Financial Daily from THE HINDU group of publications
Thursday, Aug 18, 2005
Corporate - Mergers & Acquisitions
Single window for M&A
Mohan R. Lavi
SOME of the recommendations of the Irani Committee report have come like a breath of fresh air to corporates, saddled as they are with a behemoth called the Companies Act.
In the area of mergers and acquisitions, the Committee appear to be realistic about what the corporate sector needs. The importance of a simple law to oversee mergers and acquisitions (M&A) need not be overemphasised. Not a day passes without a merger, acquisition, equity investment or an amalgamation being announced.
For M&As, the world is but a global village with majority of the deals announced being cross-country. The need for a simple law arises also because of the calling off of some mergers post-announcement First Global calling off their deal with Way2Wealth being a case in point.
The Committee makes a good beginning by stating that statutory recognition be given to mergers without court intervention. As a measure of check and balance, the Committee mandates shareholder approval as a post-mortem exercise. This logical recommendation should be implemented post-haste, since it is appears unnecessary to use the offices of the Registrar of Companies (RoC) for incorporating a company and seek High Court approval to dissolve or amalgamate one.
For companies that propose a scheme for amalgamation, since they are being dissolved without winding up, the law requires a report from the Official Liquidator (OL) or the RoC that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or the public.
The court is also restrained from making an order of dissolution till such a report is received. These reports typically take long to be submitted and, hence, the Committee advises that notices be issued to the OL and the RoC, which would have the power to file any information before the court that approves the amalgamation.
The Committee suggests the useful buzzword single-window concept to approve M&A in an effective time-bound manner. Just to ensure that the regulators are not caught napping, the concept of deemed approval is suggested when they do not do their job within a reasonable time.
For a merger to happen, valuation of shares is a must. There have been controversies galore on the valuation of the share and courts have interfered to give a just valuation. The Committee suggests that valuation of shares be done by independent registered valuers rather than by those appointed by the court.
Valuation of incorporeal property gets a mention in the report, and benchmarks for valuation are the International Valuation Standards issued by the International Valuation Standards Committee. For meeting appropriate corporate governance norms, it is suggested that the Audit Committee be entrusted with the responsibility of appointing the valuer.
The Committee suggests that the Central Government enter into dialogues with State governments to remove the anomaly regarding the payment of stamp duty following a court order under Sections 391-394 of the Companies Act, 1956. Filing of a certified copy of the court order with the RoC should be enough to meet the requirements of law, says the Committee.
It also exhorts that the law recognise that a listed company can merge with an unlisted one. Just to ensure that shareholders do not take the warpath, a safety net or a clear exit option needs to be built-in.
In a significant statement, the Committee suggests that it would meet the requirements of law if the M&A scheme is approved by 75 per cent of the shareholders and creditors present rather than 75 per cent of the shareholders and creditors.
Since shareholders need to have complete information in case of a merger/acquisition, especially when it is promoter-induced, disclosure requirements should be made clear, particularly in the Explanatory Statement.
Talking of the much-ridiculed corporate debt restructuring (CDR) scheme, the Committee makes a fervent plea to speed up the scheme with the consent of 75 per cent of the secured creditors being passť. Another innovation provided in the report is to recommend that the fees paid by the transferor company be authorised to be set-off against to the transferee company both in the case of mergers and demergers. One hopes that these relevant provisions are translated into law at the earliest.
(The author is a Hyderabad-based chartered accountant.)
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