Chapter-wise Marks Distribution I-5
Previous Exams Trend Analysis I-7
Chapter-wise Comparison with Study Material I-11
PART II
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Chapter
Chapter
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Chapter
Chapter
Chapter
PLANNING & STRATEGY
Q1.Merger & Amalgamation is one of the most attractive routes to enter into a new business. Explain advantages of starting a new business through Merger/Amalgamation.[June 2019 (5 Marks)]
Ans.: An organization could venture into a new business taking any of the routes like funding a start-up, joint venture, strategic partnership. The reasons why mergers and acquisitions appears to be the most attractive route, despite all the compliances are as under:
1.It is a much quicker way to enter the market vs. starting from the scratch vide a start-up route.
2.Another advantage is synergy. One can grab a bigger market share, create a backward or forward integration and attract a much larger customer base, and simultaneously looking to reduce the cost of operations.
3.Overcoming the entry barriers and changing the league on the value chain itself by positioning itself as a larger conglomerate.
4.Ready availability of the necessary infrastructure.
5.Ready availability of a brand name.
6.Skipping the entire gestation period which is cumbersome and costly in terms of time and effort.
Q2. While standard parameters play a crucial role, funding/borrowing for takeover should be organized in such a way that best suits the facts and circumstances of the specific case and should also meet the immediate needs and objectives of the management. Elucidate the statement with emphasis on the demerits of borrowing from the financial institutions and banks.[June 2018 (5 Marks)]
Ans.: While discussing mode of acquisition, certainly there would be a planning for organizing the necessary funding for takeover of an enterprise. Funding of
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a merger or takeover with the help of loan from financial institutions, banks, etc. has its own merits and demerits.
If borrowing from domestic Banks or Financial Institutions has been identified as a choice, all the financial and managerial information must be given to the Banks and Financial Institutions for the purpose of getting necessary finance.
Justice P N Bhagawati Committee on Takeovers, in its report of 2002 has recommended that Banks and Financial Institutions are to be encouraged to consider for financing of takeovers. The advantage of funding through this route is that the period of such funds is definite. But the flaw is that the interest burden is quite high and the merged or target Company must generate adequate returns to make timely repayments of interest and instalments. There is a risk of acquirer becoming defaulter and it may become case of non-performing assets triggering insolvency proceedings as per the Insolvency & Bankruptcy Code, 2016.
Q3. “In addition to the normal event risks, stock swap mergers involve risks associated with fluctuations in the stock prices of the two companies”. Comment on the statement in view of the funding through swaps or stock to stock mergers.
[Dec. 2018 (5 Marks)]
Ans.: Funding through swaps or stock to stock mergers: In stock swap merger or stock to stock merger, the shareholder of target company receives shares of acquiring company.
The majority of mergers during the past few years have been stock for stock deals.
A merger arbitrage specialist will sell the acquiring company’s 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 share price 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 deal’s failing.
Q4. Internal accruals accumulate to reserves prompts management to venture more avenues through acquisitions or mergers but during and after the process, funds available internally are inadequate. Suggest available avenues to fund the bids for Takeovers and Mergers in addition to internal accruals.
[Dec. 2019 (5 Marks)]
Ans.: Several modes are available to fund the mergers and takeovers, especially for an entity that has built-up balance sheet of robust financials. Further issue may be through equity shares either as rights, preferential or with differential rights. Cost of such funds is not fixed because more the revenue, more dividends can be given to shareholders.
Funds can also be borrowed by issuing instruments such as bonds and debentures. However, bond holders and debenture holders need to be paid coupon rate that is charged to revenue account. Further, borrowings can be made from banks and financial institutions that have fixed tenure. Merit of such funds coming under project finance is evaluated by banks or financial institution before extending finance. At the same time, one should also note that adoption of such process, in some cases, is an uninvited interference to dilute the management. In addition, default in payment of interest or instalment triggers the borrower as non-performing asset, which invites a case to be taken for insolvency under Insolvency & Bankruptcy Code, 2016.
The Company may borrow funds through the deposits from its directors, their relatives, business associates, shareholders and from public in the form of fixed deposits, ECBs, issue of securities, loans from Central or State financial institutions, banks, rehabilitation finance, etc.
Q5. For funding of restructuring, various foreign currency denominated instruments are available. In this context explain in brief the concept of Depository receipts and eligibility conditions for issuance of the same. [Dec. 2023 (5 Marks)]
Ans.: Depository Receipt: Depository Receipt means a foreign currency denominated instrument, whether listed on an international exchange or not, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to that foreign depository and deposited with a domestic custodian and includes ‘Global Depository Receipt’ as defined in section 2(44) of the Companies Act, 2013 as any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts.
The rules relating to the GDR are contained in Depository Receipts Scheme, 2014.
Eligibility:
1. Following persons are eligible to issue or transfer permissible securities to a foreign depository for the purpose of issue of depository receipts: (a) Any Indian company listed or unlisted, private or public.
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(b) Any other issuer of permissible securities.
(c) Any person holding permissible securities. However, such persons are not specifically prohibited from accessing the capital market or dealing in securities.
2. Unsponsored depository receipts on the back of listed permissible securities can be issued only if:
(a) Such depository receipts give holder the right to issue voting instructions.
(b) Such depository receipts are listed on an international exchange. A company may issue depository receipts provided it is eligible to do so in terms of the Scheme and relevant provisions of the Foreign Exchange Management Rules and Regulations.
Q6. ABCD Manufacturing and Exporting Ltd. desires to use Masala Bonds for further augmentation of funds. Would you guide the company as to the concept and exceptions that bars raising funds through such bonds? [June 2021 (5 Marks)]
Ans.: Masala Bonds – Meaning: Masala Bonds are rupee denominated bonds sold to offshore investors, who assumes foreign exchange risk to earn higher interest rates compared with dollar based overseas bond.
Masala Bonds are part of ECB: In 2017, RBI revised the norms for Masala Bonds. The RBI declared that from October 3, 2017 Masala Bonds will no longer form part of the limit for Foreign Portfolio Investment (FPI) in corporate bonds and it will form part of External Commercial Borrowings (ECB).
Restrictions on use of proceeds of Masala Bonds: Masala Bond Proceeds cannot be utilized for the purpose of Real Estate Activities, Capital Market or Domestic Equity Investment, Purchase of Land, certain activities prohibited as per Foreign Direct Investment guidelines and relending for the activities prohibited.
Example: HDFC was the first to issue such bonds, followed by National Highways Authority of India (NHAI) and National Thermal Power Corporation (NTPC). Thus, the raising of funds through Masala Bonds is to tap overseas cheap funds.
Q7. Zoom Ltd. engaged in the business of software development is contemplating raising finance through ECB route. Explain different variants of ECB and the tenure for which the ECB can be raised to the Company Secretary of the Company. [Dec. 2022 (5 Marks)]
Ans.: External Commercial Borrowings: External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities
ECB 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 standalone basis.
Framework for raising loans through ECB:
ParametersForeign Currency denominated ECB Indian Rupee denominated ECB
Currency of borrowing Any freely convertible Foreign Currency Indian Rupee (INR)
Forms of ECB
- Loans including bank loans
- Floating rate notes/bonds
- Fixed rate notes/bonds
- Trade credits beyond 3 years
- FCCBs
- FCEBs
- Financial Lease
- Debentures (other than fully and compulsorily convertible instruments)
- Loans including bank loans
- Floating rate notes/bonds
- Fixed rate notes/bonds
- Trade credits beyond 3 years
- Financial Lease
- Debentures/preference shares (other than fully and compulsorily convertible instruments)
- Plain vanilla rupee denominated bonds issued overseas (which can be either placed privately or listed on exchanges as per host country regulations)
Procedure for raising external commercial borrowings under Automatic Route and Approval Route is as follows:
For Automatic Route cases:
All ECB can be raised under the automatic route if they conform to the parameters prescribed under this framework.
Entities desirous to raise ECB under the automatic route may approach an AD Category-I bank with their proposal along with duly filled in Form ECB.
For Approval Route cases:
The borrowers may approach the RBI with an application in Form ECB for examination through their AD Category-I bank.
Such cases shall be considered keeping in view the overall guidelines, macro-economic situation and merits of the specific proposals.
ECB proposals received above certain threshold limit would be placed before the Empowered Committee set up by the RBI.
The Empowered Committee will have external as well as internal members and the RBI will take a final decision in the cases taking into account recommendation of the Empowered Committee.
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Q8. Write a short note on Leveraged buyout. [June 2019 (3 Marks)]
Ans.: Leveraged Buyout: When one refers to something (a company, a property or an investment) as ‘highly leveraged’ it means that item has more debt than equity.
A Leveraged Buyout (LBO) is the acquisition of a company in which the buyer put only a small amount of money and borrows the rest. The buyer can achieve this desirable result because the targeted acquisition is profitable and may provide ample cash that can be used to repay the debt.
The expectation with leveraged buyout is that the return generated on the acquisition will more than outweigh the interest paid on the debt, hence making it a very good way to experience high returns whilst only risking a small amount of capital.
Q9. Using any evident case, explain the concept of funding through leveraged buyout for the acquisition of a company. [June 2019 (5 Marks)]
Ans.: Leveraged Buyout: A Leveraged Buyout (LBO) is the purchase of a company using a large amount of debt or borrowed cash to fund the acquisition. In other words, companies use a large amount of borrowed funds to purchase another company instead of using its own money or raising capital from investors.
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 – Zain Deal: Bharti started its telecom services business by launching mobile services in India in 1995. Zain established in 1983 was the first mobile operator in Kuwait. In 2010 Bharti
Airtel entered into exclusive agreement with KSC (Zain) for the acquisition of Zain Africa International BV (Zain Africa).
The acquisition deal was done as a leveraged buyout and the loan for financing the transaction was availed by two Special Purpose Vehicles (SPVs). The acquisition was routed through SPVs keeping Bharti Airtel’s standalone financials intact. However, it did not relieve Bharti from its responsibility as a borrower.
Q10. “There have been occasions when shareholders holding miniscule shareholdings have made frivolous objections against the restructuring 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.” Comment on the statement with relevant case law.
[Dec. 2016 (5 Marks)]
Ans.: 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.
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.
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.
Q11. A Scheme, even approved by majority, can be rejected by Court but such a Scheme must be held to be unfair to the meanest intelligence. Analyze the statement citing important judicial pronouncements.
[Dec. 2017 (5 Marks)]
Or
“Fairness, reasonableness and made in good faith are the premises on which the Judicial Authority approves any scheme for amalgamation, merger or demerger.” Offer your comments supported by any judicial pronouncements.
[Dec. 2019 (5 Marks)]
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Ans.: The function and duties of the Tribunal in the matter of sanctioning of schemes are well-known. Any scheme which is fair and reasonable and made in good faith will be sanctioned if it could be reasonably supported by sensible people to be for the benefit to each class of the members or creditors concerned. In order to merit rejection, a scheme must be obviously and 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 to the extent of 100% with the highest possible standards of fairness, equity and reason.
In the matter of Sussex Brick Co. Ltd., it was held that although it might be possible to find faults in a scheme that would not be sufficient ground to reject unless it is blatantly unfair or unfair to the meanest intelligence. 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. 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 Courts as was held in English, Scottish & Australian Chartered Bank. Section 230 of the Companies Act, 2013 also makes it clear at once that the Tribunal is not merely to go by the ipse dixit means unsupported statement.
Q12. Governa Ltd. is a company with two classes of equity shareholders: Class A (founders and promoters) and Class B (public investors). Both classes initially held equal voting rights and dividend entitlements. However, the Board of Directors pass a resolution to vary the rights of Class B shareholders — reducing their voting power and prioritizing dividend pay-outs to Class A shareholders.
A group of Class B shareholders, holding 12% of the total equity, challenges this move, claiming the variation in unfair and prejudicial. The company argues that the changes are necessary for long-term strategic control and investor confidence. As a legal advisor to the minority Class B shareholders, critically analyze the legal framework of the Companies Act, 2013 governing the variation of rights of equity shareholders. [Dec. 2025 (5 Marks)]
Ans.:
Variations of shareholders rights [Section 48]: Where a share capital of the company is divided into different classes of shares, rights attached to shares of any class may be varied with consent in writing of holders of not less than 3/4th of issued shares of that class or by means of a special resolution passed at a separate meeting of the holders of the issued shares of that class.
Conditions for variation of rights:
(a) Provision with respect to variation is contained in memorandum or articles of company.
(b) In absence of any such provision in memorandum or articles, such variation is not prohibited by terms of issue of shares of that class.
However, if variation by one class of shareholders affects the rights of any other class of shareholders, the consent of 3/4th of such other class of shareholders shall also be obtained.
Rights of dissenting shareholders to apply Tribunal [Section 48(2)]: Where the holders of not less than 10% of issued shares of a class did not consent to such variation or vote in favour of special resolution for the variation, they may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal.
Time limit for making application: An application to Tribunal shall be made within 21 days after the date on which the consent was given or the resolution was passed, as the case may be.
Such application may be made on behalf of the shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose.
Decision of Tribunal [Section 48(3)]: Decision of the Tribunal shall be binding on shareholders.
Filing copy of order of Tribunal with RoC [Section 48(4)]: The Company shall, within 30 days of the date of the order of the Tribunal, file a copy thereof with the RoC.
In view of above provisions, Class B shareholders of Governa Ltd., holding 12% shares may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal.
Q13. How rights of the minority shareholders are protected during merger/amalgamation/takeover? [June 2017 (5 Marks)]
Ans.: Minority shareholders rights are protected in following manner during merger/amalgamation/takeover:
The scheme is required to be approved by the shareholders, before it is filed with the NCLT (previously court) for its approval. The scheme is circulated to all the shareholders along with the statutory note of NCLT convened meeting and the explanatory statement under section 230(3) of the Companies Act, 2013 approving the scheme of shareholders.
The NCLT while approving the scheme seeks objections, if any, against the scheme from the shareholders, etc. Any interested person (including minority shareholders) may appear before the NCLT following the due process.
A transferee company, which has acquired 90% shares of a transferor company through a scheme or contract, is entitled to acquire shares of
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remaining 10% shareholders. Such acquisition of 10% shares should be as per directions of the NCLT. [Section 235]
Dissenting shareholders have been provided with an opportunity to approach NCLT. [Sections 235, 236 & 237(4) read with section 230(3)]
In case of takeover, as per SEBI (SAST) Regulations, 2011, SEBI has got power to appoint investigating officer to undertake investigation, in case complaints are received from investors, intermediaries or any other person.
Q14. “There may be no express protection to any dissenting minority shareholder to file his objections as a matter of right, yet the Courts/ Tribunals, while approving the Scheme, follow judicious approach by inviting objections through Public Notice in Newspapers.” Elucidate. [Dec. 2018 (5 Marks)]
Ans.: As per section 230(4) of the Companies Act, 2013 it is provided that in a scheme of arrangement any person or persons holding at least 10% of the shareholding or 5% of the total outstanding debt can put objection to the proposed scheme. But this does not mean that others are disabled. There exists inbuilt safeguard in the form of serving notices to every individual shareholder and creditor, so also to various statutory authorities and sectoral regulators. Stakeholders with lesser than specified percentage of shareholding may utilize such forums.
Public notices issued in Newspapers also open a forum to raise objections that are just and genuine but not frivolous.
SEBI has powers to undertake investigation, if a complaint is received from an investor or otherwise against substantial acquisitions.
Q15. Could you explain with certain citations indicating exceptions to the Majority Rule held in Foss v. Harbottle? [June 2021 (5 Marks)]
Ans.: In case of difference amongst members the issue is decided by a vote of the majority. Since the majority of members are in an advantageous position to run the company according to their command, minority shareholders are often oppressed. The company law provides for adequate protection for the minority shareholders when their rights are trampled by the majority. But the protection of minority is not generally available when majority does anything in exercise of powers for internal administration of a company.
The basic principle of non-interference with internal management of company is laid down in a celebrated case of Foss v. Harbottle that no action can be brought by a member against the directors in respect of a wrong alleged to be committed to a company. The company itself is the proper party of such an action.
In India, the Companies Act, 2013 attempts to maintain a balance between rights of majority and minority shareholders by admitting in, rule of the majority but limiting it at the same time by a number of well-defined minority rights, and thus protecting the minority shareholders as well.
