluntary winding up, simplification of provisions by
providing exclusive right to creditors to appoint the
Fraudulent preferences
committee of inspection., remedy for fraudulent
Effect of floating charges preference and so on.
Company Liquidation Dividend and
After reading this lesson you will be able to understand
Undistributed Assets Account
the provisions relating to the winding up along with the
Liquidation Process under the Insolvency and liquidation process of the company under the
Bankruptcy Code, 2016 insolvency and bankruptcy code, 2016. However, it is
to mention here that the rules relating to the winding
up have not been notified yet.
418 PP-CRVI
INTRODUCTION
Winding-up of a company is a process of putting an end to the life of a company. It is a proceeding by means
of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are
paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is
left, it is distributed among the members in accordance with their rights.
Winding-up is the process by which management of a companys affairs is taken out of its directors hands,
its assets are realized by a liquidator and its debts are realized and liabilities are discharged out of proceeds
of realization and any surplus of assets remaining is returned to its members or shareholders. At the end of
the winding up the company will have no assets or liabilities and it will, therefore, be simply a formal step for
it to be dissolved, that is, for its legal personality as a corporation to be brought to an end.
The main purpose of winding up of a company is to realize the assets and pay the debts of the company
expeditiously and fairly in accordance with the law. However, the purpose must not be exploited for the
benefit or advantage of any class or person entitled to submit petition for winding up of a company. It may be
noted that on winding up, the company does not cease to exist as such except when it is dissolved. The
administrative machinery of the company gets changed as the administration is transferred in the hands of
the liquidator. Even after commencement of the winding-up, the property and assets of the company belong
to the company until dissolution takes place. On dissolution the company ceases to exist as a separate entity
and becomes incapable of keeping property, suing or being sued. Thus in between the winding up and
dissolution, the legal status of the company continues and it can be sued in the court of law.
Is Winding up and dissolution are synonymous?
The terms Winding up and Dissolution are sometimes erroneously used to mean the same thing. But, the
legal implications of these two terms are quite different and there are fundamental differences between them
as regards the legal procedure involved. The main points of distinction are given below:
1. The entire procedure for bringing about a lawful end to the life of a company is divided into two
stages winding up and dissolution. Winding up is the first stage in the process whereby assets
are realised, liabilities are paid off and the surplus, if any, distributed among its members.
Dissolution is the final stage whereby the existence of the company is withdrawn by the law.
2. The liquidator appointed by the company or the Court carries out the winding up proceedings but
the order for dissolution can be passed by the Court only.
3. According to the Companies Act the liquidator can represent the company in the process of winding
up.This can be done till the order of dissolution is passed by the Court. Once the Court passes
dissolution orders the liquidator can no longer represent the company.
4. Creditors can prove their debts in the winding up but not on the dissolution of the company.
5. Winding up in all cases does not culminate in dissolution. Even after paying all the creditors there
may still be a surplus; company may earn profits during the course of beneficial winding up; there
may be a scheme of compromise with creditors while company is in winding up and in all such
events the company will in all probability come out of winding up and hand over back to
shareholders/old management. Dissolution is an act which puts an end to the life of the comp.
Winding up under the Companies Act, 2013

The Companies Act, 2013 contain provisions for winding up of companies on various grounds including
Lesson 20 WINDING UP 419
inability of companies to pay their debts. The notification of the Insolvency and Bankruptcy Code, 2016 has
deleted the provisions in the Companies Act regarding winding up of companies on the ground of inability to
pay their debts and those relating to voluntary winding up of companies and detailing the requirements for
insolvency resolution of corporate persons and voluntary winding in the Code itself. The code will exclusively
be governing the insolvency resolution and liquidation of corporates.
The Companies Act, 2013 shall continue to govern winding up of companies on various other grounds
excluding inability to pay debts. Sections 270 to 288, Sections 290 to 303, Section 324 and Sections 326 to
365 of Chapter XX of the Companies Act, 2013 contain the provisions related to winding up of the company.
th th
MCA has notified these sections on 7 December, 2016 and which came into force with effect from 15
December, 2016, whereas the rules relating to the winding up have not yet notified by MCA.
Winding up by Tribunal : Grounds on which a Company may be wound up by the Tribunal
A company under Section 271 may be wound up by the tribunal if

(a) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(b) if the company has acted against the interests of the sovereignty and integrity of India, the security
of the State, friendly relations with foreign States, public order, decency or morality;
(c) if on an application made by the Registrar or any other person authorised by the Central
Government by notification under this Act, the Tribunal is of the opinion that the affairs of the
company have been conducted in a fraudulent manner or the company was formed for fraudulent
and unlawful purpose or the persons concerned in the formation or management of its affairs have
been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the
company be wound up;
(d) if the company has made a default in filing with the Registrar its financial statements or annual
returns for immediately preceding five consecutive financial years; or
(e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.
Who may file Petition for the Winding up? [Section 272]
A petition to the Tribunal for the winding up of a company under Section 272(1) of the Act shall be presented
by:
(a) the company;
(b) any contributory or contributories;
(c) all or any of the persons specified in clauses (a) and (b);
(d) the Registrar;
(e) any person authorised by the Central Government in that behalf; or
(f) in a case falling under clause (b) of section 271, by the Central Government or a State Government.
Powers of Tribunal [Section 273]
Under Section 273(1) of the Act, the Tribunal may pass any of the following orders within ninety days from
the date of presentation of the petition:
(a) dismiss it, with or without costs;
(b) make any interim order as it thinks fit;
420 PP-CRVI
(c) appoint a provisional liquidator of the company till the making of a winding up order;
(d) make an order for the winding up of the company with or without costs; or
(e) any other order as it thinks fit.
Refusal to make a winding up order by Tribunal

The Tribunal shall not refuse to make a winding up order on the ground only that the assets of the company
have been mortgaged for an amount equal to or in excess of those assets, or that the company has no
assets.
Further, Where a petition is presented on the ground that it is just and equitable that the company should be
wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion that some other
remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company
wound up instead of pursuing the other remedy.
Filing statement of affairs of the Company [Section 274]

In case, where the Tribunal is satisfied that on a petition that the winding up of the company is to be made
out, he may by an order direct the company to file its objections along with a statement of its affairs within
thirty days of the order which can be allowed a further period of thirty days in a situation of contingency or
special circumstances.
In case, where the Company fails to file the statement of affairs, the tribunal shall forfeit the right of the
company to oppose the petition and right of such directors and officers of the company as found responsible
for such non-compliance.
Further, the director or the officer of the company who is in default will be punishable with imprisonment for a
term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees
but which may extend to five lakh rupees, or with both.
Appointment of Company Liquidators by Tribunal [ Section 275]
The Tribunal at the time of the passing of the order of winding up, appoint a provisional liquidator or a Official
Liquidator or a insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016. The
Tribunal may limit and restrict the powers of the provisional liquidator in the appointing order or by a
subsequent order, but otherwise he shall have the same powers as a liquidator.
The terms and conditions of appointment of a provisional liquidator or Company Liquidator and the fee
payable to him shall be specified by the Tribunal on the basis of task required to be performed, experience,
qualification of such liquidator and size of the company.
The liquidator is required to file a declaration within seven days from the date of appointment in the
prescribed form disclosing conflict of interest or lack of independence in respect of his appointment, if any,
with the Tribunal and such obligation shall continue throughout the term of his appointment.
Removal and Replacement of Liquidator [Section 276]

In case where the reasonable cause being shown and for reasons to be recorded in writing, the tribunal may
remove the provisional liquidator or the Company Liquidator, on any of the following grounds:
(a) misconduct;
(b) fraud or misfeasance;
(c) professional incompetence or failure to exercise due care and diligence in performance of the
powers and functions;

(d) inability to act as provisional liquidator or as the case may be, Company Liquidator;
(e) conflict of interest or lack of independence during the term of his appointment that would justify
removal.
Further, In the event of death, resignation or removal of the liquidator the Tribunal may transfer the work
assigned to him or it to another Company Liquidator for reasons to be recorded in writing.
Intimation for Winding Up [Section 277]

Upon the order for appointment of provisional liquidator or for the winding up of a company, the tribunal shall
within a period not exceeding seven days from the date of passing of the order give intimation of the
appointment to the Company Liquidator or provisional liquidator and the Registrar.
The Registrar on receipt of the copy of order of appointment of provisional liquidator or winding up order shall
make an endorsement to that effect in his records relating to the company and notify in the Official Gazette
that such an order has been made and in the case of a listed company, the Registrar shall intimate about
such appointment or order, to the stock exchange or exchanges where the securities of the company are
listed.
Such winding up order shall be deemed to be a notice of discharge to the officers, employees and workmen
of the company, except when the business of the company is continued.
Constitution of the Winding Up Committee

Within a period of three weeks from the date of passing of winding up order, the Company Liquidator is
required to make an application to the Tribunal for constitution of a winding up committee comprising the
Official Liquidator attached to the Tribunal;
Nominee of secured creditors; and
A professional nominated by the Tribunal.
to assist and monitor the progress of liquidation proceedings by the Company Liquidator in carrying out the
function such as taking over assets, examination of the statement of affairs, recovery of property, cash or
any other assets of the company including benefits derived therefrom, review of audit reports and accounts
of the company, sale of assets, finalisation of list of creditors and contributories, compromise, abandonment
and settlement of claims, payment of dividends, etc. The Company Liquidator shall be the convener of the
meetings of the winding up committee.
Submission of Report to Tribunal by Winding up Committee
The Company Liquidator is required to place a report along with minutes of the meetings of the committee on
monthly basis duly signed by the members present in the meeting for consideration till the final report for
dissolution of the company is submitted before the Tribunal.
The Company Liquidator is also required to prepare the draft final report for consideration and approval of
the winding up committee and The final report so approved by the winding up committee need to be
submitted by the Company Liquidator before the Tribunal for passing of a dissolution order in respect of the
company.
422 PP-CRVI
Effect of winding up order [Section 278]

The order for winding up of a company shall operate in favour of all the creditors and all contributories of the
company as if it had been made out on the joint petition of creditors and contributories.
Stay of suits, etc., on winding up order [Section 279]

In case where a winding up order has been passed or a provisional liquidator has been appointed, no suit or
other legal proceeding shall be commenced or if pending at the date of the winding up order (except any
proceeding pending in appeal before the Supreme Court or a High Court), shall be proceeded with, by or
against the company, except with the leave of the Tribunal and subject to such terms as may be imposed by
the Tribunal. Any application for seeking leave required to be disposed of by the Tribunal within sixty days.
Submission of report by Company Liquidator [Section 281]

The liquidator is required to submit to the Tribunal, a report containing the following particulars, within sixty
days from the order:
the nature and details of the assets of the company including their location and value, stating separately
the cash balance in hand and in the bank, if any, and the negotiable securities, if any, held by the
company:
valuation Report of the assets obtained from registered valuers
amount of capital issued, subscribed and paid-up;
the existing and contingent liabilities of the company including names, addresses and occupations of its
creditors, stating separately the amount of secured and unsecured debts, and in the case of secured
debts, particulars of the securities given, whether by the company or an officer thereof, their value and
the dates on which they were given;
the debts due to the company and the names, addresses and occupations of the persons from whom
they are due and the amount likely to be realised on account thereof;
guarantees, if any, extended by the company;
list of contributories and dues, if any, payable by them and details of any unpaid call;
details of trade marks and intellectual properties, if any, owned by the company;
details of subsisting contracts, joint ventures and collaborations, if any;
details of holding and subsidiary companies, if any;
details of legal cases filed by or against the company; and
any other information which the Tribunal may direct or the Company Liquidator may consider necessary
to include.
The Company Liquidator shall include in his report:
the manner in which the company was promoted or formed and whether in his opinion any fraud has
been committed by any person in its promotion or formation or by any officer of the company in relation
to the company since the formation thereof and any other matters which, in his opinion, it is desirable to
bring to the notice of the Tribunal.
a report on the viability of the business of the company or the steps which, in his opinion, are necessary
for maximising the value of the assets of the company.
In addition to this, The Company Liquidator is also required to make periodical reports to the Tribunal and in
any case make a report at the end of each quarter with respect to the progress of the winding up of the
company.
Directions of Tribunal for Dissolution [Section 282]

Upon the report of the Company Liquidator, the tribunal shall fix a time limit within which the entire
proceedings shall be completed and the company be dissolved and at any stage of the proceedings, or on
examination of the reports submitted to tribunal by the Company Liquidator and after hearing the Company
Liquidator, creditors or contributories or any other interested person, the tribunal feels that it will not be
advantageous or economical to continue the proceedings, revise the time limit within which the entire
proceedings shall be completed and the company be dissolved.
Further, The Tribunal may, on examination of the reports submitted to it by the Company Liquidator and after
hearing the Company Liquidator, creditors or contributories or any other interested person, order sale of the
company as a going concern or its assets or part thereof:
The Tribunal may consider for constituting a sale committee comprising such creditors, promoters and
officers of the company to assist the Company Liquidator in sale.
Custody of company's properties [Section 283]

Upon the winding up order made by the tribunal the Company Liquidator or the provisional liquidator take
into his or its custody or control all the property, effects and actionable claims to which the company is or
appears to be entitled to and take such steps and measures, as may be necessary, to protect and preserve
the properties of the company which shall be deemed to be in the custody of the Tribunal from the date of
the order for the winding up of the company.
Obligations of directors and managers [Section 286]

In the case of a limited company, any person who is or has been a director or manager, whose liability is
unlimited under the provisions of this Act, shall, in addition to his liability, if any, to contribute as an ordinary
member, be liable to make a further contribution as if he were at the commencement of winding up, a
member of an unlimited company.
a person who has been a director or manager shall not be liable to make such further contribution,
if he has ceased to hold office for a year or upwards before the commencement of the winding up;
in respect of any debt or liability of the company contracted after he ceased to hold office;
unless the Tribunal deems it necessary
Advisory committee [ Section 287]

The Tribunal may direct for the constitution of an advisory committee to advise the Company Liquidator and
to report to the Tribunal consisting of not more than twelve members, being creditors and contributories of
the company or such other persons in such proportion as the Tribunal.
The Company Liquidator is required to convene a meeting of creditors and contributories, as ascertained
from the books and documents, of the company within thirty days from the date of order of winding up for
424 PP-CRVI
enabling the Tribunal to determine the persons who may be members of the advisory committee.
The advisory committee shall have the right to inspect the books of account and other documents, assets
and properties of the company under liquidation at a reasonable time.
Powers and duties of Company Liquidator [ Section 290]

The Company Liquidator, in a winding up of a company by the Tribunal, shall have the following power
to carry on the business of the company so far as may be necessary for the beneficial winding up of the
company;
to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other
documents, and for that purpose, to use, when necessary , the company's seal;
to sell the immovable and movable property and actionable claims of the company by public auction or
private contract, with power to transfer such property to any person or body corporate, or to sell the
same in parcels;
to sell the whole of the undertaking of the company as a going concern;
to raise any money required on the security of the assets of the company;
to institute or defend any suit , prosecution or other legal proceeding, civil or criminal, in the name and
on behalf of the company;
to invite and settle claim of creditors, employees or any other claimant and distribute sale proceeds in
accordance with priorities established under this Act;
to inspect the records and returns of the company on the files of the Registrar or any other authority;
to prove rank and claim in the insolvency of any contributory for any balance against his estate, and to
receive dividends in the insolvency, in respect of that balance, as a separate debt due from the
insolvent, and rateably with the other separate creditors;
to draw, accept, make and endorse any negotiable instruments including cheque, bill of exchange,
hundi or promissory note in the name and on behalf of the company, with the same effect with respect
to the liability of the company as if such instruments had been drawn, accepted, made or endorsed by
or on behalf of the company in the course of its business;
to take out, in his official name, letters of administration to any deceased contributory, and to do in his
official name any other act necessary for obtaining payment of any money due from a contributory or his
estate which cannot be conveniently done in the name of the company, and in all such cases, the
money due shall, for the purpose of enabling the Company Liquidator to take out the letters of
administration or recover the money, be deemed to be due to the Company Liquidator himself;
to obtain any professional assistance from any person or appoint any professional, in discharge of his
duties, obligations and responsibilities and for protection of the assets of the company, appoint an agent
to do any business which the Company Liquidator is unable to do himself;
to take all such actions, steps, or to sign, execute and verify any paper, deed, document, application,
petition, affidavit, bond or instrument as may be necessary,
(1) for winding up of the company;
(2) for distribution of assets;

(3) in discharge of his duties and obligations and functions as Company Liquidator; and
to apply to the Tribunal for such orders or directions as may be necessary for the winding up of the
company.
Exercise and control of Company Liquidator's powers [Section 292]

The Company Liquidator while in the administration of the assets of the company and the distribution thereof
among its creditors, have regard to any directions which may be given by the resolution of the creditors or
contributories at any general meeting or by the advisory committee.
Further, Any directions given by the creditors or contributories at any general meeting shall, in case of
conflict, be deemed to override any directions given by the advisory committee.
Audit of Company Liquidator's accounts [Section 294]

The Company Liquidator is required to maintain proper and regular books of account including accounts of
receipts and payments made by him. The Company Liquidator shall, at such times which shall not be less
than twice in each year during his tenure of office, present to the Tribunal an account of the receipts and
payments as such liquidator along with a declaration.
Further, the copy of the audited accounts shall be filed by the Company Liquidator with the Tribunal, and
shall also be delivered to the Registrar which shall be open to inspection by any creditor, contributory or
person interested.
In case of a Government company, the Company Liquidator shall forward a copy to

to the Central Government, if that Government is a member of the Government company; or
to any State Government, if that Government is a member of the Government company; or
to the Central Government and any State Government, if both the Governments are members of the
Government company.
The Company Liquidator shall also cause the accounts when audited, or a summary thereof, to be printed,
and shall send a printed copy of the accounts or summary thereof by post to every creditor and every
contributory.
Payment of debts by contributory and extent of set-off [ Section 295]
The Tribunal may, at any time after passing of a winding up order, pass an order requiring any contributory
for the time being on the list of contributories to pay, in the manner directed by the order, any money due to
the company, from him or from the estate of the person whom he represents, exclusive of any money
payable by him or the estate by virtue of any call in pursuance of the Act.
The Tribunal, in making an order, may in the case of an unlimited company, allow to the contributory, by way
of set-off, any money due to him or to the estate which he represents, from the company, on any
independent dealing or contract with the company, but not any money due to him as a member of the
company in respect of any dividend or profit; and in the case of a limited company, allow to any director or
manager whose liability is unlimited, or to his estate, such set-off.
In the case of any company, whether limited or unlimited, when all the creditors have been paid in full, any
money due on any account whatever to a contributory from the company may be allowed to him by way of
set-off against any subsequent call.
426 PP-CRVI
Power of Tribunal to make calls [Section 296]

The Tribunal may, at any time after the passing of a winding up order, and either before or after it has
ascertained the sufficiency of the assets of the company, make calls on all or any of the contributories for the
time being on the list of the contributories, to the extent of their liability, for payment of any money which the
Tribunal considers necessary to satisfy the debts and liabilities of the company, and the costs, charges and
expenses of winding up, and for the adjustment of the rights of the contributories among themselves; and
make an order for payment of any calls so made.
Power to summon suspected persons [ Section 299]

The Tribunal at any time summon before it any officer of the company or person known or suspected to have
in his possession any property or books or papers, of the company, or known or suspected to be indebted to
the company, or any person whom the Tribunal thinks to be capable of giving information concerning the
promotion, formation, trade, dealings, property, books or papers, or affairs of the company.
The Tribunal may examine any officer or person so summoned on oath concerning the matters aforesaid,
either by word of mouth or on written interrogatories or on affidavit and may, in the first case, reduce his
answers to writing and require him to sign them.
The Tribunal may require any officer or person so summoned to produce any books and papers relating to
the company in his custody or power, but, where he claims any lien on books or papers produced by him, the
production shall be without prejudice to such lien, and the Tribunal shall have power to determine all
questions relating to that lien.
The Tribunal may direct the liquidator to file before it a report in respect of debt or property of the company in
possession of other persons.
If the Tribunal finds that a person is indebted to the company, the Tribunal may order him to pay to the
provisional liquidator or, as the case may be, the liquidator at such time and in such manner as the Tribunal
may consider just, the amount in which he is indebted, or any part thereof, either in full discharge of the
whole amount or not, as the Tribunal thinks fit, with or without costs of the examination or a person is in
possession of any property belonging to the company, the Tribunal may order him to deliver to the
provisional liquidator or, as the case may be, the liquidator, that property or any part thereof, at such time, in
such manner and on such terms as the Tribunal may consider just.
Examination of Promoters, Directors [ Section 300]

Upon the report of the Company stating that in his opinion a fraud has been committed by any person in the
promotion, formation, business or conduct of affairs of the company since its formation, the Tribunal may,
after considering the report, direct that such person or officer shall attend before the Tribunal on a day
appointed by it for that purpose, and be examined as to the promotion or formation or the conduct of the
business of the company or as to his conduct and dealings as an officer thereof.
Arrest of person trying to leave India or abscond [ Section 301]

The Tribunal, if satisfied that a contributory or a person having property, accounts or papers of the company
in his possession is about to leave India or otherwise to abscond, or is about to remove or conceal any of his
property, for the purpose of evading payment of calls or of avoiding examination respecting the affairs of the
company, the Tribunal may cause the contributory to be detained until such time as the Tribunal may order;
and his books and papers and movable property to be seized and safely kept until such time as the Tribunal
may think fit.
Dissolution of company by Tribunal [ Section 302]
When the affairs of a company have been completely wound up, the Company Liquidator shall make an
application to the Tribunal for dissolution of such company.
The Tribunal shall on an application filed by the Company Liquidator or when the Tribunal is of the opinion
that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company
should be made, make an order that the company be dissolved from the date of the order, and the company
shall be dissolved accordingly.
A copy of the order shall, within thirty days from the date thereof, be forwarded by the Company Liquidator to
the Registrar who shall record in the register relating to the company a minute of the dissolution of the
company.
If the Company Liquidator makes a default in forwarding a copy of the order within the aforesaid period, the
Company Liquidator shall be punishable with fine which may extend to five thousand rupees for every day
during which the default continues.
PART III
PROVISIONS APPLICABLE TO EVERY MODE OF WINDING UP UNDER COMPANIES

ACT, 2013
Debts of all descriptions to be admitted to proof [Section 324]

In every winding up (subject to, in the case of insolvent companies, to the application in accordance with the
provisions of this Act or of the law of insolvency), all debts payable on a contingency, and all claims against
the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be
admissible to proof against the company, a just estimate being made, so far as possible, of the value of such
debts or claims as may be subject to any contingency, or may sound only in damages, or for some other
reason may not bear a certain value.
Overriding preferential payments [Section 326]

In the winding up of a company under the Companies Act , 2013 , the debts relating ot the workmen's dues
and the Dues of the Secured creditor on a pari passu basis shall be paid in priority to all other debts:
Provided that in case of the winding up of a company, the sums referred above, which are payable for a
period of two years preceding the winding up order, shall be paid in priority to all other debts (including debts
due to secured creditors), within a period of thirty days of sale of assets and shall be subject to such charge
over the security of secured creditors.
The term Workmen and Workmens dues can be referred as under:
"workmen'', in relation to a company, means the employees of the company, being workmen within the
meaning of clause (s) of section 2 of the Industrial Disputes Act, 1947;
"workmen's dues'', in relation to a company, means the aggregate of the following sums due from the
company to its workmen, namely:
i. all wages or salary including wages payable for time or piece work and salary earned wholly or in
428 PP-CRVI
part by way of commission of any workman in respect of services rendered to the company and any
compensation payable to any workman under any of the provisions of the Industrial Disputes Act,
1947;
ii. all accrued holiday remuneration becoming payable to any workman or, in the case of his death, to
any other person in his right on the termination of his employment before or by the effect of the
winding up order or resolution;
iii. unless the company is being wound up voluntarily merely for the purposes of reconstruction or
amalgamation with another company or unless the company has, at the commencement of the
winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen's
Compensation Act*, 1923, rights capable of being transferred to and vested in the workmen, all
amount due in respect of any compensation or liability for compensation under the said Act in
respect of the death or disablement of any workman of the company;
iv. all sums due to any workman from the provident fund, the pension fund, the gratuity fund or any
other fund for the welfare of the workmen, maintained by the company;
"workmen's portion", in relation to the security of any secured creditor of a company, means the
amount which bears to the value of the security the same proportion as the amount of the
workmen's dues bears to the aggregate of the amount of workmen's dues and the amount of the
debts due to the secured creditors.
Illustration: The value of the security of a secured creditor of a company is `1,00,000. The total amount of
the workmen's dues is `1,00,000. The amount of the debts due from the company to its secured creditors is
`3,00,000. The aggregate of the amount of workmen's dues and the amount of debts due to secured
creditors is `4,00,000. The workmen's portion of the security is, therefore, one-fourth of the value of the
security, that is ` 25,000.
Preferential payments [Section 327]
The following sum shall be paid in priority after the payment of the Overriding Preferential payments to all
other debts,
all revenues, taxes, cesses and rates due from the company to the Central Government or a State
Government or to a local authority at the relevant date, and having become due and payable within the
twelve months immediately before that date;
all wages or salary including wages payable for time or piece work and salary earned wholly or in part
by way of commission of any employee in respect of services rendered to the company and due for a
period not exceeding four months within the twelve months immediately before the relevant date,
subject to the condition that the amount payable under this clause to any workmanshall not exceed such
amount as may be notified;
all accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any
other person claiming under him, on the termination of his employment before, or by the winding up
order, or, as the case may be, the dissolution of the company;
unless the company is being wound up voluntarily merely for the purposes of reconstruction or
amalgamation with another company, all amount due in respect of contributions payable during the
period of twelve months immediately before the relevant date by the company as the employer of
persons under the Employees' State Insurance Act, 1948 (34 of 1948) or any other law for the time
being in force;
unless the company has, at the commencement of winding up, under such a contract with any insurer
as is mentioned in section 14(See Appendix I) of the Workmen's Compensation Act, 1923 (8 of 1923),
rights capable of being transferred to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of the death or disablement of
any employee of the company:
Provided that where any compensation under the said Act is a weekly payment, the amount payable
under this clause shall be taken to be the amount of the lump sum for which such weekly payment
could, if redeemable, be redeemed, if the employer has made an application under that Act;
all sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other
fund for the welfare of the employees, maintained by the company; and
the expenses of any investigation held in pursuance of sections 213 and 216, in so far as they are
payable by the company.
Status of the Fraudulent Preference Transactions [Section 328]

In case, Where a company has given preference to a person who is one of the creditors of the company or a
surety or guarantor for any of the debts or other liabilities of the company, and the company does anything or
suffers anything done which has the effect of putting that person into a position which, in the event of the
company going into liquidation, will be better than the position he would have been in if that thing had not
been done prior to six months of making winding up application, the Tribunal, if satisfied that, such
transaction is a fraudulent preference may order as it may think fit for restoring the position to what it would
have been if the company had not given that preference.
Further, If the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or
any delivery of goods, payment, execution made, taken or done by or against a company within six months
before making winding up application, the Tribunal may order as it may think fit and may declare such
transaction invalid and restore the position.
Liabilities and rights of Persons Fraudulently Preferred [Section 331]
Where a company is being wound up and anything made, taken or done after the commencement of the Act
is invalid under section 328 as a fraudulent preference of a person interested in property mortgaged or
charged to secure the company's debt, then, without prejudice to any rights or liabilities arising, apart from
this provision, the person preferred shall be subject to the same liabilities, and shall have the same rights, as
if he had undertaken to be personally liable as a surety for the debt, to the extent of the mortgage or charge
on the property or the value of his interest, whichever is less.
Where a company is being wound up, a floating charge on the undertaking or property of the company
created within the twelve months immediately preceding the commencement of the winding up, shall, unless
it is proved that the company immediately after the creation of the charge was solvent, be invalid, except for
the amount of any cash paid to the company at the time of, or subsequent to the creation of, and in
consideration for, the charge, together with interest on that amount at the rate of five per cent per annum or
such other rate as may be notified by the Central Government in this behalf.
In case, Where any part of the property of a company which is being wound up consists of:
land of any tenure, burdened with onerous covenants;
shares or stocks in companies;
any other property which is not saleable or is not readily saleable by reason of the possessor thereof
430 PP-CRVI
being bound either to the performance of any onerous act or to the payment of any sum of money; or
unprofitable contracts,
the Company Liquidator has endeavoured to sell or has taken possession of the property or exercised any
act of ownership in relation thereto or done anything in pursuance of the contract, with the leave of the
Tribunal and subject to the provisions of this section, by writing signed by him, at any time within twelve
months after the commencement of the winding up or such extended period as may be allowed by the
Tribunal, disclaim the property.
In case of the wound up by the Tribunal, any attachment, distress or execution put in force, without leave of
the Tribunal against the estate or effects of the company, after the commencement of the winding up; or any
sale held, without leave of the Tribunal of any of the properties or effects of the company, after such
commencement shall be void.
Any proceedings for the recovery of any tax or impost or any dues payable to the Government will not be
void in this regard.
In case, If any person, who is or has been an officer of a company which, at the time of the commission of
the alleged offence, is being wound up, by the Tribunal or which is subsequently ordered to be wound up by
the Tribunal;
does not, to the best of his knowledge and belief, fully and truly disclose to the Company Liquidator all
the property, movable and immovable, of the company, and how and to whom and for what
consideration and when the company disposed of any part thereof, except such part as has been
disposed of in the ordinary course of the business of the company;
does not deliver up to the Company Liquidator, or as he directs, all such part of the movable and
immovable property of the company as is in his custody or under his control and which he is required by
law to deliver up;
does not deliver up to the Company Liquidator, or as he directs, all such books and papers of the
company as are in his custody or under his control and which he is required by law to deliver up;
within the twelve months immediately before the commencement of the winding up or at any time
thereafter,
i. conceals any part of the property of the company to the value of one thousand rupees or more, or
conceals any debt due to or from the company;
ii. fraudulently removes any part of the property of the company to the value of one thousand rupees
or more;
iii. conceals, destroys, mutilates or falsifies, or is privy to the concealment, destruction, mutilation or
falsification of, any book or paper affecting or relating to, the property or affairs of the company;
iv. makes, or is privy to the making of, any false entry in any book or paper affecting or relating to, the
property or affairs of the company;
v. fraudulently parts with, alters or makes any omission in, or is privy to the fraudulent parting with,
altering or making of any omission in, any book or paper affecting or relating to the property or
affairs of the company;
vi. by any false representation or other fraud, obtains on credit, for or on behalf of the company, any
property which the company does not subsequently pay for;
vii. under the false pretence that the company is carrying on its business, obtains on credit, for or on
behalf of the company, any property which the company does not subsequently pay for; or
viii. pawns, pledges or disposes of any property of the company which has been obtained on credit and
has not been paid for, unless such pawning, pledging or disposing of the property is in the ordinary
course of business of the company;
makes any material omission in any statement relating to the affairs of the company;
knowing or believing that a false debt has been proved by any person under the winding up, fails for a
period of one month to inform the Company Liquidator thereof;
after the commencement of the winding up, prevents the production of any book or paper affecting or
relating to the property or affairs of the company;
after the commencement of the winding up or at any meeting of the creditors of the company within the
twelve months next before the commencement of the winding up, attempts to account for any part of the
property of the company by fictitious losses or expenses; or
is guilty of any false representation or fraud for the purpose of obtaining the consent of the creditors of the
company or any of them, to an agreement with reference to the affairs of the company or to the winding up,
he shall be punishable with imprisonment for a term which shall not be less than three years but which may
extend to five years and with fine which shall not be less than one lakh rupees but which may extend to three
lakh rupees:
Explanation.- For the purposes of the expression "officer" includes any person in accordance with whose
directions or instructions the directors of the company have been accustomed to act.
Penalty for frauds by officers [Section 337]

An officer of a company upon the subsequently order for winding up shall not,
by false pretences or by means of any other fraud, induced any person to give credit to the company;
with intent to defraud creditors of the company or any other person, has made or caused to be made
any gift or transfer of, or charge on, or has caused or connived at the levying of any execution against,
the property of the company; or
with intent to defraud creditors of the company, has concealed or removed any part of the property of
the company since the date of any unsatisfied judgment or order for payment of money obtained against
the company or within two months before that date.
In such cases, the officer shall be punishable with imprisonment for a term which shall not be less than one
year but which may extend to three years and with fine which shall not be less than one lakh rupees but
which may extend to three lakh rupees.
Liability where proper accounts not kept [ Section 338]

Where a company is being wound up, if it is shown that proper books of account were not kept by the
company throughout the period of two years immediately preceding the commencement of the winding up, or
the period between the incorporation of the company and the commencement of the winding up, whichever
is shorter, every officer of the company who is in default shall, unless he shows that he acted honestly and
that in the circumstances in which the business of the company was carried on, the default was excusable,
be punishable with imprisonment for a term which shall not be less than one year but which may extend to
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three years and with fine which shall not be less than one lakh rupees but which may extend to three lakh
rupees.
Liability for fraudulent conduct of business [ Section 339]

If in the course of the winding up of a company, it appears that any business of the company has been
carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose,
the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or
contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a
director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of
the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all
or any of the debts or other liabilities of the company as the Tribunal may direct:
Where any business of a company is carried on with such intent or for such purpose as is mentioned above,
every person who was knowingly a party to the carrying on of the business in the manner aforesaid, shall be
liable for action under section 447 of the Companies Act, 2013.
Power of Tribunal to assess damages against delinquent directors, etc. [Section 340]
If in the course of winding up of a company, it appears that any person who has taken part in the promotion
or formation of the company, or any person, who is or has been a director, manager, Company Liquidator or
officer of the company has misapplied, or retained, or become liable or accountable for, any money or
property of the company or has been guilty of any misfeasance or breach of trust in relation to the company.
The Tribunal may, on the application of the Official Liquidator, or the Company Liquidator, or of any creditor
or contributory, made within the period specified in that behalf, inquire into the conduct of the person,
director, manager, Company Liquidator or officer aforesaid, and order him to repay or restore the money or
property or any part thereof respectively, with interest at such rate as the Tribunal considers just and proper,
or to contribute such sum to the assets of the company by way of compensation in respect of the
misapplication, retainer, misfeasance or breach of trust, as the Tribunal considers just and proper.
In the matters where such person may be criminally liable, the aforesaid application shall be made within
five years from the date of the winding up order, or of the first appointment of the Company Liquidator in the
winding up, or of the misapplication, retainer, misfeasance or breach of trust, as the case may be, whichever
is longer.
Prosecution of delinquent officers and members of company [Section 342]

In case where it appears to the Tribunal in the course of a winding up by the Tribunal, that any person, who
is or has been an officer, or any member, of the company has been guilty of any offence in relation to the
company, the Tribunal may, either on the application of any person interested in the winding up or suo motu,
direct the liquidator to prosecute the offender or to refer the matter to the Registrar.
When any prosecution is instituted, it shall be the duty of the liquidator and of every person, who is or has
been an officer and agent of the company to give all assistance in connection with the prosecution which he
is reasonably able to give.
Explanation For the purposes of this sub-section, the expression "agent", in relation to a company, shall
include any banker or legal adviser of the company and any person employed by the company as auditor.
If a person fails or neglects to give required assistance, he shall be liable to pay fine which shall not be less
than twenty-five thousand rupees but which may extend to one lakh rupees.
Being Wound up to be mentioned in All Communication and Letters [Section 344]

Where a company is being wound up, whether by the Tribunal or voluntarily, every invoice, order for goods
or business letter issued by or on behalf of the company or a Company Liquidator of the company, or a
receiver or manager of the property of the company, being a document on or in which the name of the
company appears, shall contain a statement that the company is being wound up.
In Case of the contravention, the company, and every officer of the company, the Company Liquidator and
any receiver or manager, who wilfully authorises or permits the non-compliance, shall be punishable with fine
which shall not be less than fifty thousand rupees but which may extend to three lakh rupees.
Disposal of books and papers of company [Section 347]

When the affairs of a company have been completely wound up and it is about to be dissolved, the books
and papers of such company and those of the Company Liquidator may be disposed of in such manner as
the Tribunal directs.
After the expiry of five years from the dissolution of the company, no responsibility shall devolve on the
company, the Company Liquidator, or any person to whom the custody of the books and papers has been
entrusted, by reason of any book or paper not being forthcoming to any person claiming to be interested
therein.
Information to be furnished to tribunal, if the winding up is not concluded within one year
[Section 348]
If the winding up of a company is not concluded within one year after its commencement, the Company
Liquidator shall, unless he is exempted from so doing, either wholly or in part by the Central Government,
within two months of the expiry of such year and thereafter until the winding up is concluded, at intervals of
not more than one year or at such shorter intervals, if any, file a statement in such form containing such
particulars as may be prescribed, duly audited, by a person qualified to act as auditor of the company, with
respect to the proceedings in, and position of, the liquidation, with the Tribunal. Further, a copy shall
simultaneously be filed with the Registrar and shall be kept by him along with the other records of the
company.
In case if a Government company in liquidation, the Company Liquidator is required to forward a copy
thereof
to the Central Government, if that Government is a member of the Government company;
to any State Government, if that Government is a member of the Government company; or
to the Central Government and any State Government, if both the Governments are members of the
Government company.
In case of the contravention, the Company Liquidator shall be punishable with fine which may extend to five
thousand rupees for every day during which the failure continues.
If a Company Liquidator makes wilful default in causing the statement referred above, audited by a person
who is not qualified to act as an auditor of the company, the Company Liquidator shall be punishable with
imprisonment for a term which may extend to six months or with fine which may extend to one lakh rupees,
or with both.
Company Liquidator to deposit monies into scheduled bank [ Section 350]

Every Company Liquidator of a companyis required to deposit the monies received by him in his capacity as
434 PP-CRVI
such in a scheduled bank to the credit of a special bank account opened by him in that behalf:
Provided that if the Tribunal considers that it is advantageous for the creditors or contributories or the
company, it may permit the account to be opened in such other bank specified by it.
If any Company Liquidator at any time retains for more than ten days a sum exceeding five thousand rupees
or such other amount as the Tribunal may, on the application of the Company Liquidator, authorise him to
retain, then, unless he explains the retention to the satisfaction of the Tribunal, he shall
pay interest on the amount so retained in excess, at the rate of twelve per cent per annum and also pay
such penalty as may be determined by the Tribunal;
be liable to pay any expenses occasioned by reason of his default; and
also be liable to have all or such part of his remuneration, as the Tribunal may consider just and proper,
disallowed, or may also be removed from his office.
Neither the Official Liquidator nor the Company Liquidator of a company shall deposit any monies received
by him in his capacity as such into any private banking account.
Company Liquidation Dividend and Undistributed Assets Account [ Section 352]

Where any company is being wound up and the liquidator has in his hands or under his control any money
representing dividends payable to any creditor but which had remained unpaid for six months after the date
on which they were declared or assets refundable to any contributory which have remained undistributed for
six months after the date on which they become refundable, the liquidator shall forthwith deposit the said
money into a separate special account to be known as the Company Liquidation Dividend and Undistributed
Assets Account maintained in a scheduled bank.
The liquidator shall on the dissolution of the company, pay into the Company Liquidation Dividend and
Undistributed Assets Account any money representing unpaid dividends or undistributed assets in his hands
at the date of dissolution.
The liquidator, when making any payment referred above shall furnish to the Registrar, a statement in the
prescribed form, setting forth, in respect of all sums included in such payment, the nature of the sums, the
names and last known addresses of the persons entitled to participate therein, the amount to which each is
entitled and the nature of his claim thereto, and such other particulars as may be prescribed.
The liquidator shall be entitled to a receipt from the scheduled bank for any money paid to it and such receipt
shall be an effectual discharge of the Company Liquidator in respect thereof.
Where a company is being wound up voluntarily, the Company Liquidator shall, when filing a statement in
pursuance of sub-section (1) of section 348, indicate the sum of money which is payable under sub-sections
(1) and (2) of this section during the six months preceding the date on which the said statement is prepared,
and shall, within fourteen days of the date of filing the said statement, pay that sum into the Company
Liquidation Dividend and Undistributed Assets Account.
Any person claiming to be entitled to any money paid into the Company Liquidation Dividend and
Undistributed Assets Account, whether paid in pursuance of this section or under the provisions of any
previous company law may apply to the Registrar for payment thereof, and the Registrar, if satisfied that the
person claiming is entitled, may make the payment to that person of the sum due:
Provided that the Registrar shall settle the claim of such person within a period of sixty days from the date of
receipt of such claim, failing which the Registrar shall make a report to the Regional Director giving reasons
of such failure.
Any money paid into the Company Liquidation Dividend and Undistributed Assets Account in pursuance of
this section, which remains unclaimed thereafter for a period of fifteen years, shall be transferred to the
general revenue account of the Central Government, but a claim to any money so transferred may be
preferred above and shall be dealt with as if such transfer had not been made and the order, if any, for
payment on the claim will be treated as an order for refund of revenue.
Any liquidator retaining any money which should have been paid by him into the Company Liquidation
Dividend and Undistributed Assets Account shall:
pay interest on the amount so retained at the rate of twelve per cent per annum and also pay such
penalty as may be determined by the Registrar:
Provided that the Central Government may in any proper case remit either in part or in whole the
amount of interest which the liquidator is required to pay under this clause;
be liable to pay any expenses occasioned by reason of his default; and
where the winding up is by the Tribunal, also be liable to have all or such part of his remuneration, as
the Tribunal may consider just and proper, to be disallowed, and to be removed from his office by the
Tribunal.
Meetings to ascertain wishes of creditors or contributories [ Section 354]

In all matters relating to the winding up of a company the Tribunal may:
have regard to the wishes of creditors or contributories of the company, as proved to it by any sufficient
evidence;
if it thinks fit for the purpose of ascertaining those wishes, direct meetings of the creditors or
contributories to be called, held and conducted in such manner as the Tribunal may direct; and
appoint a person to act as chairman of any such meeting and to report the result thereof to the Tribunal.
While ascertaining the wishes of creditors and contributories as above regard shall be had to the value of
each debt of the creditor and number of votes which may be cast by each contributory respectively.
Powers of Tribunal to declare dissolution of company void [Section 356]
Where a company has been dissolved, whether in pursuance of the provision of Companies Act, 2013 or
otherwise, the Tribunal may at any time within two years of the date of the dissolution, on application by the
Company Liquidator of the company or by any other person who appears to the Tribunal to be interested,
make an order, upon such terms as the Tribunal thinks fit, declaring the dissolution to be void, and thereupon
such proceedings may be taken as if the company had not been dissolved.
It shall be the duty of the Company Liquidator or the person on whose application the order was made, within
thirty days after the making of the order or such further time as the Tribunal may allow, to file a certified copy
of the order with the Registrar who shall register the same, and if the Company Liquidator or the person fails
so to do, the Company Liquidator or the person shall be punishable with fine which may extend to ten
thousand rupees for every day during which the default continues.
436 PP-CRVI
Exclusion of certain time in computing period of limitation [Section 358]

Notwithstanding anything in the Limitation Act, 1963 (36 of 1963), or in any other law for the time being in
force, in computing the period of limitation specified for any suit or application in the name and on behalf of a
company which is being wound up by the Tribunal, the period from the date of commencement of the
winding up of the company to a period of one year immediately following the date of the winding up order
shall be excluded.
Liquidation Process under the Insolvency and Bankruptcy Code, 2016 [Section 33 to 54]
The liquidation process starts with the winding up order and ends with the order of dissolution of the
corporate debtor. It involves realization of the assets of the entity in liquidation and distribution of the
realization proceeds among the creditors and other stakeholders who have claim to share the proceeds and
other incidental activities by virtue of the liquidator being the trustee for the stakeholders as discussed
hereunder:
Taking possession and control of the liquidation estate of corporate debtor
Section 36 of the Code lists the assets which shall form the liquidation estate and which the liquidator shall
hold as fiduciary for the benefit of all creditors. Section 36 also mentions the assets which shall not form part
of the liquidation estate. The liquidator has to take into his custody or control all the assets, property, effects
and actionable claims of the corporate debtor and take appropriate measures to protect and preserve the
same. He shall have the power to access any information systems for the purpose of identification of the
liquidation estate assets relating to the corporate debtor in terms of section 37.
Consolidation, verification, admission/rejection and determination of valuation of claims
The liquidator shall have the power to access any information system for the purpose of admission and proof
of claims and identification of assets to be held in liquidation estate. The creditors can also call for financial
information of the corporate debtor from the liquidator. Section 38 stipulates a time bound period of 30 days
from the date of commencement of the liquidation process for collection of claims by the liquidator. The
methods by which the different categories of creditors can submit and prove their claims have also been
specified. Financial creditors can prove their claims by providing the record of claim as stored in an
information utility. The liquidator shall verify the claims submitted by the creditors within such time as
specified by the Board by regulations. He may require any creditor or the corporate debtor or any other
person to produce any other document or evidence which he thinks necessary for the purpose of verifying
the whole or any part of the claim. After verification, the liquidator may either admit or reject the claim, in
whole or in part, as the case may be. Where he rejects a claim, he shall record the reasons for such rejection
in writing. The decision of admission or rejection of the claim shall be communicated to the creditor and the
corporate debtor within 7 days of such admission or rejection. The value of claims shall be determined by the
liquidator in such manner as may be specified by the Board in regulations. A creditor may appeal to NCLT
against the decision of the liquidator rejecting the claim within 14 days of the receipt of such decision.
Evaluation and sale/disposal of the assets of corporate debtor
Subject to the directions of NCLT, the liquidator shall have the powers and duties to evaluate the assets and
property of the corporate debtor in the manner as may be specified in the regulations by the Board. He can
carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary. He shall
also have power to sell the immovable and movable property and actionable claims of the corporate debtor
in liquidation by public auction or private contract, with power to transfer such property to any person or body
corporate, or sell the same in parcels in such manner as may be specified by the Board in regulations.
Avoidance of preferential transactions, undervalued transactions, transactions defrauding creditors

and extortionate credit transactions
Sections 44 to 51 provide for avoidance of preferential transactions, undervalued transactions, transactions
defrauding creditors and extortionate credit transactions entered into by the corporate debtor within the
specified period prior to the liquidation order as discussed hereunder
Preferential transactions
During the course of corporate insolvency resolution process or the liquidation process it may come to the
notice of the resolution professional or the liquidator that any preferential transaction has been made with
any person within the period of one year preceding the insolvency commencement date or such transaction
was made with a related party within a period of two years preceding the insolvency commencement date,
an application may be made by the resolution professional or the liquidator to NCLT for avoidance of such
preferential transaction. Section 44 specifies the orders that may be passed by NCLT in relation to the
avoidance of a preferential transaction. The orders are aimed at reversing the effects of the preferential
transaction and requiring the person to whom preference is granted to pay back any gains he may have
made as a result of such preference. An order of NCLT, however, shall not affect any interest in property
which was acquired from a person other than the corporate debtor or any interest derived from such interest
and was acquired in good faith and for value or shall not require a person, who received a benefit from the
preferential transaction in good faith and for value to pay the liquidator or the resolution professional. Where
a person, who has acquired an interest in property from another person other than the corporate debtor, or
who has received a benefit from the preference or such another person to whom the corporate debtor gave
the preference had sufficient information of the initiation or commencement of insolvency resolution process
of the corporate debtor or is a related party, it shall be presumed that the interest was acquired or the benefit
was received otherwise than in good faith unless contrary is shown. A person shall be deemed to have
sufficient information or opportunity to avail such information if a public notice regarding the corporate
insolvency resolution process has been made.
Undervalued transactions
A transaction which was made with any person within the period of one year preceding the insolvency
commencement date or a transaction made with a related party within the period of two years preceding the
insolvency commencement date shall be considered undervalued where the corporate debtor,-
(a) Makes a gift to a person; or
(b) Enters into a transaction with a person which involves the transfer of one or more assets by the
corporate debtor for a consideration the value of which is significantly less than the value of the
consideration provided by the corporate debtor and such transaction has not taken place in the
ordinary course of business.
The liquidator or the resolution professional may make an application to NCLT for declaring such transaction
void under section 45 and to reverse the effect of such transaction. The provision is aimed at preventing the
siphoning away of corporate assets by the management of the corporate debtor, which has knowledge of the
corporate debtors poor financial condition and may enter into such transaction in the vicinity of insolvency. If
the liquidator or the resolution professional does not make such application to NCLT knowingly, disciplinary
proceedings can be ordered by NCLT against them. In that case, a creditor, member or a partner of the
corporate debtor, as the case may be, may make an application to NCLT. NCLT may pass order restoring
the position as it existed before such transactions and reversing the effects thereof and the order may
provide for the following:-
(a) Require any property transferred as part of transaction, to be vested in the corporate debtor;
438 PP-CRVI
(b) Release or discharge, in whole or in part, any security interest granted by the corporate debtor;
(c) Require any person to pay such sums, in respect of benefits received by such person, to the
liquidator or the resolution professional, as the case may be, as the NCLT may direct; or
(d) Require the payment of such consideration for the transaction as may be determined by an
independent expert.
Transactions defrauding creditors
Section 49 strikes at transactions entered into with the intention of putting the assets of the corporate debtor
beyond the reach of, or otherwise prejudicing the interests of a person who is making or may make a claim,
against the corporate debtor. As it involves fraud, there is no time limit for challenging such transactions. On
application being made, NCLT may order restoring the position as it existed before such transaction as if the
transaction had not been entered into and protecting the interests of persons who are victims of such
transactions. Third party transactions entered into in good faith may not be affected by NCLT order.
Extortionate credit transactions
Where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of
financial or operational debt during the period of two years preceding the insolvency commencement date,
the liquidator or the resolution professional, as the case may be, may make an application to NCLT for
avoidance of the transaction if the terms of such transaction required exorbitant payments to be made by the
corporate debtor. The Board may, in regulations, specify the circumstances in which a transaction shall be
covered under the definition of extortionate credit transaction.. Any debt extended by any person providing
financial services which is in compliance with any law for the time being in force in relation to such debt,
however, shall in no event be considered as an extortionate credit transaction. Where NCLT is satisfied that
the terms of a credit transaction required exorbitant payments to be made by the corporate debtor, it shall, by
order- (a) Restore the position as it existed prior to such transaction; (b) Set aside the whole or part of the
debt created on account of the extortionate credit transaction; (c) Modify the terms of the transaction; (d)
require any person who is, or was, a party to the transaction to repay any amount received by such person;
or (e) Require any security interest that was created as part of the extortionate credit transaction to be
relinquished in favour of the liquidator or the resolution professional, as the case may be.
Distribution of assets
In terms of section 53, the proceeds from the sale of the liquidation assets shall be distributed in the following
order of priority and within such period and in such manner as may be specified in the regulations by the
Board, namely,-
(a) The insolvency resolution process costs and the liquidation costs paid in full;
(b) The following debts which rank equally between and among the following:-
(i) workmens dues for the period of 24 months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in
the manner set out in section 52 (see para 10.4 supra);
(c) wages and any unpaid dues owed to employees other than workmen for the period of 12 months
preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors; (e) the following dues shall rank equally between and
among the following:-
(i) any amount due to the Central Government and the State Government including the amount to
be received on account of the Consolidated Fund of India and the Consolidated Fund of a State,
if any, in respect of the whole or any part of the period of two years preceding the liquidation
commencement date;
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security
interest.
(f) Any remaining debts and dues;
(g) Preference shareholders, if any, and
(h) Equity shareholders or partners, as the case may be.
Any contractual arrangements between recipients with equal ranking, if disrupting the order of priority shall
be disregarded. The fees payable to the liquidator shall be deducted proportionately from the proceeds
payable to each class of recipients and the proceeds to the relevant recipient shall be distributed after such
deduction. At each stage of the distribution of proceeds in respect of a class of recipients that rank equally,
each of the debts will either be paid in full, or will be paid in equal proportion within the same class of
recipients, if the proceeds are insufficient to meet the debts in full.
Dissolution of corporate debtor.
Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an
application to NCLT for the dissolution of such corporate debtor and NCLT shall order that the corporate
debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
A copy of an order of dissolution shall be forwarded to the authority with which the corporate debtor is
registered within 7 days from the date of such order in terms of section 54.
LESSON ROUND UP
The main purpose of winding up of a company is to realize the assets and pay the debts of the company
expeditiously and fairly in accordance with the law.
Sections 270 to 288, Sections 290 to 303, Section 324 and Sections 326 to 365 of Chapter XX of the
Companies Act, 2013 contain the provisions related to winding up of the company.
The winding up proceedings relating to a companys inability to pay debts is now covered under the provisions
of the Insolvency and Bankruptcy Code, 2016, and are deleted from Companies Act 2013. Though the
adjudicating authority continues to be the NCLT, the adjudication will be under the Insolvency and Bankruptcy
Code, 2016.
Companies Act 2013 has only provisions relating to winding up of solvent companies through the NCLT, and
winding up of unregistered companies.
The Winding up rules under the Companies Act, 2013 are not yet notified by Ministry of Corporate Affairs.
SELF TEST QUESTIONS

1. Describe the ground on which a company may be wound up by the Tribunal.
2. Briefly explain the provisions relating to the Constitution of the Winding up Committee and its Report
to Tribunal.
3. Briefly explain the Content of initial report by Company Liquidator under section 281 of the
Companies Act, 2013.
440 PP-CRVI
4. Briefly explain the provisions relating to the preferential payment and overriding preferential
Payment.
5. Describe the provisions relating to the Company Liquidation Dividend and Undistributed Assets
Account.
Lesson 21
Cross Border Insolvency
LEARNING OBJECTIVES
LESSON OUTLINE
Corporate Insolvency Vs. Individual insolvency Although the number of cross-border insolvency
cases has increased significantly since the 1990s,
Development of UNCITRAL Model law the adoption of national or international legal regimes
Salient features of Model law equipped to address the issues raised by those
cases has not kept pace. The lack of such regimes
UNCITRAL Legislative guide on insolvency law has often resulted in inadequate and uncoordinated
Summary of World Bank Principles approaches to cross-border insolvency that are not
only unpredictable and time-consuming in their
Chapter 11 of US Bankruptcy code application, but lack both transparency and the tools
necessary to address the disparities and, in some
Reforms in Insolvency laws
cases, conflicts that may occur between national
Legislative response to the reform process laws and insolvency regimes. These factors have
impeded the protection of the value of the assets of
financially troubled businesses and hampered their
rescue.
United Nations Commission on International Trade

Law (UNCITRAL), with the general mandate to
further the progressive harmonization and unification
of the law of international trade, has developed a
Model Law which is designed to assist States to
equip their insolvency laws with a modern legal
framework to more effectively address cross-border
insolvency proceedings concerning debtors
experiencing severe financial distress or insolvency.
Further, the World Bank and Asian Development
Bank have also contributed to legislative
developments in dealing with cross-border
insolvency. Chapter 11 of US Bankruptcy Code is
considered as one of the effective ways of
rehabilitation of bankrupt corporates.

understand the overall view of UNCITRAL Model
Law, World Bank principles, Chapter 11 of US
Bankruptcy Code and other emerging aspects of
insolvency laws.
442 PP-CRVI
INTRODUCTION
The organisation of insolvency proceedings with an international element is not an easy or straightforward
matter. Solutions to the phenomenon of cross-border insolvency are reliant on a number of complex and
interrelated questions to which the courts and legislatures in different jurisdictions have provided varying
answers.
Cross-border insolvency (sometimes called international insolvency) regulates the treatment of financially
distressed debtors where such debtors have assets or creditors in more than one country. Typically, cross-
border insolvency is more concerned with the insolvency of companies which operate in more than one
country rather than the bankruptcy of individuals. Like traditional conflict of laws rules, cross-border
insolvency focuses upon three areas: choice of law rules, jurisdiction rules and enforcement of judgment
rules. However, in relation to insolvency, the principal focus tends to be the recognition of foreign insolvency
officials and their powers.
Cross-border insolvency problems are not limited to the failure of major international businesses. Even
in small cases, assets may be located in various countries, for good or for bad reasons. A domestic
business may have foreign branches or subsidiaries, or a foreign business may have domestic
branches or subsidiaries. Property located in a foreign country may provide security for a debt so that
domestic assets can be used to pay unsecured creditors. Foreign creditors may have valid claims in
domestic bankruptcy cases, and domestic creditors may have valid claims in foreign bankruptcy cases.
Any one of these situations raises a transnational insolvency problem. The increase in transnational
insolvencies arises from the growth in international trade. Traditionally, banking institutions financed
international transactions through letters of credit and resolved any problems that arose when particular
debtors were unable to settle their international accounts. The growth of multinational businesses in the
twentieth century has largely bypassed the banking system and created the possibility of transnational
insolvencies.
The impact of international insolvency law is not limited to the legal issues involved in the pathology of
failed and failing businesses. International insolvency law is also a major front-end factor in international
investment and the extension of international credit. The availability and effectiveness of insolvency
procedures is an important point in assessing non-market risk: It is thus an important investment
consideration for both private investors and public institutions such as the World Bank and the
International Monetary Fund. The legal rules governing insolvency law and practice are rooted deeply in
the legal traditions of individual countries.
In part this arises because insolvency law preempts and supersedes many rules of both substantive
and procedural law. Moreover, the importance of national economic interests varies from country to
country, resulting in very different insolvency laws.
DEVELOPMENT OF UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW

(UNCITRAL) MODEL LAW
The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 as a
subsidiary body of the General Assembly of the United Nations with the general mandate to further the
progressive harmonization and unification of the law of international trade.
The UN General Assembly is the main deliberative, policymaking and representative organ of the
United Nations. Comprising all 193 Members of the United Nations, it provides a unique forum for
multilateral discussion of the full spectrum of international issues covered by its Charter. India is a
member of UN General Assembly and UNCITRAL.
Lesson 21 Cross Border Insolvency 443
The General Assembly recognised that differences in national laws regarding international trade were
barriers to the effective flow of trade. The purpose of UNCITRAL was to harmonize and unify the law of
international trade. As part of this programme of harmonization, the UNCITRAL has developed a Model Law
on Cross-Border Insolvency (the Model Law).
In December 1997, the General Assembly endorsed the Model Law on Cross Border Insolvency, developed
and adopted by the UNCITRAL. The Model Law was accompanied by a Guide to Enactment that provided
background and explanatory information to assist those preparing the legislation necessary to implement the
Model Law and judges and others responsible for its application and interpretation.
The Model Law is not a law in its own right and has no force; rather it provides (as the name
suggests) a legal text for incorporation into national law.
The following circumstances necessitated the harmonization of legislations across nations with reference to
cross-border insolvency:
Continuing global expansion of trade and investment.
Increasing incidences of cross-border insolvency due to integration of trade across countries.
National insolvency laws of different countries have by and large not kept pace with the trend.
Inadequate and inharmonious legal approaches due to differences in regulatory platform across
countries that hampers the rescue of financially troubled businesses and impede the protection of
the assets of the insolvent debtor against dissipation.
The UNCITRAL Model Law aims at harmonization of legislations across countries
The United Nations Commission on International Trade Law (UNCITRAL) has a mandate from the General
Assembly of the United Nations to harmonize and unify the law of international trade. As part of this
programme of harmonization, the Commission has developed a Model Law on Cross-Border Insolvency (the
Model-Law) in order to create and maintain harmony in regulatory aspects of insolvency mechanism across
countries. The Commission approved the text of the UNCITRAL Model Law on Cross-Border Insolvency (the
Model Law) in May 1997. The Model Law respects the differences among national procedural laws and
does not attempt a substantive unification of insolvency law. It offers solutions that help in several significant
ways to have harmony among regulatory frameworks.
The objectives
The purpose of the Model Law is to provide effective mechanisms for dealing with cases of cross-border
insolvency so as to promote the objectives of:
(a) Cooperation between the courts and other competent authorities of different countries dealing with
cases of cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of cross-border insolvencies that protects the interests of all
creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtors assets; and
(e) Facilitation of the rescue of financially troubled businesses, thereby protecting investment and
preserving employment.
Key provisions of Model Law
The Model Law focuses on four identified elements, viz.
444 PP-CRVI
(a) access;
(b) recognition;
(c) relief (assistance) and
(d) cooperation.
(a) Access
The provisions relating

(i) to access give representatives of foreign insolvency proceedings and creditors a right of access to
the courts of an enacting (domestic) country to seek assistance; and
(ii) to authorize representatives of local proceedings being conducted in the enacting country
(domestic) to seek assistance elsewhere.
For example, in a cross-border insolvency involving Indian and Australian companies, the access is with
respect to representatives of Australian proceedings to Indian court and vice versa.
(b) Recognition
These core provisions accord recognition to orders issued by foreign courts commencing qualifying foreign
proceedings and appointing the foreign representative of those proceedings. Provided it satisfies specified
requirements, a qualifying foreign proceeding should be recognized as either a main proceeding, taking
place where the debtor had its centre of main interests at the date of commencement of the foreign
proceeding or a non-main proceeding, taking place where the debtor has an establishment. Recognition of
foreign proceedings under the Model Law has several effects - principal amongst them is the relief accorded
to assist the foreign proceeding.
(c) Relief
A basic principle of the Model Law is that the relief considered necessary for the orderly and fair conduct of
cross-border insolvencies should be available to assist foreign proceedings. By specifying the relief that is
available, the Model Law neither imports the consequences of foreign law into the insolvency system of the
enacting State nor applies to the foreign proceedings the relief that would be available under the law of the
enacting State.
Key elements of the relief include interim relief at the discretion of the court between the making of an
application for recognition and the decision on that application, an automatic stay upon recognition of main
proceedings and relief at the discretion of the court for both main and non-main proceedings following
recognition.
(d) Cooperation and coordination
These provisions address cooperation among the courts of different countries where the debtor's assets are
located and coordination of concurrent proceedings concerning that debtor. The Model Law expressly
empowers courts to cooperate in the areas governed by the Model Law and to communicate directly with
foreign counterparts.
Cooperation between courts and foreign representatives and between representatives, both foreign and
local, is also authorized. The provisions addressing coordination of concurrent proceedings aim to foster
decisions that would best achieve the objectives of both proceedings, whether local and foreign proceedings
or multiple foreign proceedings.
Situations under which model law can be applied for cross border insolvencies- Examples
Access to local representatives for foreign records and access to foreign representatives to local
records
Request for assistance by foreign court/foreign representatives in a foreign proceedings
Co-ordination of concurrent proceedings, etc.
Let us understand certain basic terms

(a) "Foreign proceeding" means a collective judicial or administrative proceeding in a foreign State,
including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the
assets and affairs of the debtor are subject to control or supervision by a foreign court, for the
purpose of reorganization or liquidation;
(b) "Foreign main proceeding" means a foreign proceeding taking place in the State where the debtor
has the centre of its main interests;
(c) "Foreign non-main proceeding" means a foreign proceeding, other than a foreign main proceeding,
taking place in a State where the debtor has an establishment within the meaning of subparagraph
(f) of this Article;
(d) "Foreign representative" means a person or body, including one appointed on an interim basis,
authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtors
assets or affairs or to act as a representative of the foreign proceeding;
(e) "Foreign court" means a judicial or other authority competent to control or supervise a foreign
proceeding;
(f) "Establishment" means any place of operations where the debtor carries out a non-transitory
economic activity with human means and goods or services.
(g) The word "State", as used in the preamble and throughout the Model Law, refers to the country that
enacts the Law (the "enacting State"). The term should not be understood as referring, for example,
to a state in a country with a federal system.
GENERAL PROVISIONS
Scope of application (Article 1)
According to Article 1 of the Model Law, it applies where:

(a) Assistance is sought in the enacting State by a foreign court or a foreign representative in
connection with a foreign proceeding; or
(b) Assistance is sought in a foreign State in connection with a proceeding under the laws of the
enacting State relating to insolvency; or
(c) A foreign proceeding and a proceeding under the laws of the enacting State relating to insolvency in
respect of the same debtor are taking place concurrently; or
(d) Creditors or other interested persons in a foreign State have an interest in requesting the
commencement of, or participating in, a proceeding under the laws of the enacting State relating to
insolvency.
It further says that the Model Law does not apply to a proceeding concerning any types of entities, such as
banks or insurance companies, that are subject to a special insolvency regime in a State and that State
wishes to exclude from the Law (the type of entity to be excluded may be designated).
446 PP-CRVI
Banks or insurance companies are mentioned as examples of entities that the enacting State might decide to
exclude from the scope of the Model Law. The reason for the exclusion would be that the insolvency of such
entities gives rise to the particular need to protect vital interests of a large number of individuals, or that the
insolvency of those entities usually requires particularly prompt and circumspect action (for instance to avoid
massive withdrawals of deposits). For those reasons, the insolvency of such types of entities is in many
States administered under a special regulatory regime. The enacting State might decide to exclude the
insolvency of entities other than banks and insurance companies.
Types of foreign proceedings covered
To fall within the scope of the Model Law, a foreign insolvency proceeding needs to possess certain
attributes. These include the basis in insolvency-related law of the originating State; involvement of creditors
collectively; control or supervision of the assets and affairs of the debtor by a court or another official body;
and reorganization or liquidation of the debtor as the purpose of the proceeding. Within those parameters, a
variety of collective proceedings would be eligible for recognition, be they compulsory or voluntary, corporate
or individual, winding-up or reorganization. It also includes those proceedings in which the debtor retains
some measure of control over its assets, albeit under court supervision (e.g. suspension of payments,
"debtor in possession"). An inclusive approach is also used as regards the possible types of debtors covered
by the Model Law.
Principle of supremacy of international obligations (Article 3)
Article 3 provides that to the extent the Model Law conflicts with an obligation of the State enacting the Model
Law arising out of any treaty or other form of agreement to which it is a party with one or more other States,
the requirements of the treaty or agreement prevail.
Competent court or authority (Article 4)
The functions under the Model Law relating to recognition of foreign proceedings and cooperation with
foreign courts shall be performed by the court, courts, authority or authorities as specified in the Model Law
who are competent to perform those functions in the enacting State.
ACCESS OF FOREIGN REPRESENTATIVES AND CREDITORS TO COURTS IN STATE ENACTING

MODEL LAW
Right of direct access (Article 9)
A foreign representative is entitled to apply directly to a court in the State enacting law. Article 9 is limited to
expressing the principle of direct access by the foreign representative to courts of the enacting State, thus
freeing the representative from having to meet formal requirements such as licences or consular action.
Application by a foreign representative to commence a proceeding (Article 11)
According to Article 11, a foreign representative is entitled to apply to commence a proceeding under the
laws of the enacting State relating to insolvency, if the conditions for commencing such proceeding otherwise
met.
A foreign representative has this right without prior recognition of the foreign proceeding because the
commencement of an insolvency proceeding might be crucial in cases of urgent need for preserving the
assets of the debtor.
1
The Model Law avoids the need to rely on cumbersome and time-consuming letters rogatory or other forms
of diplomatic or consular communications that might otherwise have to be used. This facilitates a
coordinated, cooperative approach to cross-border insolvency and makes fast action possible.
In addition to establishing the principle of direct court access for the foreign representative, the Model
Law:
(a) Establishes simplified proof requirements for seeking recognition and relief for foreign
proceedings, which avoid time-consuming "legalization" requirements involving notarial or
consular procedures (Article 15);
(b) Provides that the foreign representative has procedural standing for commencing an insolvency
proceeding in the enacting State (under the conditions applicable in the enacting State) and
that the foreign representative may participate in an insolvency proceeding in the enacting
State (Articles 11 and 12);
(c) Confirms, subject to other requirements of the enacting State, access of foreign creditors to the
courts of the enacting State for the purpose of commencing in the enacting State an insolvency
proceeding or participating in such a proceeding (Article 13);
(d) Gives the foreign representative the right to intervene in proceedings concerning individual
actions in the enacting State affecting the debtor or its assets (Article 24);
(e) Provides that the mere fact of a petition for recognition in the enacting State does not mean
that the courts in that State have jurisdiction over all the assets and affairs of the debtor (Article
10).
Upon recognition of a foreign proceeding, the foreign representative is entitled to participate in a

proceeding regarding the debtor under the laws of the enacting State relating to insolvency (Article 12).
Article 12 is limited to giving the foreign representative procedural standing (or "procedural legitimation")
to make petitions, requests or submissions concerning issues such as protection, realization or
distribution of assets of the debtor or cooperation with the foreign proceeding and does not vest the
foreign representative with any specific powers or rights.
Protection of creditors and other interested persons
Foreign creditors have the same rights regarding the commencement of and participation in a
proceeding under the laws of the enacting State relating to insolvency as creditors in the State.
The Model Law contains following provisions to protect the interests of the creditors (in particular local
creditors), the debtor and other affected persons:
availability of temporary relief upon application for recognition of a foreign proceeding or upon
recognition is subject to the discretion of the court; it is expressly stated that in granting such
relief the court must be satisfied that the interests of the creditors and other interested persons,
including the debtor, are adequately protected (Article 22, paragraph 1);
the court may subject the relief it grants to conditions it considers appropriate; and
the court may modify or terminate the relief granted, if so requested by a person affected
thereby (Article 22, paragraphs 2 and 3).
In addition to those specific provisions, the Model Law in a general way provides that the court may
1. Seeking information by one Court from another, especially foreign Court.

448 PP-CRVI
refuse to take an action governed by the Model Law if the action would be manifestly contrary to the
public policy of the enacting State (Article 6).
Notification to foreign creditors of a proceeding (Article 14)
Article 14 of the Model Law provides that whenever under laws of the enacting State relating to
insolvency, a notification is to be given to creditors, such notification shall also be given to the known
creditors that do not have addresses in the State. The court may order that appropriate steps be taken
with a view to notifying any creditor whose address is not yet known. The main purpose of notifying
foreign creditors is to inform them of the commencement of the insolvency proceeding and of the time-
limit to file their claims.
Such notification shall be made to the foreign creditors individually, unless the court considers that,
under the circumstances, some other form of notification would be more appropriate. No letters rogatory
or other, similar formality is required. When a notification of commencement of a proceeding is to be
given to foreign creditors, the notification shall:
(a) Indicate a reasonable time period for filing claims and specify the place for their filing;
(b) Indicate whether secured creditors need to file their secured claims; and
(c) Contain any other information required to be included in such a notification to creditors
pursuant to the law of this State and the orders of the court.
RECOGNITION OF A FOREIGN PROCEEDING AND RELIEF
Application for recognition of a foreign proceeding (Article 15)
Article 15 defines the core procedural requirements for an application by a foreign representative for
recognition. In incorporating the provision into national law, it is desirable not to encumber the process
with additional requirements beyond these requirements. A foreign representative may apply to the
court for recognition of the foreign proceeding in which the foreign representative has been appointed.
An application for recognition shall be accompanied by:
(a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign
representative; or
(b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the
appointment of the foreign representative; or
(c) In the absence of evidence referred to in subparagraphs (a) and (b) above, any other evidence
acceptable to the court of the existence of the foreign proceeding and of the appointment of the
foreign representative.
An application for recognition shall also be accompanied by a statement identifying all foreign
proceedings in respect of the debtor that are known to the foreign representative. The court may require
a translation of documents supplied in support of the application for recognition into an official language
of State.
The Model Law presumes that documents submitted in support of the application for recognition need
not be authenticated in any special way, in particular by legalization. According to Article 16, the court is
entitled to presume that those documents are authentic whether or not they have been legalized.
"Legalization" is a term often used for the formality by which a diplomatic or consular agent of the State
in which the document is to be produced certifies the authenticity of the signature, the capacity in which
the person signing the document has acted and, where appropriate, the identity of the seal or stamp on
the document.
In respect of the provision relaxing any requirement of legalization, the question may arise whether that
is in conflict with the international obligations of the enacting State. Several States are parties to
bilateral or multilateral treaties on mutual recognition and legalization of documents. According to Article
3 of the Model Law, if there is still a conflict between the Model Law and a treaty, the treaty will prevail.
In order not to prevent recognition because of non-compliance with a mere technicality, the law allows
evidence other than that specified; that provision, however, does not compromise the courts power to
insist on the presentation of evidence acceptable to it.
It further requires that an application for recognition must be accompanied by a statement identifying all
foreign proceedings in respect of the debtor that are known to the foreign representative. That
information is needed by the court not so much for the decision on recognition itself but for any decision
granting relief in favour of the foreign proceeding. In order to tailor such relief appropriately and make
sure that the relief is consistent with any other insolvency proceeding concerning the same debtor, the
court needs to be aware of all foreign proceedings concerning the debtor that may be under way in third
States.
Decision to recognize a foreign proceeding (Article 17)
Subject to Article 6, a foreign proceeding shall be recognized if:

(a) The foreign proceeding is a proceeding within the meaning as defined under Article 2;
(b) The foreign representative applying for recognition is a person or body within the meaning as
defined under Article 2;
(c) The application meets the requirements of Article 15; and
(d) The application has been submitted to the court referred to in Article 4.
The foreign proceeding shall be recognized as a foreign main proceeding if it is taking place in the State
where the debtor has the centre of its main interests; or as a foreign non-main proceeding if the debtor
has an establishment within the meaning of subparagraph (f) of Article 2 in the foreign State.
The purpose of Article 17 is to indicate that, if recognition is not contrary to the public policy of the
enacting State and if the application meets the above said requirements, recognition will be granted as
a matter of course. A decision to recognize a foreign proceeding would normally be subject to review or
rescission, as any other court decision.
Subsequent information (Article 18)
The foreign representative shall inform the court immediately, if from the time of filing the application for
recognition of the foreign proceeding, there is:
(a) Any substantial change in the status of the recognized foreign proceeding or the status of the
foreign representatives appointment; and
(b) Any other foreign proceeding regarding the same debtor that becomes known to the foreign
representative.
It is possible that, after the application for recognition or after recognition, changes may occur in the
foreign proceeding that would have affected the decision on recognition or the relief granted on the
basis of recognition. For example, the foreign proceeding may be terminated or transformed from a
liquidation proceeding into a reorganization proceeding, or the terms of the appointment of the foreign
450 PP-CRVI
representative may be modified or the appointment itself terminated. The technical modifications in the
status of the proceedings or the terms of the appointment are frequent, but that only some of those
modifications are such that they would affect the decision granting relief or the decision recognizing the
proceeding; therefore, the provision only calls for information of "substantial" changes.
Relief that may be granted upon application for recognition of a foreign proceeding (Article 19)
According to Article 19, from the time of filing an application for recognition until the application is
decided upon, the court may, at the request of the foreign representative, where relief is urgently
needed to protect the assets of the debtor or the interests of the creditors, grant relief of a provisional
nature, including:
(a) Staying execution against the debtors assets;
(b) Entrusting the administration or realization of all or part of the debtors assets located in a State
to the foreign representative or another person designated by the court, in order to protect and
preserve the value of assets that, by their nature or because of other circumstances, are
perishable, susceptible to devaluation or otherwise in jeopardy; and
(c) Any relief mentioned in Article 21.
Relief available under Article 19 is provisional in the sense that, the relief terminates when the
application for recognition is decided upon; however, the court is given the opportunity to extend the
measure, as provided in Article 21. The court may refuse to grant relief under this Article if such relief
would interfere with the administration of a foreign main proceeding.
Effects of recognition of a foreign main proceeding (Article 20)
Once foreign proceeding is recognized which is a foreign main proceeding, the following are the effects:
(a) Commencement or continuation of individual actions or individual proceedings concerning the
debtors assets, rights, obligations or liabilities is stayed;
(b) Execution against the debtors assets is stayed; and
(c) The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.
The effects provided by Article 20 are not discretionary in nature. These flow automatically from
recognition of the foreign main proceeding. The automatic effects under Article 21 apply only to main
proceedings.
Relief that may be granted upon recognition of a foreign proceeding (Article 21)
Upon recognition of a foreign proceeding, whether main or non-main, where it is necessary to protect
the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign
representative, grant any appropriate relief, including:
(a) Staying the commencement or continuation of individual actions or individual proceedings
concerning the debtors assets, rights, obligations or liabilities, to the extent they have not been
stayed under Article 20;
(b) Staying execution against the debtors assets to the extent it has not been stayed under Article
20;
(c) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to
the extent this right has not been suspended under Article 20;
(d) Providing for the examination of witnesses, the taking of evidence or the delivery of information
concerning the debtors assets, affairs, rights, obligations or liabilities;

(e) Entrusting the administration or realization of all or part of the debtors assets located in this
State to the foreign representative or another person designated by the court;
(f) Extending relief granted under Article 19; and
(g) Granting any additional relief that may be available to a person or body administering a
reorganization or liquidation under the law of the enacting State under the laws of that State.
Upon recognition of a foreign proceeding, whether main or non-main, the court may, at the request of
the foreign representative, entrust the distribution of all or part of the debtors assets located in the State
enacting the Model Law to the foreign representative or another person designated by the court,
provided that the court is satisfied that the interests of creditors are adequately protected.
In granting relief under this Article to a representative of a foreign non-main proceeding, the court must
be satisfied that the relief relates to assets that, under the law of the enacting State, should be
administered in the foreign non-main proceeding or concerns information required in that proceeding.
Protection of creditors and other interested persons (Article 22)
The court may under Article 22, at the request of the foreign representative or a person affected by
relief granted, or at its own motion, modify or terminate such relief. In granting or denying relief under
Article 19 or 21, or in modifying or terminating relief, the court must be satisfied that the interests of the
creditors and other interested persons, including the debtor, are adequately protected.
The idea underlying Article 22 is that there should be a balance between relief that may be granted to
the foreign representative and the interests of the persons that may be affected by such relief.
Actions to avoid acts detrimental to creditors (Article 23)
Under many national laws both individual creditors and insolvency administrators have a right to bring
actions to avoid or otherwise render ineffective acts detrimental to creditors. Such a right, insofar as it
pertains to individual creditors, is often not governed by insolvency law but by general provisions of law
(such as the civil code); the right is not necessarily tied to the existence of an insolvency proceeding
against the debtor so that the action may be instituted prior to the commencement of such a
proceeding. The person having such a right is typically only an affected creditor and not another person
such as the insolvency administrator. Furthermore, the conditions for these individual-creditor actions
are different from the conditions applicable to similar actions that might be initiated by an insolvency
administrator.
The procedural standing conferred by Article 23 extends only to actions that are available to the local
insolvency administrator in the context of an insolvency proceeding, and the Article does not equate the
foreign representative with individual creditors who may have similar rights under a different set of
conditions. Such actions of individual creditors fall outside the scope of Article 23.
The Model Law expressly provides that a foreign representative has "standing" to initiate actions to
avoid or otherwise render ineffective legal acts detrimental to creditors. The provision is drafted
narrowly in that it does not create any substantive right regarding such actions and also does not
provide any solution involving conflict of laws. The effect of the provision is that a foreign representative
is not prevented from initiating such actions by the sole fact that the foreign representative is not the
insolvency administrator appointed in the enacting State.
452 PP-CRVI
Intervention by a foreign representative in proceedings (Article 24)
Upon recognition of a foreign proceeding, the foreign representative may, provided the requirements of
the law of the State are met, intervene in any proceedings in which the debtor is a party. The purpose of
Article 24 is to avoid the denial of standing to the foreign representative to intervene in proceedings
merely because the procedural legislation may not have contemplated the foreign representative
among those having such standing. The Article applies to foreign representatives of both main and non-
main proceedings.
Cooperation with Foreign Courts and Foreign Representatives
Chapter IV (Articles 25-27), on cross-border cooperation, is a core element of the Model Law. Its
objective is to enable courts and insolvency administrators from two or more countries to be efficient
and achieve optimal results. Cooperation as described in the chapter is often the only realistic way, for
example, to prevent dissipation of assets, to maximize the value of assets.
Articles 25 and 26 not only authorize cross-border cooperation, they also mandate it by providing that
the court and the insolvency administrator "shall cooperate to the maximum extent possible". The
Articles are designed to overcome the widespread problem of national laws lacking rules providing a
legal basis for cooperation by local courts with foreign courts in dealing with cross-border insolvencies.
Enactment of such a legal basis would be particularly helpful in legal systems in which the discretion
given to judges to operate outside areas of express statutory authorization is limited. However, even in
jurisdictions in which there is a tradition of wider judicial latitude, enactment of a legislative framework
for cooperation has proved to be useful. To the extent that cross-border judicial cooperation in the
enacting State is based on the principle of comity among nations, the enactment of Articles 25-27 offers
an opportunity for making that principle more concrete and adaptable to the particular circumstances of
cross-border insolvencies.
The Articles in chapter IV leave certain decisions, in particular when and how to cooperate, to the courts
and, subject to the supervision of the courts, to the insolvency administrators. For a court to cooperate
with a foreign court or a foreign representative regarding a foreign proceeding, the Model Law does not
require a previous formal decision to recognize that foreign proceeding.
Cooperation and direct communication between courts or foreign representatives (Article 25)
The court is entitled to communicate directly with, or to request information or assistance directly from,
foreign courts or foreign representatives. The ability of courts, with appropriate involvement of the
parties, to communicate "directly" and to request information and assistance "directly" from foreign
courts or foreign representatives is intended to avoid the use of time-consuming procedures traditionally
in use, such as letters rogatory.
Cooperation and direct communication between a person or body administering a

reorganization or liquidation under the law of the enacting State and foreign courts or foreign
representatives (Article 26)
Article 26 on international cooperation between persons who are appointed to administer assets of
insolvent debtors reflects the important role that such persons can play in devising and implementing
cooperative arrangements, within the parameters of their authority. The provision makes it clear that an
insolvency administrator acts under the overall supervision of the competent court. The Model Law
does not modify the rules already existing in the insolvency law of the enacting State on the supervisory
functions of the court over the activities of the insolvency administrator.
According to Article 27, Cooperation may be implemented by any appropriate means, including:
(a) Appointment of a person or body to act at the direction of the court;
(b) Communication of information by any means considered appropriate by the court;
(c) Coordination of the administration and supervision of the debtors assets and affairs;
(d) Approval or implementation by courts of agreements concerning the coordination of
proceedings;
(e) Coordination of concurrent proceedings regarding the same debtor;
(f) The enacting State may wish to list additional forms or examples of cooperation.
CONCURRENT PROCEEDINGS
Commencement of a proceeding after recognition of a foreign main proceeding (Article 28)
After recognition of a foreign main proceeding, a proceeding under the laws of the enacting State
relating to insolvency may be commenced only if the debtor has assets in the State enacting the Model
Law. The effects of that proceeding shall be restricted to the assets of the debtor that are located in
such State and to the extent necessary to implement cooperation and coordination under Articles 25, 26
and 27 to other assets of the debtor that, under the law of such State, should be administered in that
proceeding.
Article 28, in conjunction with Article 29, provides that recognition of a foreign main proceeding will not
prevent the commencement of a local insolvency proceeding concerning the same debtor as long as the
debtor has assets in the State.
Coordination of a proceeding (Article 29)
Article 29 gives guidance to the court that deals with cases where the debtor is subject to a foreign
proceeding and a local proceeding at the same time. Where a foreign proceeding and a proceeding
under the laws of the enacting State relating to insolvency are taking place concurrently regarding the
same debtor, the court shall seek cooperation and coordination under Articles 25, 26 and 27, and the
following shall apply:
(a) When the proceeding in the State (which has enacted Model Law) is taking place at the time
the application for recognition of the foreign proceeding is filed,
(i) Any relief granted under Article 19 or 21 must be consistent with the proceeding in such
State; and
(ii) If the foreign proceeding is recognized in such State as a foreign main proceeding, Article
20 does not apply;
(b) When the proceeding in such State commences after recognition, or after the filing of the
application for recognition, of the foreign proceeding,
(i) Any relief in effect under Article 19 or 21 shall be reviewed by the court and shall be
modified or terminated if inconsistent with the proceeding in this State; and
(ii) If the foreign proceeding is a foreign main proceeding, the stay and suspension referred to
in Article 20 shall be modified or terminated, if inconsistent with the proceeding in such
State;
454 PP-CRVI
(c) In granting, extending or modifying relief granted to a representative of a foreign non-main

proceeding, the court must be satisfied that the relief relates to assets which, according to the
law of the enacting State, should be administered in the foreign non-main proceeding or
concerns information required in that proceeding.
The salient principle embodied in Article 29 is that the commencement of a local proceeding does not
prevent or terminate the recognition of a foreign proceeding. This principle is essential for achieving the
objectives of the Model Law in that it allows the court in the enacting State in all circumstances to
provide relief in favour of the foreign proceeding.
Coordination of more than one foreign proceeding (Article 30)
Article 30 deals with cases where the debtor is subject to insolvency proceedings in more than one
foreign State and foreign representatives of more than one foreign proceeding seek recognition or relief
in the enacting State. The provision applies whether or not an insolvency proceeding is pending in the
enacting State. If, in addition to two or more foreign proceedings, there is a proceeding in the enacting
State, the court will have to act pursuant to both Article 29 and Article 30.
In respect of more than one foreign proceeding regarding the same debtor, the court shall seek
cooperation and coordination under Articles 25, 26 and 27, and the following shall apply:
(a) Any relief granted under Article 19 or 21 to a representative of a foreign non-main proceeding
after recognition of a foreign main proceeding must be consistent with the foreign main
proceeding;
(b) If a foreign main proceeding is recognized after recognition, or after the filing of an application
for recognition, of a foreign non-main proceeding, any relief in effect under Article 19 or 21 shall
be reviewed by the court and shall be modified or terminated if inconsistent with the foreign
main proceeding; and
(c) If, after recognition of a foreign non-main proceeding, another foreign non-main proceeding is
recognized, the court shall grant, modify or terminate relief for the purpose of facilitating
coordination of the proceedings.
The objective of Article 30 is similar to that of Article 29 in that the key issue in the case of concurrent
proceedings is to promote cooperation, coordination and consistency of relief granted to different
proceedings. Such consistency will be achieved by appropriate tailoring of relief to be granted or by
modifying or terminating relief already granted. Unlike Article 29, which, as a matter of principle, gives
primacy to the local proceeding, Article 30 gives preference to the foreign main proceeding, if there is
one.
Rule of payment in concurrent proceedings (Article 32)
Without prejudice to secured claims or rights in rem, a creditor who has received part payment in
respect of its claim in a proceeding, pursuant to a law relating to insolvency, in a foreign State, may not
receive a payment for the same claim in a proceeding under the laws of the enacting State relating to
insolvency regarding the same debtor, so long as the payment to the other creditors of the same class
is proportionately less than the payment the creditor has already received.
The rule set forth in Article 32, also referred to as the hotchpotch rule, is a useful safeguard in a legal
regime for coordination and cooperation in the administration of cross-border insolvency proceedings. It
is intended to avoid situations in which a creditor might obtain more favourable treatment than the other
creditors of the same class by obtaining payment of the same claim in insolvency proceedings in
different jurisdictions.
UNCITRAL LEGISLATIVE GUIDE ON INSOLVENCY LAWS1
Purpose
The Legislative Guide provides a comprehensive statement of the key objectives and principles that
should be reflected in the insolvency laws of respective countries. It is intended to inform and assist
insolvency law reforms around the world, providing a reference tool for national authorities and
legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws
and regulations. The advice provided aims at achieving a balance between the need to address a
debtor's financial difficulty as quickly and efficiently as possible; the interests of the various parties
directly concerned with that financial difficulty, principally creditors and other stakeholders in the
debtor's business; and public policy concerns, such as employment and taxation. The Legislative Guide
assists the reader to evaluate the different approaches and solutions available and to choose the one
most suitable to the local context.
The purpose of the Legislative Guide on Insolvency Law is

(i) to assist the establishment of an efficient and effective legal framework to address the financial
difficulty of debtors.
(ii) intended to be used as a reference by national authorities and legislative bodies when
preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
Key provisions
The Legislative Guide is divided into three parts:
Part one discusses the key objectives of an insolvency law, structural issues such as the relationship
between insolvency law and other laws, the types of mechanisms available for resolving a debtor's
financial difficulties and the institutional framework required to support an effective insolvency regime.
Part two deals with core features of an effective insolvency law, following as closely as possible the
various stages of an insolvency proceeding from their commencement to discharge of the debtor and
closure of the proceedings. Key elements are identified as including: standardized commencement
criteria; a stay to protect the assets of the insolvency estate that includes actions by secured creditors;
post-commencement finance; participation of creditors; provision for expedited reorganization
proceedings; simplified requirements for submission and verification of claims; conversion of
reorganization to liquidation when reorganization fails; and clear rules for discharge of the debtor and
closure of insolvency proceedings.
Part three addresses the treatment of enterprise groups in insolvency, both nationally and
internationally. While many of the issues addressed in parts one and two are equally applicable to
enterprise groups, there are those that only apply in the enterprise group context. Part three thus builds
upon and supplements parts one and two. At the domestic level, the commentary and
recommendations of part three cover various mechanisms that can be used to streamline insolvency
proceedings involving two or more members of the same enterprise group. These include: procedural
coordination of multiple proceedings concerning different debtors; issues concerning post-
commencement and post-application finance in a group context; avoidance provisions; substantive
consolidation of insolvency proceedings affecting two or more group members; appointment of a single
or the same insolvency representative to all group members subject to insolvency; and coordinated
1 http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/2004Guide.html
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reorganization plans. In terms of the international treatment of groups, part three focuses on
cooperation and coordination, extending provisions based upon the Model Law on Cross-Border
Insolvency to the group context and, as appropriate, considering the applicability to the international
context of the mechanisms proposed to address enterprise group insolvencies in the national context.
EFFECTIVE INSOLVENCY AND CREDITOR RIGHTS SYSTEMS - WORLD BANK PRINCIPLES
The World Bank Principles were originally developed in 2001 in response to a request from the
international community in the wake of the financial crises in emerging markets in the late 90s. At the
time, there were no internationally recognized benchmarks or standards to evaluate the effectiveness of
domestic creditor rights and insolvency systems. The World Banks initiative began in 1999, with the
constitution of an ad hoc committee of partner organizations, and with the assistance of leading
international experts who participated in the World Banks Task Force and Working Groups. The
Principles were vetted in a series of five regional conferences, involving officials and experts from some
75 countries, and drafts were placed on the World Banks website for public comment. The Banks
Board of Directors approved the Principles in 2001 for use in connection with the joint IMF-World Bank
program to develop Reports on the Observance of Standards and Codes (ROSC), subject to reviewing
the experience and updating the Principles as needed.
From 2001 to 2004, the Principles were used to assess country systems under the ROSC and Financial
Sector Assessment Program (FSAP) in some 24 countries in all regions of the world. Assessments
using the Principles have been instrumental to the Banks developmental and operational work, and in
providing assistance to member countries. This has yielded a wealth of experience and enabled the
Bank to test the sufficiency of the Principles as a flexible benchmark in a wide range of diverse country
systems. In taking stock of that experience, the Bank has consulted a wide range of interested parties
at the national and international level, including officials, civil society, business and financial sectors,
investors, professional groups, and others.
In 2003, the World Bank convened the Global Forum on Insolvency Risk Management (FIRM) to
discuss the experience and lessons from the application of the Principles in the assessment program.
The forum consisted of over 200 experts from 31 countries to discuss the lessons from the principles
and to discuss further refinements to them. During 2003 and 2004, the Bank also convened three
working group sessions of the Global Judges Forum, involving judges from approximately 70 countries,
who have assisted the Bank in its review of the institutional framework principles and in developing
more detailed recommendations for strengthening court practices for commercial enforcement and
insolvency proceedings. Other regional fora have also provided a means for sharing experience and
obtaining feedback in areas of the Principles, including the Forum on Asian Insolvency Reform (FAIR)
from 2002-2004 (organized by OECD and co-sponsored with the Bank and the Asian Development
Bank), and Forum on Insolvency in Latin America (FILA) in 2004 organised by the Bank.
In the area of the insolvency law framework and creditor rights systems, staffs of the Bank maintained
participation in the UNCITRAL working groups on insolvency law and security interests and liaised with
UNCITRAL staff and experts to ensure consistency between the Banks Principles and the UNCITRAL
Legislative Guide on Insolvency Law. The Bank has also benefited from an ongoing collaboration with
the International Association of Insolvency Regulators (IAIR) to survey regulatory practices of IAIR
member countries and develop recommendations for strengthening regulatory capacity and frameworks
for insolvency systems. A similar collaboration with INSOL International has provided feedback and
input in the area of directors and officers liability and informal workout systems.
Based on the experience gained from the use of the Principles, and following extensive consultations,
the Principles have been thoroughly reviewed and updated. The revised Principles have benefited from
wide consultation and, more importantly, from the practical experience of using them in the context of
the Banks assessment and operational work.
The World Bank Principles have been designed as a broad-spectrum assessment tool to assist
countries in their efforts to evaluate and improve core aspects of their commercial law systems that are
fundamental to a sound investment climate, and to promote commerce and economic growth. Efficient,
reliable and transparent creditor rights and insolvency systems are of key importance for reallocation of
productive resources in the corporate sector, for investor confidence and forward looking corporate
restructuring. These systems also play a pivotal role in times of crisis to enable a country and
stakeholders to promptly respond to and resolve matters of corporate financial distress on systemic
scales.
The Principles emphasize contextual, integrated solutions and the policy choices involved in developing
those solutions. The Principles highlight the relationship between the cost and flow of credit (including
secured credit) and the laws and institutions that recognize and enforce credit agreements (Part A). The
Principles also outline key features and policy choices relating to the legal framework for risk
management and informal corporate workout systems (Part B), formal commercial insolvency law
frameworks (Part C) and the implementation of these systems through sound institutional and
regulatory frameworks (Part D).
The principles have broader application beyond corporate insolvency regimes and creditor rights. The
Principles are designed to be flexible in their application, and do not offer detailed prescriptions for
national systems. The Principles embrace practices that have been widely recognized and accepted as
good practices internationally. As legal systems and business and commerce are evolutionary in nature,
so too are the Principles, and it is anticipated that these will continue to be reviewed going forward to
take account of significant changes and developments.
THE WORLD BANK PRINCIPLES A SUMMARY
A brief summary of the key elements of the World Bank Principles for effective insolvency and creditor
rights systems is given below:
1. Credit Environment
Compatible credit and enforcement systems. A regularized system of credit should be supported by
mechanisms that provide efficient, transparent and reliable methods for recovering debt, including
seizure and sale of immovable and movable assets and sale or collection of intangible assets, such as
debt owed to the debtor by third parties. An efficient system for enforcing debt claims is crucial to a
functioning credit system, especially for unsecured credit. A creditors ability to take possession of a
debtors property and to sell it to satisfy the debt is the simplest, most effective means of ensuring
prompt payment. It is far more effective than the threat of an insolvency proceeding, which often
requires a level of proof and a prospect of procedural delay that in all but extreme cases make it not
credible to debtors as leverage for payment.
Collateral systems. One of the pillars of a modern credit economy is the ability to own and freely
transfer ownership interests in property, and to grant a security interest to credit providers with respect
to such interests and rights as a means of gaining access to credit at more affordable prices. Secured
transactions play an enormously important role in a well functioning market economy. Laws on secured
credit mitigate lenders risks of default and thereby increase the flow of capital and facilitate low cost
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financing. Discrepancies and uncertainties in the legal framework governing security interests are the
main reasons for high costs and unavailability of credit, especially in developing countries.
The legal framework for secured lending addresses the fundamental features and elements for the
creation, recognition and enforcement of security interests in all types of assets, movable and
immovable, tangible and intangible, including inventories, receivables, proceeds and future property,
and on a global basis, including both possessory and non-possessory interests. The law should
encompass any or all of a debtors obligations to a creditor, present or future and between all types of
persons. In addition, it should provide for effective notice and registration rules to be adapted to all
types of property, and clear rules of priority on competing claims or interests in the same assets. For
security rights and notice to third parties to be effective, they must be capable of being publicized at
reasonable costs and easily accessible to stakeholders. A reliable, affordable, public registry system is
therefore essential to promote optimal conditions for asset based lending. Where several registries
exist, the registration system should be integrated to the maximum extent possible so that all notices
recorded under the secured transactions legislation can be easily retrieved.
Enforcement systems. A modern, credit-based economy requires predictable, transparent and

affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of
insolvency, as well as a sound insolvency system. These systems must be designed to work in
harmony. Commerce is a system of commercial relationships predicated on express or implied
contractual agreements between an enterprise and a wide range of creditors and constituencies.
Although commercial transactions have become increasingly complex as more sophisticated
techniques are developed for pricing and managing risks, the basic rights governing these relationships
and the procedures for enforcing these rights have not changed much. These rights enable parties to
rely on contractual agreements, fostering confidence that fuels investment, lending and commerce.
Conversely, uncertainty about the enforceability of contractual rights increases the cost of credit to
compensate for the increased risk of non-performance or, in severe cases, leads to credit tightening.
Credit information systems. A modern credit-based economy requires access to complete, accurate
and reliable information concerning borrowers payment histories. This process should take place in a
legal environment that provides the framework for the creation and operation of effective credit
information systems. Permissible uses of information from credit information systems should be clearly
circumscribed, especially regarding information about individuals. Legal controls on the type of
information collected and distributed by credit information systems may often be used to advance public
policies, including anti-discrimination laws.
Privacy concerns should be addressed through notice of the existence of such systems, notice of when
any information from such systems is used to make adverse decisions, and access by data subjects to
stored credit information with the ability to dispute and have corrected inaccurate or incomplete
information. An effective enforcement and supervision mechanism should be in place that provides
efficient, inexpensive, transparent and predictable methods for resolving disputes concerning the
operation of credit information systems along with proportionate sanctions which encourage compliance
but that are not so stringent as to discourage operations of such systems.
Informal corporate workouts. Corporate workouts should be supported by an environment that

encourages participants to restore an enterprise to financial viability. Informal workouts are negotiated
in the shadow of the law. Accordingly, the enabling environment must include clear laws and
procedures that require disclosure of or access to timely and accurate financial information on the
distressed enterprise; encourage lending to, investment in or recapitalization of viable distressed
enterprises; support a broad range of restructuring activities, such as debt write-offs, reschedulings,
restructurings and debt-equity conversions; and provide favourable or neutral tax treatment for
restructurings. A countrys financial sector should promote an informal out-of-court process for dealing
with cases of corporate financial difficulty in which banks and other financial institutions have a
significant exposure especially in markets where enterprise insolvency is systemic.
2. Insolvency Law Systems
Commercial insolvency. Though approaches vary, effective insolvency systems have a number of
aims and objectives. Systems should aspire to:
(i) integrate with a countrys broader legal and commercial systems;
(ii) maximize the value of a firms assets and recoveries by creditors;
(iii) provide for both efficient liquidation of nonviable businesses and those where liquidation is
likely to produce a greater return to creditors and reorganization of viable businesses;
(iv) strike a careful balance between liquidation and reorganization, allowing for easy conversion of
proceedings from one proceeding to another;
(v) provide for equitable treatment of similarly situated creditors, including similarly situated foreign
and domestic creditors;
(vi) provide for timely, efficient and impartial resolution of insolvencies;
(vii) prevent the improper use of the insolvency system;
(viii) prevent the premature dismemberment of a debtors assets by individual creditors seeking
quick judgments;
(ix) provide a transparent procedure that contains, and consistently applies, clear risk allocation
rules and incentives for gathering and dispensing information;
(x) recognize existing creditor rights and respect the priority of claims with a predictable and
established process; and
(xi) establish a framework for cross-border insolvencies, with recognition of foreign proceedings.
Where an enterprise is not viable, the main thrust of the law should be swift and efficient liquidation to
maximize recoveries for the benefit of creditors. Liquidations can include the preservation and sale of
the business, as distinct from the legal entity. On the other hand, where an enterprise is viable, meaning
it can be rehabilitated, its assets are often more valuable if retained in a rehabilitated business than if
sold in a liquidation. The rescue of a business preserves jobs, provides creditors with a greater return
based on higher going concern values of the enterprise, potentially produces a return for owners and
obtains for the country the fruits of the rehabilitated enterprise.
The rescue of a business should be promoted through formal and informal procedures. Rehabilitation
should permit quick and easy access to the process, protect all those involved, permit the negotiation of
a commercial plan, enable a majority of creditors in favor of a plan or other course of action to bind all
other creditors (subject to appropriate protections) and provide for supervision to ensure that the
process is not subject to abuse.
3. Implementation: Institutional and Regulatory Frameworks
Strong institutions and regulations are crucial to an effective insolvency system. The institutional
framework has three main elements: the institutions responsible for insolvency proceedings, the
operational system through which cases and decisions are processed and the requirements needed to
460 PP-CRVI
preserve the integrity of those institutions recognizing that the integrity of the insolvency system is the
linchpin for its success.
4. Overarching considerations of sound investment climates
Transparency, accountability and corporate governance. Minimum standards of transparency and

corporate governance should be established to foster communication and cooperation. Disclosure of
basic informationincluding financial statements, operating statistics and detailed cash flowsis
recommended for sound risk assessment. Accounting and auditing standards should be compatible
with international best practices so that creditors can assess credit risk and monitor a debtors financial
viability. A predictable, reliable legal framework and judicial process are needed to implement reforms,
ensure fair treatment of all parties and deter unacceptable practices.
Corporate law and regulation should guide the conduct of the borrowers shareholders. A corporations
board of directors should be responsible, accountable and independent of management, subject to best
practices on corporate governance. The law should be imposed impartially and consistently. Creditor
rights and insolvency systems interact with and are affected by these additional systems, and are most
effective when good practices are adopted in other relevant parts of the legal system, especially the
commercial law.
Transparency and Corporate Governance. Transparency and good corporate governance are the
cornerstones of a strong lending system and corporate sector. Transparency exists when information is
assembled and made readily available to other parties and, when combined with the good behavior of
corporate citizens, creates an informed and communicative environment conducive to greater
cooperation among all parties. Transparency and corporate governance are especially important in
emerging markets, which are more sensitive to volatility from external factors. Without transparency,
there is a greater likelihood that loan pricing will not reflect underlying risks, leading to higher interest
rates and other charges. Transparency and strong corporate governance are needed in both domestic
and cross-border transactions and at all phases of investmentat the inception when making a loan,
when managing exposure while the loan is outstanding, and especially once a borrowers financial
difficulties become apparent and the lender is seeking to exit the loan.
Transparency increases confidence in decision making and so encourages the use of out off court
restructuring options. Such options are preferable because they often provide higher returns to lenders
than straight liquidation through the legal processand because they avoid the costs, complexities and
uncertainties of the legal process.
Predictability. Investment in emerging markets is discouraged by the lack of well defined and
predictable risk allocation rules and by the inconsistent application of written laws. Moreover, during
systemic crises investors often demand uncertainty risk premiums too onerous to permit markets to
clear. Some investors may avoid emerging markets entirely despite expected returns that far outweigh
known risks. Rational lenders will demand risk premiums to compensate for systemic uncertainty in
making, managing and collecting investments in emerging markets. The likelihood that creditors will
have to rely on risk allocation rules increases as fundamental factors supporting investment deteriorate.
That is because risk allocation rules set minimum standards that have considerable application in
limiting downside uncertainty, but that usually do not enhance returns in non-distressed markets. During
actual or perceived systemic crises, lenders tend to concentrate on reducing risk, and risk premiums
soar. At these times the inability to predict downside risk can cripple markets. The effect can impinge on
other risks in the country, causing lender reluctance even towards untroubled borrowers.
US BANKRUPTCY CODE
Six basic types of bankruptcy situations are dealt with under the US Bankruptcy Code.
Chapter 7 bankruptcy leading to liquidation. In this type of bankruptcy, a court-appointed trustee or
administrator takes possession of any nonexempt assets, liquidates these assets (for example, by
selling at an auction), and then uses the proceeds to pay creditors.
Chapter 9, entitled Adjustment of Debts of a Municipality, provides essentially for reorganization. Only a
"municipality" may file under chapter 9, which includes cities and towns, as well as villages, counties,
taxing districts, municipal utilities, and school districts.
Chapter 11, entitled Reorganization, ordinarily is used by commercial enterprises that desire to continue
operating a business and repay creditors concurrently through a court-approved plan of reorganization.
Chapter 12 allows a family of farmer or fisherman to continue to operate the business while the plan is
being carried out.
Chapter 13, enables individuals with regular income to develop a plan to repay all or part of their debts.
Under this chapter, debtors propose a repayment plan to make installments to creditors over three to
five years.
Chapter 15 provides effective mechanisms for dealing with insolvency cases involving debtors, assets,
claimants, and other parties of interest involving more than one country.
US BANKRUPTCY CODE CHAPTER 11

American bankruptcy procedures enable sick Companies to restructure its debt obligations even while
remaining operational. In this context, one must recognise that in the US the well known Chapter 11
bankruptcy proceedings are considered as re-organization/ resurrection process for corporates. Many
companies are known to have revived under Chapter 11. Further, Chapter 11 ensures the emergence
of companies with sustainable debt levels and profitable working.
One of the most remarkable events in recent business history has been the decision of General Motors
Corporation USA to file bankruptcy proceedings a decision forced on the company after it lost market
share in the ongoing recession. Its assets were significantly lower than its liabilities. It has emerged
from 40 days bankruptcy protection after creating a "new GM" made up of the best assets with fewer
brand, fewer employees, etc. For that matter, Chapter 11 could even recover WorldCom which
emerged from bankruptcy as MCI during 2004.
Section 363 under Chapter 11 of US Bankruptcy law is an established procedure which enables
companies to sell assets free of debts and encumbrances to preserve the value of the enterprise. A
company under Chapter 11 can choose to sell off particular assets. A bankrupt company, the "debtor,"
might use this Code to "reorganize" its business and become profitable again.
The key to a successful Chapter 11 case is the continued operation of the debtor's business. In addition
to running the business, the debtor or the trustee must fulfill additional duties required by the
Bankruptcy Code and work with creditors, the court, and other parties to obtain financing for ongoing
business operations.
Salient Features of Chapter 11
Chapter 11 is not a declaration of insolvency.
Companies dont file under Chapter 11 to liquidate; they do so in order to continue operating
and to take the necessary steps to emerge as a financially stronger business, reorganizing their
462 PP-CRVI
operations or balance sheet or in some cases by selling substantially all its assets.
Management remains in control of the business during the chapter 11 rehabilitative process.
Trustees, administrators and monitors typically are not appointed.
Chapter 11 normally does not cause interruption to business operations.
The company is given breathing room during the process - an automatic stay generally
prevents parties from taking legal action against the company or taking the companys assets.
Most publicly-held companies prefer to file under Chapter 11 rather than Chapter 7 because
they can still run their business and control the bankruptcy process. Chapter 11 provides a
process for rehabilitating the business of the company.
Sometimes the company successfully works out a plan to return to profitability; sometimes, in the end, it
liquidates. Under Chapter 11 reorganization, a company usually keeps doing business and its stock and
bonds may continue to trade in securities markets.
The U.S. Trustee, the bankruptcy arm of the Department of Justice, appoints one or more committees
to represent the interests of creditors and stockholders in working with the company to develop a plan
of reorganization to enable it to get out of debt. The plan must be accepted by the creditors,
bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders
vote aginst the plan, the court can disregard the vote and still confirm the plan if it finds that the plan
treats creditors and stockholders fairly.
Committees of creditors and stockholders negotiate a plan with the company to relieve the company
from repaying part of its debt so that the company is able to get back to its normal condition.
After the committees work with the company to develop a plan, the bankruptcy court must find that it
legally complies with the Bankruptcy Code before the plan can be implemented.
Thus, Chapter 11 bankruptcy involves a reorganization plan that accommodates debt reorganization
through a payment plan and the major advantage is that the debtors generally remain in possession of
their property and operate their business under the supervision of Court. Chapter 11 debtors also often
keep a substantial portion of their assets. The provisions of Chapter 11 allow the debtor, relief from
pending obligations and the opportunity to reorganize its business and restructure debts while
continuing to operate the business. Under this chapter a company can choose to sell off particular
assets. Accordingly, subsidiaries outside US need not be included in the Chapter 11 filings.
There is therefore no change in the legal status of its subsidiaries that are kept out of Chapter 11 filings.
Further, Debtors Audit, Debtors Counselling, Mandatory debtor education, etc. are provided under US
Bankruptcy laws which help in minimizing the fraudulent bankruptcies. In the light of the above, a need
is felt to have similar legal framework in India which allows continuity of business during bankruptcy
proceedings, control over the management of company filing bankruptcy application, keeping
subsidiaries / certain assets outside the purview of bankruptcy application, etc. in line with Chapter 11
of US Bankruptcy Code.
LESSON ROUND UP
A company is said to be insolvent when its liabilities exceed its assets which results in its inability
to pay off the debts. Cross border insolvency issues arise when a non-resident is either a debtor
or contributory or creditor.
Since National insolvency laws have by and large not kept pace with the trend, they are often ill
equipped to deal with cases of cross border nature. It hampers the rescue of financially troubled
business. It hampers the administration of cross border insolvencies. This gave the path for
evolution of UNCITRAL Model law on Cross-Border Insolvency in 1997.
UNICITRAL had also came out with the legislative guide on Insolvency Law in 2004.
The study deals with each article of the UNCITRAL Model law covering its purpose, scope, the
process, reliefs foreign courts, foreign proceedings, etc. in a summarized and easy language.
The study further discusses about World Bank Principles which have been designed as a broad-
spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects
of their commercial law systems that are fundamental to a sound investment climate and to
promote commerce and economic growth.
These principles emphasize contextual, integrated solutions and the policy choices involved in
developing the solutions. The principles inter alia outline key features and policy choices relating to
legal framework for risk management and informal corporate workout systems, formal commercial
insolvency law frame works, etc.
SELF TEST QUESTIONS

for evaluation).
1. Write short note on:
(i) UNCITRAL Model Law
(ii) Foreign proceedings
(iii) State
2. Under UNCITRAL Model Law, what are the reliefs that may be granted upon recognition of a
foreign proceeding under Article 21.
3. What are the World Bank Principles? Why and how these are designed?
4. Chapter 11 of US bankruptcy code is preferred by many corporates based in the US. Discuss.
464 PP-CRVI
Test Paper 465
PP-CRVI
TEST PAPER
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from appearing in any one or more examinations, cancel his examination result, or studentship registration,
or debar him from future registration as a student, as the case may be.
Explanation - Misconduct for the purpose of this regulation shall mean and include behaviour in a disorderly
manner in relation to the Institute or in or near an Examination premises/centre, breach of any regulation,
condition, guideline or direction laid down by the Institute, malpractices with regard to postal or oral tuition or
resorting to or attempting to resort to unfair means in connection with the writing of any examination
conducted by the Institute".
466 PP-CRVI
TEST PAPER
(This Test Paper is for recapitulate and practice for the students. Students need not
to submit responses/answers to this test paper to the Institute.)
Time Allowed: 3 hours Maximum Marks: 100
PART A (50 Marks)
(Corporate Restructuring)
1. (a) Comment on the following statements:
(i) The provision of the Companies Act, 2013 are likely to bring a paradigm shift in the manner in
which these important restructurings are implemented.
(ii) Declaration of solvency by a company in case of Merger.
(iii) Ind AS 103 has a wider scope in comparison to AS-14.
(iv) An open offer once made cannot be withdrawn except in the certain circumstance.
(v) Is demerger different from reconstruction of a Company? (3 marks each)
(b) Explain the procedures for investigation of Combination under the Competition Act, 2002.
(5 marks)
2. (a) Explain the various Consideration, which shall be considered upon the Amalgamation of
Companies.
(b) In the light of the various judicial announcement, whether stamp Duty is payable on a tribunal
order Sanctioning the Amalgamation.
(c) Describe the entitlement of the dissenting shareholders in case of the Amalgamation of banking
companies. (5 marks each)
OR
2A. (a) Reduction of capital is one of the modes of re-organisation of capital structure of the company.
Explain the procedural aspects involved in reduction of capital.
(b) State the object and reasons for buy-back of shares. Explain the provisions relating to buy back
of shares through book-building route.
(c) In case of merger and amalgamation, describe the content and procedure for providing notice of
meeting to the stakeholder. (5 marks each)
3. (a) Minority interest is to be considered in the course of mergers. Do you agree? Explain the same
with regulatory provisions under the companies Act, 2013
(b) Discuss the various instrument available in India for Funding of Mergers and Amalgamation.
(c) Briefly explain the factors relevant for post-merger evaluation and analyse its success.
(5 marks each)
Test Paper 467
PART B (30 MARKS)

(Valuation)
4. (a) Explain the steps for carrying out valuation exercise based on market comparables.
(b) Enumerate the content of valuation report for corporate strategies.
(c) How do you value the shares issued to a person residing outside India. (5 marks each)
5. (a) Discus the salient features of the Asset Based Valuation and Earning Based Valuation methods
of valuation.
(b) Discuss briefly how valuation strategies differ under different restructuring plans.
(c) What are the objectives of Documentation in Valuation Exercise? (5 marks each)
PART (C) (20 Marks)
(Insolvency)
6. (a) Explain different modes of corporate insolvency under US Bankruptcy Code.

(b) Explain the Term Right to lodge a caveat under the provisions of SARFAESI Act, 2002.
(5 marks each)
6. (1) State the grounds on which the tribunal may remove the provisional liquidator or the company
liquidator and also state the circumstances under which a liquidator may be replaced by the
tribunal. (10 marks)
OR
7. (a) Enumerate in detail the particulars required to be stated by a Company Liquidator in his report
to the tribunal.
(b) The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 was challenged in various courts. Discuss the constitutional validity of the Act?
(10 mark each)

468 PP-CRVI

Corporate Restructuring

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STUDY MATERIAL

Public Dealing Timings

Laser Typesetting by Delhi Computer Services, Dwarka, New Delhi

PART A - Corporate Restructuring (50 Marks)

Disclosure and Open Offer Requirements

Internal & External Restructuring

PART C Insolvency (20 Marks)

LIST OF RECOMMENDED BOOKS

Recommended Readings and References:

1. A. Ramaiya : Guide to Companies Act, LexisNexis Butterworths,

ARRANGEMENT OF STUDY LESSONS

Lesson No. Subject

PART A - Corporate Restructuring

CORPORATE RESTRUCTURING INTRODUCTION & CONCEPTS

Regulatory Framework for Merger/Amalgamation 14

IndAS-103- for Bussiness Combinations 72

Lesson Outline 107

Lesson Outline 141

Meaning and Concept of Takeovers 142

Lesson Outline 179

Procedure for Reduction of Capital A Flow Chart 197

Lesson Outline 217

Lesson Outline 237

6. Leveraged Buy-Out Bharti-Zain Deal 243

Lesson Outline 251

Valuation of Shares under the Sweat Equity Unlisted Companies

Lesson Outline 295

Lesson Outline 313

Historical Background 314

Lesson Outline 342

Manner and Effect of Takeover of Management 366

Lesson Outline 391

Establishment of Appellate Tribunal 396

Lesson Outline 417

Lesson Round Up 439

Lesson Outline 441

Test Paper 467

Corporate restructuring is the process of significantly changing a company's business model,

NEED AND SCOPE OF CORPORATE RESTRUCTURING

Corporate Restructuring ..an Example

Planning, formulation and execution of various restructuring strategies

Important aspects to be considered while planning or implementing corporate restructuring

Based on the analysis of various aspects, a right type of strategy is chosen.

Types of Corporate Restructuring Strategies

Various types of corporate restructuring strategies include:

Disinvestment means the action of an organization or government selling or liquidating an asset or

6. Joint Venture (JV)

CORPORATE RESTRUCTURING - HISTORICAL BACKGROUND

COMPANIES ACT, 2013

1. All material facts relating to the company.

The company may be wound up in any of the following modes:

Instances wherein the company can be wound up by Tribunal:

Who may file Petition for the Winding up?

(a) the company;

(b) any contributory or contributories;

(d) the Registrar;

(e) any person authorised by the Central Government in that behalf; or

Voluntary Winding up:

SELF TEST QUESTIONS

Note: Major Portions of Section 230-240 of