40 CHAPTER 3 LAWS GOVERNING MERGER AND ACQUISITION AND RIGHTS OF EMPLOYEES OF COMPANIES IN INDIA 3.1 Introduction India seems to expand its horizons into entering foreign markets and merging with foreign companies entering India. Singh 61 found an overwhelming increase in Merger and acquisition cases in India. This has been recorded as an important example of India‘s progress and determining a place in the international market. He records ―dynamic attitude of Indian entrepreneurs, buoyancy in economy, favourable government policies, additional liquidity‖ as important factors in pushing this wave of Merger and acquisitions. Telecom and manufacturing industries seem to lead the deals in mergers and acquisitions. Laws governing mergers and acquisitions provide the backdrop upon which these trade practises foster. The term merger is not present in the Indian Laws governing it, however we may use it frequently. As per S. 2(1B) of the Income Tax Act, 1961 62 , contains the term ―amalgamation‖ which defines the term ―with respect to companies‖ as: 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; 61 Partap Singh, 2012. ―Mergers and Acquisitions: Some Issues & Trends‖. International Journal of Innovati ons in Engineering and Technology 1:1-9. 62 Section 2(1B) of the Income Tax Act, 1961.
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40
CHAPTER 3
LAWS GOVERNING MERGER AND
ACQUISITION AND RIGHTS OF EMPLOYEES
OF COMPANIES IN INDIA
3.1 Introduction
India seems to expand its horizons into entering foreign markets and merging with
foreign companies entering India. Singh61
found an overwhelming increase in Merger
and acquisition cases in India. This has been recorded as an important example of
India‘s progress and determining a place in the international market. He records
―dynamic attitude of Indian entrepreneurs, buoyancy in economy, favourable
government policies, additional liquidity‖ as important factors in pushing this wave of
Merger and acquisitions. Telecom and manufacturing industries seem to lead the deals
in mergers and acquisitions.
Laws governing mergers and acquisitions provide the backdrop upon which these
trade practises foster. The term merger is not present in the Indian Laws governing it,
however we may use it frequently. As per S. 2(1B) of the Income Tax Act, 196162
,
contains the term ―amalgamation‖ which defines the term ―with respect to
companies‖ as:
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;
61Partap Singh, 2012. ―Mergers and Acquisitions: Some Issues & Trends‖. International Journal of Innovations in Engineering
and Technology 1:1-9. 62Section 2(1B) of the Income Tax Act, 1961.
41
(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.
As stated earlier, many legal provisions in India govern the mergers and acquisition
process. Not only they act against an unfair acquisition or merger, they also keep in
due consideration public interest. Mergers and Acquisitions in India are governed by
the Indian Companies Act, 2013, under Sections 230 to 240 of the Act which are new
provisions and prior to this it was Indian Companies Act 1956 under the sections 391
to 394 which governed provisions related to Mergers and Acquisitions. Under new
Act there are some of the differences on M&A when we compared it to old Act of
1956. Apart from Indian Companies Act there are some important provisions related
to M&A which are provided in the Competition Act 2002, Foreign Exchange
Management Act 1999, SEBI (SAST) Regulations, Income Tax Act 1961, Indian
Stamp Act, Intellectual Property and due diligence in mergers and acquisition, legal
procedure for bringing about mergers of companies and waiting period in mergers and
acquisitions also discussed in the chapter.
3.2 Laws governing Mergers and Acquisitions in India
Legal frameworks provide set of rules that could govern mergers and acquisitions.
Mainly, mergers and acquisitions are governed by the Companies Act, 1956 with
sections 391 to 394 and a newer version of the Companies Act, 2013 with sections
230 to 240. However, many other provisions have commandments related to mergers
and acquisitions. These are:
42
1. The Competition Act, 2002
2. The SEBI (The Securities and Exchange Board of India) SAST (Substantial
Acquisition of Shares and Takeover) Regulations, 1997, 2011
3. The Income Tax Act, 1961
4. The Foreign Exchange and Management Act, 1999.
5. The Intellectual Property rights
6. Indian Stamp Act, 1899
3.3 The Companies Act, 1956 and 2013.
The Companies Act is an Act to strengthen and make amendments to the laws which
cater to industries and their associations63
. The Companies Act, 1956 existed for over
50 years. In 2008, a new Companies bill was enacted in the Lok Sabha. It was in
2013, that 29 chapters, 470 clauses and 7 schedules comprising the Companies‘ Act,
2013 was passed64
. Though, Companies Act, 2013 has brought about changes much
needed in the Companies Act, 1956; the Companies Act, 1956 is not discarded
completely owing to certain changes that still need to be done in Companies Act,
2013. Some non-notified sections of the Companies Act, 1956 are still in effect.
Chapter V (―Arbitrations, Compromises, Arrangements and Reconstructions‖) of
Companies Act 1956 talk about merger and acquisitions in sections 390-396. The
Act runs through the following sections65
:
390: Deals with Interpretation of sections 391 and 393
391. Power of compromising or making arrangements with creditors and members
392. Power of High Court to enforce compromises and arrangements
393. Information as to compromises or arrangements with creditors and members
394. Provisions for facilitating reconstruction and amalgamation of companies
63Act 1, Companies Act, 1956. 64ASSOCHAM "Mergers and acquisitions in the new era of Companies Act, 2013".2014. www.ey.com/...Companies_Act/$File/Assocham_White_paper_Companies_Act.pdf. 65 Chapter V: Arbitration, Compromises, Arrangements and Reconstructions, Ss. 390,391,392,393,394, 394A, 395,396,396A,
Companies Act, 1956.
43
394A. Notice has to be given to the authority delegated by Central Government for
applications under sections 391 and 394
395. Power and duty to acquire shares of shareholders dissenting from scheme or
contract approved by majority
396. Power of Central Government to provide for amalgamation of companies in
public interest
396A. Preservation of books and papers of amalgamated company
Chapter XV (―Compromises, Arrangements and Amalgamations‖) of Companies
Act, 2013 comprises of sections 230 to 240 that deal with mergers and acquisitions.
The Act runs through these sections66
:
3.4 Disclosures about Merger & Amalgamation
Gandhi and Arora67
provide a comparative analysis of the Companies Act, 1956 and
2013. They bring about the new provisions and changes that the Companies Act, 2013
has brought about68
:
Under Companies Act, 1956: The judges had the power to sanction a
compromise or arrangements on the premise that the people involved have
disclosed all facts pertaining to the company in a truthful manner, in the form
or affidavit. Such as financial position of the company in the present scenario,
accounts of the company and a latest report by the auditor. Later, statements
regarding the compromise deal and its effect, material interest of directors or
other members of the company should be sent along with the notice for the
meeting. The tribunal had to co-ordinate with the central government to take
into account any other representations that might have been received by the
government. Also, the information of the deal had to be published in the
newspaper to be seen by all and if objections occurred, they should be heard
during the second motion petition.
66Chapter XV, Compromises, Arrangements and Amalgamations, Ss. 230-240, Companies Act, 2013. 67Karan Gandhi and Mukesh Arora. 2015. Last Updated-14 July 2015. ―India: Key Comparison Between Companies Act, 1956 &
The value of assets will be the book value of assets for the financial year
immediately preceding the financial year in which the date of the combination
falls as per the:
audited books of accounts of the enterprise; or
statutory auditor‘s report if the financial statements of the enterprise have not
yet become due to be filed
As reduced by depreciation and the value of assets shall include various forms
of intellectual property including goodwill, brand value etc, if any.
The turnover will be the turnover of the said portion or division or business of
the enterprise as certified by the statutory auditor on basis of the last available
audited accounts of the company79
.
3.16 Pre-filing consultation
The companies which intend to come together in the form of a merger or acquisition
may inform the Competition Commission of India. They must discuss the matters
with the official and take guidance from them on such a proposal.
3.17 Mandatory Reporting
Section 6 of the Competition Act makes a combination null or void if it has an
adverse effect on competition. Therefore, to avoid such a case it is mandatory by
Section 6 of the Competition Act to inform the Competition Commission of India
about a combination within 30 days of the decision made towards it. It is imperative
for the companies to take a prior permission from the Competition Commission of
India before setting forth or executing the combinations. The Competition
Commission of India will then look into the adverse effects if any in the desired
combination. If it has any doubt of the combination being a nuisance to the healthy
market competition, then it has the full right to reject it. The companies must wait till
they get a nod from the Competition Commission accepting their proposal or wait till
the end of 210 days upon which a decision accepting or rejecting the combination
would be made by the Competition Commission of India.
79 Ibid
56
3.18 Single notification involving multiple tranches
If a business transaction takes place through a series of steps or smaller transactions
and requires combination in between then all such information should be a part of a
single notice that must be filed by the intenders to the combination.
3.19 Combination which don‟t need notification
A company whose assets in the form of shares, controls etc are being acquired by
another company and has a total value of not more than INR 250 crores (approx. USD
56 million) in India or turnover of the value of not more than INR 750 crores (approx.
USD 160 million) in India, is not liable to follow the provisions of Section 5 of
competition act, 2002 till March 4, 2016.
3.20 Exceptions to Filing
There are certain set of categories that aren‘t regarded as having a negative effect on
competition don‘t require to be notified to the Competition Commission of India
according to section 6. These are:
Acquisitions of shares or voting rights in the form of an investment wherein
the investor doesn‘t carry more than 25% of the voting rights of the company
whether directly or indirectly.
A merger wherein one of the company already had a 50% or more share or
voting rights in the company. The company acquiring the other company must
be liable to notification only if there is a transfer of power from joint control to
individual control.
An acquisition wherein the company acquiring the voting rights or shares of
another doesn‘t belong to the same business.
Acquisitions which are in the form of acquiring stocks-in-trade, raw materials,
stores, current assets etc.
Acquisitions or mergers taking place outside India with no connection to the
local markets but influencing markets in India.
57
3.21 SEBI introduced SAST
SEBI introduced SAST (Substantial Acquisitions of Shares and Takeovers) in 1994,
1997 and the latest in 2011, to regulate acquisition of shares and voting rights in
public listed companies in India. These regulations apply on direct or indirect
acquisition of voting rights or shares in target company. Some of the important
provisions of the SEBI (SAST) Regulations, 2011 are80
:
According to the 1997 regulation, an acquirer had to be a party and there
should be substantial acquisition of shares. However, the regulations of 2011
provides the acquirer the liberty to act through other people and the scope of
PAC81
to include people directly or indirectly to give in to acquisitions of
shares, voting rights, or exercising control over the target company. Therefore,
a company, with its holding company and subsidiary companies under same
management/directors and any persons entrusted with the company are
deemed to be PAC unless stated otherwise. Also, the persons acting in concert
has been broadened to include those entrusted with the management and not
just management of funds.
The initial trigger point for open offer which was 15% has increased to 25%.
That is when the acquirer alone or with PAC acquires more than 25% shares
and voting rights of the company along with the existing holdings, should
make public announcement for open offer. So, the investors now can increase
stake holding upto 24.99% without open offer.
Acquisition by way of control whether directly or indirectly would require the
acquirer to make public announcement for open offer. Change in control
through passing of special resolution through postal ballot has been
withdrawn. The open offer size has been increased from 20% to 26%.
There have been provided different methods for determining the offer price of
direct or indirect acquisition. The price is determined at volume weighted
average market price at 60 days rather than simple average.
80PriyaShanmuga. 2012. SEBI (SAST) Regulations 2011.CA Club India. https://www.caclubindia.com/articles/sebi-sast-regulations-2011-13538.asp 81PAC means "any person or group of people who with common objective of Acquisition as defined earlier directly or indirectly
cooperate for acquisition of shares or voting rights in or exercise of control over Target Company". Source: Ibid.
58
Voluntary open offer means open offer given by the acquirer voluntarily
without triggering the mandatory open offer obligations. An acquirer can
make an open offer of 10% of total shares of target company provided he
directly or with PAC already holds 25% of the shares and has not acquired any
shares in the preceding 52 weeks except through open offer. Also, he is
restricted to make any acquisition for a period of 6 months after the
completion of open offer except through another voluntary open offer or
competing offer.
The new regulations have also made it obligatory for the acquirer to make
disclosures whereas according to the 1997 regulations, only the target
company was obligated to do that. There are two types of disclosures:
Event Based Disclosures
i. When the acquirer acquires the shares or voting rights of the target company,
which taken along with his existing holding and that of his PAC is 5% or more
of shares or voting rights of the target company, then disclosure is to be
submitted to the stock exchange in the subscribed format. Also, to the target
company within 2 days of the receipt of intimation of allotment or acquisition.
ii. When the acquirer together with the PAC holds more than 5% of the shares or
voting rights of the Company, then every acquisition and disposal of shares
representing 2% of the shares of the target company has to be informed by the
acquirer to the stock exchanges and the target company within 2 days of the
acquisition or disposal.
Continual Disclosures
Every person who along with the PAC holds shares or voting rights more than 25% of
the shares or voting rights of the target company has to inform the aggregate
shareholding or voting rights as of 31st March of every year to the stock exchange
and the target company within 7 days from the end of financial year.
3.22 Income-Tax Act 1961
Income Tax Act, 1961 doesn‘t use the term merger while dealing with arrangements
or combinations of any type. It uses the term ―amalgamation‖ under Section 2(1B) of
59
the act. It defines amalgamation as a merger of two or more companies with one
company or a merger of two or more companies into one company in such a manner
that:
All the properties related to the amalgamating company becomes a part of the
amalgamated company.
All the liabilities of the amalgamating company become the liabilities of the
amalgamated company
Shareholders holding two third or more shares of the amalgamating company
become shareholders of the amalgamated company.
Mergers and acquisitions are subject to the following taxes82
:
3.22.1 Capital Gains Tax
According to the Income Tax Act, whatever gains are acquired in the transfer of
assets including shares is liable to capital gains tax. However, if the amalgamated
company that is the resultant company from amalgamation is an Indian company then
it is exempted from paying capital gains tax even in the transfer of assets.
3.22.2 Tax on transfer of share
When shares are transferred from amalgamating company to amalgamated company,
it is liable to pay security‘s transaction tax and stamp duty. However, if the shares are
in a dematerialized83
form then no stamp duty is to be paid.
3.22.3 Tax on transfer of fixed asset
When property is transferred the respected state is liable to impose taxes on it. There
are two kinds of properties having separate form of taxes. These are:
Movable Property: When the property being transferred is immovable in
nature, then Stamp duty and registration fee must be paid on the instrument of
transfer84
82Diljeet Titus. 2008. ―Mergers and Acquisitions (―M&A‖) is the route most often adopted for corporate growth and expansion in India‖. 83 ‗Dematerialized‘ form is an electronic form of shares kept in a demat account. 84 ‗An Instrument of Transfer‘ is a document necessary for transferring the legal title of the shares.
60
Immovable Property: When the property being transferred is immovable in
nature, then Stamp duty and VAT (imposed by the state) must be paid on the
instrument of transfer.
3.22.4 Tax on transfer of liabilities
Even when liabilities are transferred from one company to another, they are subject to
taxes. The following provisions are levied on liabilities acquired in transfer:
Income Tax: Before the merger and till the effective date of merger the
previous owner is liable to pay the Income Tax on liabilities. After the
company has been transferred to another, the new owner is responsible for
paying the Income tax on liabilities.
Central Excise Act: Under this Act, when a company or business is
transferred by a person who has his name registered with the company must
de-register his name. Upon which the new owner shall register his name with
the company. In case the previous owner has Cenvat85 credit, the same is
transferred.
Service Tax: When owner of a company discontinues to pay taxes owing to a
transfer of his company to another, he must deregister himself. Likewise, the
new owner has to file a fresh registration with the company upon which he
would have to pay service tax now. Regarding the Cenvat credit, the rules are
according to the Central Excise Act.
Value added Tax: The statutes which govern the imposition of VAT require
to be informed about the new ownership of business to the relevant authority.
However, these don‘t have fixed guidelines on how to transfer tax credit.
There is an ambivalence in the joint venture of tax payment by previous owner
and the new owner.
3.23 Foreign Exchange and Management Act, 199986
Foreign Exchange Management Act (FEMA) protects and deals with cross border
mergers. The Foreign Exchange Management Regulation (Transfer or Issue of
85 ‗Cenvat Credit‘ is a scheme where the manufacturers are allowed a set off the taxes paid on the inputs or the input services that
are used while manufacturing the final products or providing the output service. 86 Singh, Avatar, Company Law,16, (Lucknow: Eastern Book Company, 2014).
61
Security by a person residing outside India), 2000 manages shares being transferred to
foreign companies. These regulations have guidelines for inbound (Foreign
companies merging with India) and outbound (Indian companies merging with
foreign) cross border mergers in India. According to the foreign exchange
management regulation, if the merger is sanctioned by the Indian court, then the
transferee company is free to transfer shares to the shareholders of the transferor
company which is outside India. However, it is subject to certain rules such as:
i. The shareholders of the new company residing outside India are not allowed to
exceed their percentage of shareholding beyond sectoral cap87
ii. The transferrer or the transferor company shouldn‘t be engaged in actions
prohibited by the Foreign Direct Investment (FDI) policy.
3.24 Intellectual Property Rights and Due Diligence
Intellectual property rights are defined as a property that came into existence through
the use of intellectual faculty by some people or person. It can refer to creations of the
mind such as designs, logos, inventions, literary pieces, art work, symbols, signs etc
that can be used in the business world. Intellectual property rights ensure that the
owners of these rights benefit from their creation even when their creation is exploited
through commercial means. These rights work within the provisions of legislature and
are statutory rights. These rights aim at praising the creativity of human mind and
hard work put by certain individuals in the success of human beings88
In case of merger and acquisition, all the assets of the acquired company, including
Intellectual property like patents, trademarks, designs are transferred to the acquiring
company. If a trademark or copyright is unregistered, it is transferred like any other
right as per the scheme of arrangement under Section 394 of the Companies Act,
1956. If a trademark or copyright is registered, then it is transferred after a sanction by
the high court. Transfer of trademark or copyrights may be given in the license where
the transferor or licensor consents to it himself89
.
87Sectoral Cap: It is the maximum amount that can be invested by foreign investor in a company. 88Intellectual Property India. 2017. Accessed July 14, 2017. www.ipindia.nic.in/ 89Diljeet Titus. 2008. ―Mergers and Acquisitions (―M&A‖) is the route most often adopted for corporate growth and expansion in
India‖.
62
Intellectual Property rights also involves Due Diligence. Due diligence is a process by
which a party investigates into the whereabouts of the other party in terms of its
ownership, usage rights and also stop others from using intellectual property rights of
other individuals90
.
Due Diligence in Intellectual property is used where91
:
i. If Intellectual property assets are ignored or not given importance, its
maximization would be discussed
ii. If a prominent use of trademarks led to the loss of its unique value, then
methods to reinstate its value would be discussed
iii. If the mark is becoming common and losing its identity then reclaiming it
would be considered
iv. Certain events can lead to devaluation of Intellectual property assets to prevent
such events, the impact of product and company on the assets could be known
with due diligence.
v. Due diligence can also highlight contingency risks.
So, with due diligence in intellectual property rights, it can be known what the present
and future value of the assets is.
3.25 Stamp Duty92
The Indian Stamp Act, 1899, is a state-wise legislation. Some of the states have their
own stamp acts, while others follow the Indian Stamp Act, 1899 (ISA) with their state
amendments. The Indian Stamp Act lays down the law related to tax applicable in the
form of stamps on instruments recording transactions.
A standing committee of State secretaries of Stamp and registration headed by
Additional Secretary (revenue) has been constituted vide Department of Revenue‘s
Resolution dated 9th August 2000, for discussion and examination of issues related to
stamps and registrations.
90Prabhanshu. 2015. Laws regulating mergers and acquisitions in India. Legal Service India.Accessed July 14, 2017. http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html 91Ibid 92Indian Stamp Act, 1899.
63
Maharashtra, Gujarat, Karnataka, Rajasthan etc have their own Stamp Duty Acts.
They have made their own legislations regarding the payment of Stamp Duty on the
order of the high court under section 394 in their Acts/ Schedules. While other states
like Madhya Pradesh, Andhra Pradesh etc. have adopted the Indian Stamp Act, 1899.
They rather have made their own amendments to apply Stamp duty on the high court
order. As for the remaining states, which neither have an independent Stamp Duty Act
nor have they made amendments to the existing one levy Stamp Duty as per the
decision of High court or Supreme court. So, in case the transferor company has its
assets in different states, calculating Stamp duty becomes complicated because every
state has its own method of arriving at a figure. Payment of stamp duty is an
important consideration before going for mergers especially when the asset of the
transferor company has a significant amount of value.93
However, according to a circular issued in the year 1937 vide had exempted Stamp
Duty to be paid when there is an amalgamation between Holding and Subsidiary
Company94
.
All these laws make matters related to mergers and acquisitions highly critical and
effort making. Indian legislature involves procedure to follow during an
amalgamation.
3.26 Steps involved in Amalgamation
Sections 391 to 394 of the Companies Act, 1956 lays down the steps involved in
amalgamation:
1) Examination of Object clauses: MOA of entities should be examined in this
clause.
2) Intimation to stock Exchanges:
3) Approval of the draft amalgamation proposal by the Respective Boards:
Application to the National Company Law Tribunal (NCLT): Dispatch of
notice to shareholders and creditors:
4) Holding of Meetings of shareholders and creditors:
93Didwania, Pradhumna. 2013. ―Stamp Duty On High Court Orders In Case Of Mergers In India‖. Accessed July 31, 2017.
copy of the scheme along with the required disclosures (company's financial
position, auditor's report etc).
After receiving the application, NCLT may hold meetings with the shareholders and
creditors of the transferor and transferee Company. The members and creditors are
also required to send notice to regulatory bodies such as Central Government,
Registrar of Companies, Income Tax authorities, RBI, SEBI, Competition
Commission of India, Stock Exchange as directed by the tribunal. The process also
involves filling of Affidavit of the Chairperson which states all the directions
regarding issue of notices and advertisements for convening meetings are complied
with.
At the meeting, voting takes place whether in person or through e-ballot. However,
only members holding more than 10% of shareholding and creditors holding 5% are
eligible for the vote.
The next step entails filling of representation by the regulators or statutory authorities
to the tribunal within the prescribed time limit. The chairperson of the meetings is to
submit the report of the result of the meeting to the tribunal.
Then the companies are required to file a petition with the tribunal to confirm the
merger agreement. The tribunal shall decide on a fixed date for hearing of petition and
send notices informing all the members and creditors to be aware of the final hearing
at the tribunal. If all the procedures had been complied with and the NCLT finds no
reason to reject the proposal, the merger application is passed and the companies are
provided a certified copy under the section 232 read with section 230 (7) of the
Companies ACT, 2013.
3.29 Approval by Competition Commission
The Competition Commission, according to regulation 19 of The Competition
Commission of India Regulations, 2011 lays down the prima facie opinion that is
responsible for the approval of mergers.
67
Regulation 19 of The Competition Commission of India, 2011 lays down provision
such as98
:
19. Prima facie opinion on the combination. –
(1) The Commission shall form its prima facie opinion under sub-section (1) of
section29 of the Act, on the notice filed in Form I or Form II, as the case may be, as to
whether the combination is likely to cause or has caused an appreciable adverse effect
on competition within the relevant market in India, within thirty working days of
receipt of the said notice99
.
So, The Companies Act (1956, 2013), The Competition Act 2002, SEBI‘s (Securities
and Exchange board of India) Regulations, Income-Tax Act 1961, Foreign Exchange
and Management Act, 1999 and Intellectual Property rights due diligence, together
govern the welfare of mergers and acquisitions in India. There have been amendments
to these laws according to the changing needs of the market. With an increasing state
of market competition and growing cases of mergers these laws must be updated to
contain all the possible conditions or problems that the combinations might have.
The laws discussed above confine themselves to profit, loss, liabilities, assets, rules,
prohibitions, permissions, notifications, procedures of mergers and acquisitions. Let
us see if they have any share in protecting the rights of employees involved in
mergers and acquisitions.
3.30 Laws governing rights of employees
There are several labour regulations that stand guard for the rights of the employees.
These labour laws are a kind of social security meant for the welfare of the people. No
matter what the ideology of a nation is, protection of employees always find place
amongst the legislatures. Social welfare is a basic right of every human being and is
important for his healthy development. Indian legislation imposed many laws to
protect the rights of the employees in organised and unorganised sector100
.
98 Regulation 19, The Competition Commission of India, 2011. 99
Section 29 and 31 of the Competition Commission of India,2011. 100JyotiAngrish, ―Impact of globalization on Indian labour laws with special reference to social security‖. Shodganga: A reservoir
of Indian thesis. Accessed on July 24, 2017. http://hdl.handle.net/10603/57426.
68
In cases of mergers and acquisitions, when the employees are transferred from one
organisation or the other; or the management above introduces changes because of
amalgamations; these labour laws often become the saviour for the employees. They
can invoke such laws in case they feel exploited by their employees or demand certain
rights encased in the labour laws.
State and Central government are the sources of employment laws. The major laws
contains provisions to regulate the employer-employee relations. It lays down
legislations related to settlement of disputes, strikes, lock-outs, retrenchments,
unfair labour practices, transfer of employees in cases of undertaking, closure
of establishment etc.
2) Contract Labour (Regulation and Abolition) Act, 1970: The Contract
Labour Act contains provisions regarding the regulation of contract labour and
prevention their exploitation at the hands of the employers. It also contains
provisions under which the contract labour is to be abolished. The Act lays
down regulations for the duties and obligations of the employer and the
contract, who acts as a mediator between employee and contract labour.
3) Employees‟ Compensation Act, 1923 (“EC Act”): The Employee
Compensation Act makes sure to provide the required compensation to the
employee if he happens to be caught in an accident or death, at the workplace.
4) Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952
(“EPF Act”): The Act ensures socials security for the employees after their
term of employment at an establishment. It provides provisions for provident
funds, pension funds and deposit linked insurance fund for the benefit of
employees working in factories and establishments.
5) Employees‟ State Insurance Act, 1948 (“ESI Act”): The Act contains
provisions for the social welfare of its employees in certain cases such as
101Vaibhav Bhardwaj and Pooja Ramchandani. 2017. Employment and Labour Laws 2017.International Comparative Legal Guides.https://iclg.com/practice-areas/employment-and-labour-law/employment-and-labour-law-2017/india\. Accessed on
August 2, 2017.
69
sickness, pregnancy, employment injury and related matters, where they
require support in terms of their health.
6) Equal Remuneration Act, 1976 (“ER Act”): The Act guards against any
kind of discrimination meted out on the basis of sex, and provides for an equal
payment of remuneration between men and women.
7) Factories Act, 1948 (“Factories Act”): The Act contains provisions
regarding the welfare of the employees, in this case labour employed in
factories. The Act creates an obligation on the employer to govern matters
related to health, safety, working hours, annual leaves etc, for his employees.
8) Industrial Employment (Standing Orders) Act, 1946 (“S.O. Act”): This
Act provides for a formal and clear definition of conditions of employment in
case of industrial establishments. The Standing Order Act mandate an
employer to prescribe standing orders which are required to be certified. The
standing order contains matters related to classification of workmen, working
in shifts, attendance and late coming, procedure for leave and holidays,
termination of workmen, suspension or dismissal for misconduct, etc.
9) Maternity Benefits Act, 1961 (“MB Act”): The Act regulates employment of
women in a company for a definite span of time before and after childbirth. It
also provides certain maternity benefits to the new mother.
10) Minimum Wages Act, 1948 (“MW Act”): The Act sets a minimum wage
limit to be exercised by the employers in case of wages of employees, working
hours, overtime etc.
11) Payment of Bonus Act, 1965 (“Bonus Act”): The Act provides an employer
to pay bonus to his eligible employees. The bonus is not subject to any loss or
profit that might have incurred during the financial year in which the bonus is
liable to be paid to the employee. However, an establishment is not liable to
pay bonus in the first five years of getting established if there are no profits.
12) Payment of Gratuity Act, 1972 (“Gratuity Act”): Payment of Gratuity Act
prescribes payment of gratuity to the employees which is a form of retirement
benefit for the employees upon the cessation of employment.
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13) Trade Unions Act, 1926 (“TU Act”): The Act contains provisions for
registration of trade unions and prescribes certain rights and duties upon
registration. A trade union has the right to enter collective bargain with the
employer for demands such as better wages or better conditions at work.
14) Payment of Wages Act, 1936 (“PWA”): The Act regulates the payment of
wages to employees in an industrial or other establishment notified by the
government. Among other things, the act contains provisions for fixed periods
of wage earning, fixed timings for the wages and permissible deductions that
can be made from the wages.
15) Apprentices Act, 1961 (“Apprentices Act”): The Act promotes regulation of
training apprentices in the country and creating a readily available work-force
who possess skills relevant to the market.
16) Labour Welfare Fund Acts (“LWF Acts”): The Act promotes state specific
legislations to govern matters related to the welfare of labour working in a
state. The Act provides for constitution of funds for the purpose of promoting
welfare and financial activities for the labour in such states.
17) Shops and Establishments Acts (“Shops Acts”): The Act promotes state
specific regulations for commercial establishments where any trade or
business is being carried on. The Act governs regulation of working hours,
payment of wages, leave, holidays, terms of service and other conditions of
work of persons employed in establishments.
These labour laws together regulate the welfare of the employees in organised or
unorganised sector. Social welfare is an important part of Indian legislation. It does
keep in mind that a healthy and happy employee leads to a successful establishment.
It provides regulations against any kind of exploitation meted out to the employees
and provide them a space to voice their opinions invoking the labour laws, wherever
applicable.
3.31 Rights of employees encased in the Constitution of India
Indian Constitution promotes certain rights for the employees, apart from the labour
laws framed to govern their well-being at work. The Indian Constitution embedded a
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series of fundamental rights for the labourers. These rights govern welfare of
labourers in terms of equality in pay and in terms of opportunity, having a right to
decent working conditions, to form unions at work etc. These rights guarantee a
labourer or an employee to have an equal and fair amount of experience during work.
Certain articles in the Indian Constitution provides rights to employees and labourers
to promote health, safety, opportunity and scope for success, in employment. These
are:
1) Article 14102
: This article promotes equality of a laborer before law. It ensures
that the state shall not deny any person equality before the law. It also
promotes an equal protection of the laws within the territory of India. It
prohibits discrimination on the grounds of religion, race, sex, caste, or place of
birth.
2) Article 15103
: This article is a complement of article 14. Article 15 prohibits
discrimination between people based on religion, race, caste, sex or place of
birth, by the state.
3. Article 16104
: This article promotes equality of opportunity in terms of
employment.
4. Article 19105
: This article provides protection against the right to speech to
every citizen of India. Article 19 (c) protects the rights of labour unions to
form associations in a legal and rightful manner.
5. Article 23106
: This article prohibits any form of human trafficking or forced
form of labour, against any citizen of India.
6. Article 24107
: This article prohibits child labour by law. It provides that there
must be no child employed in factories and other harmful establishments. No
child who is less than fourteen years of age forced to do work in any factory
and mine where hazardous types of works are carried out.
102 Article 14, The Constitution of India, 1949. 103 Article 15, The Constitution of India, 1949. 104Article 16, The Constitution of India, 1949. 105Article 19, The Constitution of India, 1949. 106Article 23, The Constitution of India, 1949. 107Article 24, The Constitution of India, 1949.
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7. Article 38108
: The article directs the state to promote the welfare of its people
through a secured social order.
8. Article 41109: The article ensures e that state is under obligation to provide its
citizens with the right to employment, right to education and right to public
assistance in case of need.
9. Article 42110
: This article provides for a just and humane conditions of work
during employment. It also guarantees a right to maternity relief.
10. Article 43111
: The article promotes the right of wages to the workers.
These above said articles together form a kind of secure niche for the workers
to work in. It also provides them with an opportunity to know if they are being
exploited or discriminated against.
3.32 Summary of the chapter
Mergers and Acquisitions are business and financial processes, undertaken by several
companies intending to reach heights of success. Indian legislature provides certain
laws that would look into the entire process from the very start to the end of a
company‘s existence. It ensures that not only mergers and acquisitions are done in a
fair manner but for the welfare of the market and people too. No whims and fancies
are allowed to promote the process of mergers. If the government finds a merger
against the welfare of the people or competition in the market or market itself, it
might as well prohibit such an action.
Laws related to mergers and acquisitions are framed in order to promote an equal and
just opportunity for companies to undergo amalgamations of any kind. These laws lay
procedures to be carried out by the companies intending to merger, for the process to
be without a hitch. The Companies Act, 1956 and 2013, The Competition Act 2002,
SEBI‘s (SAST) Regulations, Income-Tax Act 1961, Foreign Exchange and
Management Act, 1999, Intellectual Property rights due diligence and Stamp duty are
certain provisions to be followed during mergers and acquisitions. They are
108 Article 38, The Constitution of India, 1949. 109Article 41, The Constitution of India, 1949. 110Article 42, The Constitution of India, 1949. 111 Article 43, The Constitution of India, 1949.
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responsible in their own way to keep the financial combinations under due check of
the government.
While merger and acquisition laws provide surveillance to the procedures involved in
merges and acquisitions, some labour legislations provide protection for the
employees working in such companies. These are socio-comical and welfare
legislations: Industrial Dispute Act, Contract Labour Act, Maternity Benefits Act,
Minimum Wages Act, trade union act and so on. These laws help the employees to
work in a healthy environment with a just amount of salary. Those employees who
had been working for a significant amount of time with a company are liable to
receive many benefits from the employees. The legislations make sure that the efforts
that the employees put in their work don‘t go unnoticed.
These rights often fall vulnerable during mergers and acquisitions. When employees
are transferred from one company to another, they are at ample risk and vulnerability.
It is often a well cited phenomenon that employees seek retirement benefits rather
than transferring to the newly formed company. It is their apprehensions and doubts
that are never solved by the company‘s involved in mergers. Many lose jobs, out of
which many are those that have passed the minimum age of getting a job elsewhere. It
leads to an ample amount of unemployment.
Indian Constitution also guarantees certain rights to the labourers for them to fare well
in their work. These are article 14, 15, 16, 19 (c), 23, 24 and so on. These provide
employees equality before law and in terms of employment. Provides them freedom
of speech and to demand their rights by organising themselves as unions. These are
intended to provide the working citizens of India some fundamental rights. These
fundamental rights prohibit any instance of discrimination against any employee.
Though, laws are doing their bit to safeguard the rights of the employees involved in
mergers, there is still a scope to improve by knowing the phenomenon better through
a deep study. A study that could focus on the employees during mergers and not any
financial or economic aspects during mergers. To study the plight of people who are
vulnerable the most and are ignored the most. How these laws fare in those instances
where employees are exploited or undergo injustice during market oriented mergers