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By : V.Durga Rao, Proprietor/Attorney - M/s Durga Rao & Associates
Industry : Law Functional Area : Capital Management
Activity:  11 comments  4257 views  last activity : 07 20 2010 08:57:56 +0000
 Refer 758

          Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers and the procedure to be followed for getting the arrangement, compromise or the scheme of amalgamation approved.  The business people or the MBA students look at the issue of mergers in a different angle to that of legal professionals. It is very often been criticized by legal professionals that the sections providing for amalgamation etc. are being misused and it may be true to some extent, but, its not wholly true. But, when we discuss the issue of mergers with business people and MBA graduates, then, they talk about business strategies like market penetration strategy etc. Its true that when a company is not doing well and its financial position is weak, then, the Act itself guides the Company to go for settlement with creditors or go for some arrangement instead of winding-up the Company. The Act can not force the company to go for compulsory merger or settlement and it all depends upon the commercial wisdom and viability of a Company. While the Act facilitates the arrangement or settlement with creditors etc. when the Company is not doing well, it is for the creditors and other stake-holders to decide as to whether they agree for settlement etc. or not. The act facilitates arrangement, settlement, amalgamation and merger etc. If it is a private company or a public limited company, the Company has to follow the procedure laid down under the Companies Act apart from the Central Government rules in this regard. If it is a listed public company, then, the company has to comply with the SEBI regulations too and its all in the nature of giving prior relevant information to the stake holders/public or giving further material information when the deal is over.

          Dealing with the issue of mergers and amalgamations elaborately is a bigger and complicated affair.

          In this article, I would like to deal with, in brief, as to whether it is right to say that the amalgamation provisions as provided in the Act are being misused and the procedure to be followed while getting the scheme of amalgamation approved under the provisions of Companies Act, 1956. 

Is it correct to say that the provisions dealing with the arrangement and amalgamations will be useful for the unscrupulous as an escape route? 

          There is a general assumption that the provisions of Act especially provisions providing for compromise, arrangement or amalgamation, are getting misused. Even though, there is nothing in law even by implication to suggest that the provisions will get misused, it is general thought that the persons charged with will take the plea that the application has been filed for sanctioning the scheme and the proceedings will automatically get abated. Law is very clear in this regard that the criminal proceedings against the persons connected with the affairs of the company will not get abated just because an application seeking sanction of scheme is filed or scheme is being implemented. Only the proceedings, to some extent, sought to be stayed when a scheme is filed and implemented. It is based on the logic that if the civil proceedings are going on simultaneously when the scheme is being approved, then, the scheme could not be worked out. Dealing with the same, the High Court of Bombay, in State of Tamilnadu Vs. Uma Investments Pvt. Ltd (1977) 47 Com Cases 242, was pleased to observe that “it is in respect of these classes of creditors that a proposal is put forward by the company for a compromise or arrangement. The compromises or arrangements are, therefore, concerned with civil liabilities where a creditor will accept a lesser payment or receive less on distribution or grant time or waive interest and work out other kindred things. It is not possible to take the view that section 391 is meant for freezing criminal proceedings which may be instituted either by a creditor or a member of a company or by the State either against the company or its officers. The section does not provide an umbrella to a company or its directors and officers for a thing which is an offence or an infringement or violation of any law, rule or regulation punishable by imprisonment or fine or both. Such criminal proceedings can be commenced or continued notwithstanding the fact that a scheme for compromise or arrangement has been initiated under section 391”.  

Procedure to be followed while approving the scheme of amalgamation: 

          The procedure to be followed while getting the scheme of amalgamation is approved will depend upon sections 391 to 394A. Though, section 391 deals with the issue of compromise or arrangement which is different from the issue of amalgamation as deal with under section 394, as section 394 too refers to the procedure under section 391 etc., all the section are to be seen together while understanding the procedure of getting the scheme of amalgamation approved.  Again, it is true that while the procedure to be followed in case of amalgamation of two companies is wider than the scheme of compromise or arrangement though there exist substantial overlapping. The procedure to be followed while getting the scheme of amalgamation and the important points, are as follows:

     (1)    Any company, creditors of the company, class of them, members or the class of members can file an application under section 391 seeking sanction of any scheme of compromise or arrangement. However, by its very nature it can be understood that the scheme of amalgamation is normally presented by the company.  While filing an application either under section 391 or section 394, the applicant is supposed to disclose all material particulars in accordance with the provisions of the Act.

     (2)    Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the meeting of the members, class of members, creditors or the class of creditors.  Rather, passing an order calling for meeting, if the requirements of holding meetings with class of shareholders or the members, are specifically dealt with in the order calling meeting, then, there won’t be any subsequent litigation. The scope of conduct of meeting with such class of members or the shareholders is wider in case of amalgamation than where a scheme of compromise or arrangement is sought for under section 391.

     (3)    The scheme must get approved by the majority of the stake holders viz., the members, class of members, creditors or such class of creditors. The scope of conduct of meeting with the members, class of members, creditors or such class of creditors will be restrictive some what in an application seeking compromise or arrangement.

     (4)    There should be due notice disclosing all material particulars and annexing the copy of the scheme as the case may be while calling the meeting.

     (5)    In a case where amalgamation of two companies is sought for, before approving the scheme of amalgamation, a report is to be received form the registrar of companies that the approval of scheme will not prejudice the interests of the shareholders.

     (6)    The Central Government is also required to file its report in an application seeking approval of compromise, arrangement or the amalgamation as the case may be under section 394A.

     (7)   After complying with all the requirements, if the scheme is approved, then, the certified copy of the order is to be filed with the concerned authorities.


          Please note the pendency of new companies bill before Lok Sabha.

11 comments on "Important issues pertaining to mergers and amalgamations in India"
  Commented by  sandesh saboo, Research Associate/Analyst, saboo associates    | 08 09 2009 12:23:13 +0000
theoritically the act sec 390 to 395 have been misused in practice, can be misused.practically i can go thru all th e procedures the paper work,the permission of share holders.the high courts,the registrars th ebest interest of the investors share holders and law so many things have been done.

in a particular case SEBI disreconised a particulr stock exchange stating it is in the best interest of the investors and trade.i guess lakhs of share holders having shares which are not traded any more and they have no exit option is the best interest of investors.

mergeres and demergers have been used to manipulate in the stock market.
to increae earning per share and take on record huge assest without increase in the equity base.just by switching shares.

mergers have been used to avoid taxes because when the company gets merged the transfer for internel consumtions become interdepartment transfers and does not have to go thru sales tax,excise duty etc.

www i.e wine,women and wealth is rampantly used in the courts to gove judgements within the freame work of th e law in nicely worded scripts.

jusgements are given even under laws that have been removed.

when we have SEBI a market regulator which is passing consent orders and collecting penalties because they find they can hardly do naything often after the event is over.
there is a huge difference in the understand the subject in theory and puting to use in practice.
  Commented by  S. Muralidharan, Head/VP/GM-Corporate Planning/Strategy, Freelance Consultant    | 08 04 2009 12:33:29 +0000
Your contributions to this community are very commendable.  Thanks
  Commented by  Preetha, Architect Manager, Southern Techno Ventures    | 08 04 2009 09:10:56 +0000
Thank you for  the referral, I find  all of these article worth keeping and forwarding
  Commented by  Anjali Bhatia, Construction-Heavy, Sobha Developers    | 08 04 2009 07:25:04 +0000
Nice article Mr. Durga Rao. Really its very informative.Thanks for sharing...
  Commented by  Hrudanand De, sales and Marketing Modern Trade and Key Account , NiLoN's Enterprises Pvt. Ltd    | 08 04 2009 07:15:47 +0000
Thanx for the nice article 
  Commented by  Khalil Qureshi, Civil Engineer-Other, Magnus Incorporation    | 08 04 2009 07:04:35 +0000
Thnx for the referral.
  Commented by  V.Durga Rao, Proprietor/Attorney - M/s Durga Rao & Associates    | 08 04 2009 05:19:23 +0000
While thanking all my friends, elders,well-wishers and critics for their appreciation in response to my article, I thank my fellow professional Mr.Amar. I want to deal with "time and effort" as avered by my friend. Its true that writing an article is not an easything and it consumes lot of time and one needs to take lot of effort to write articles or to do presentations. I have acadamic interest and I was doing search for two and half years while I was equally involved in profession. To be frank, I don't have that luxury to sit and spend so much time on writing articles. But, god has given me certain qualities like very speed in typing, drafting skills and some exposure. Thats why, even if I spend little time thinking about writing an article, I would be writing one. Its true. But, I thank my friends and elders who devote so much time on enlightening others and sharing their knowledge spending their time and putting a great effort. I thank toostep team for providing me this great opportunity to learn and exchange my views. Thank you.
  Commented by  Amar K. Keralikar, Corporate Attorney, MD&T Partners    | 08 04 2009 05:00:33 +0000

I deeply appreciate the time and effort rendered by you in sharing your knowledge. Thank you for all the articles referred to me.

Best Regards.
  Commented by  Raghu Kastury, CTO/CIO, Freelancer    | 08 04 2009 02:32:06 +0000
Good one. Would like an article on legal aspects in franchising and things to take care of before entering into a deal. 
  Commented by  Devi Kaladeen, Audit Manager, Health Sector Development Unit    | 08 03 2009 15:37:34 +0000
Thanks for the referral. 
  Commented by  Makrand Bhave, Sales Promotion Manager, XYZ    | 08 03 2009 13:15:54 +0000
That is an amazingly USEDUL information on mergers!! Fantastic insight Mr. Vanayam... Yjanks for the referral. :))
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