Legal Requirements for Corporate Restructuring

Several laws control the operation of mergers, acquisitions, and downsizing of business, as these are crucial to the development and expansion of the business. These activities are governed by several statutes, regulations, rules, orders, and notifications, and they are implemented by several sectoral regulators, which include the Central Government, RBI, SEBI, CCI, RoC, etc. The requirements are as follows:

1. Corporate Restructuring under the Companies Act, 2013:

Under Sections 230-240 of the Companies Act, 2013 there are provisions regarding the compromise, arrangements, and amalgamations of businesses. These activities promote the growth of the company or help in utilizing the advantage of the economic synergy then. Section 232 includes the process to be followed by the business during merger or amalgamation. Section 233 provides the fast track mode to certain companies, including small companies, their holding companies, and subsidiary companies at the time of merger or amalgamation. Usually, the Central Government approves the fast-track method and imposes certain conditions if required. The company has to consider the process as per Sections 230-232 for mergers and acquisitions.

2. Corporate Restructuring under the Competition Act, 2002:

The Competition Act, 2002 provides about the economic aspects of mergers and combinations. This act establishes a commission to control the marketplace by protecting the economy from activities that could significantly affect competition. The Competition Act refers to mergers and acquisitions as a combination. Section 6 of the Act regulates combinations. This act states that notification of the proposed combination is to be submitted to the commission within 30 days after receiving the board of directors’ approval.

Section 29 authorises the Competition Commission of India to investigate the accuracy of the information disclosed to it under Section 6 and whether the proposed combination would negatively impact competition. If CCI (Competition Commission of India) has reasonable grounds to suspect that such a transaction will hurt competition, it can issue notice to the parties explaining why any investigation will not be conducted against them. After receiving the receipt of the reply, CCI can ask for the DG’s report within 7 days. The commission may recommend changes even after asking for public suggestions and objections if it determines that the proposed combination will hurt competition. Such a combination will only be approved if the parties agree to the modifications or if the CCI accepts the parties’ proposed amendments. In addition, a penalty under Section 43A of the act will be applied to the person, association of persons, enterprise, or association of enterprises for any failure to provide such notice or declaration.

3. Corporate Restructuring under the Insolvency and Bankruptcy Code, 2016:

The Insolvency and Bankruptcy Code, 2016 establishes a framework and procedures for creditors or corporate debtors that must be followed while resolving debts and reviving the company’s position. Under Chapter II of the act, the provisions related to the Corporate Insolvency Resolution Process (CIRP) are mentioned, and can be commenced by the financial creditors, operational creditors, or corporate debtors. In case, provisions of the Corporate Insolvency Resolution Process (CIRP) are not met, debtors will be settled, and the liquidator can realize and distribute assets.

4. Corporate Restructuring under the Income Tax Act, 1961:

The Income Tax Act, 1961 refers to mergers and acquisitions as “amalgamation,” and merging companies are referred to as Amalgamating Companies. In addition to meeting requirements under the Companies Act, 2013, an amalgamation must be confirmed under specific conditions to be considered tax-neutral.

In the following mentioned cases, the merger is considered an amalgamation under the Income Tax Act, 1961:

• All of the assets and liabilities of the amalgamating company are transferred to the amalgamated company.
• The shareholders of the amalgamating company hold at least 3/4th of the value of the shares and become the shareholders of the amalgamated company.

Section 47 of the Income Tax Act, 1961 provides an exemption from capital gains tax to an amalgamating company when the capital assets of the amalgamating company are transferred to the amalgamated company. When one foreign company merges with another foreign company that holds shares of an Indian company, the capital gain is exempted from taxation if it is not subject to foreign company provisions. However, the remaining 25% of the merging company’s shareholders must continue to hold shares in the amalgamated company. The expenses incurred by the amalgamating company for scientific research that is transferred to an Indian amalgamated company can be carried forward and deducted. If the amalgamated company sells such an asset, any price above cost will be taxed as capital gains, and the asset’s cost will be regarded as business income. For example, if an asset cost ₹15 lakh and is sold for ₹20 lakh, the difference, i.e., ₹5 lakh is taxable as a capital gain.

5. Corporate Restructuring under SEBI Regulations:

SEBI also provides provisions regarding the merger and acquisitions of the listed company. It includes:

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 to regulate the business takeovers;
• SEBI (Issuance of Capital and Disclosure Requirements) Regulations 2018 to regulate capital and disclosure requirements;
• SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 to regulate listing obligations and Disclosure Requirements.