Parties to the Case:
- Equitas Micro Finance Limited & Equitas Housing Finance Ltd. (“Transferor Companies”)
- Equitas Finance Ltd. (“Transferee Company”)
Dates in a scheme of Amalgamation:
A typical scheme of amalgamation provides for two dates, viz., ‘Appointed Date’ and the ‘Effective Date’. The Effective Date would be the date on which the scheme is sanctioned by the High Court and all legal formalities are completed. However, ordinarily, scheme comes into effect from a retrospective date which is ‘Appointed Date’. In view of this, many a times questions arise as to how one should recognise the transactions that have been taken place between these two dates. In the case of Marshall and Sons Company (India) Ltd. vs. ITO (88 Company Cases 528) the Supreme Court has clarified that once the scheme is sanctioned by the Court it comes into effect retrospectively from the Appointed Date. In view of this, interesting questions under the Income-tax Act, the Sales-tax Act, Excise Duty laws etc. are likely to arise.
- Date on which assets and liabilities of the transferor company vest in and stand transferred to the transferee company
- Accounts on the appointed date form the basis for valuation of shares and determination of share exchange ratio
- Appointed date is relevant for the purpose of assessment of income of the transferor and transferee companies.
- Date on which scheme is complete & effective i.e. certified copy of the High Court order is filed with Registrar of Company or last of the approvals is obtained
- From the effective date amalgamation becomes effective and transferor company stands dissolved.
Petitions seeking sanction of the Scheme of Amalgamation (“Scheme”) of Transferor Companies with the Transferee Company were filed with the Hon’ble High Court of Judicature at Madras.
The Transferor Companies are subsidiaries of a company by the name of Equitas Holdings Limited. The holding company had applied to the Reserve Bank of India (“the RBI”) for grant of in-principle approval to establish a Small Finance Bank (“SFB”). The RBI granted an in-principle approval subject to certain conditions which, inter alia, required the amalgamation of the Transferor Companies with the Transferee Company to be effected prior to the commencement of business of the SFB.
It is in this context that the Companies took steps for bringing about the amalgamation of the Transferor Companies with the Transferee Company. Towards this, Companies proceeded to secure consent of its shareholders and creditors.
Upon notice being filed with the Regional Director (“RD”) in the aforesaid matter, the RD raised the following concerns:
- The Scheme did not fix the “appointed date”, and that, its definition was tied in with the definition of the “effective date”. Further, the effective date was defined to be the working day immediately preceding the date of commencement of business of bank by the proposed SFB. A concern was also raised that there was no clear date fixed in the Scheme, which would work as the effective date;
- The share-exchange ratio was being arrived at based on the book value of the shares of the Transferor Co. 1 and Transferor Co. 2 as on the effective date; and
- The Scheme which envisaged dissolution of the Transferor Company.
Observation of the Court:
It was argued by the Counsel representing the Companies that the Scheme was so crafted keeping in mind the in-principle approval granted by RBI for establishing the SFB.
The Court observed that the in-principle approval for commencing SFB business was based on an assurance that the merger of Transferor Co. 1 and Transferor Co. 2 with the Transferee Company would take place prior to the matter being taken up for grant of a banking license. It was further observed that there was no assurance that a banking license would follow if, for any reason, the RBI came to the conclusion that all formalities and conditions stipulated by it do not stand fulfilled. It was in these circumstances that the Scheme could not provide a clear appointed date or fix a share exchange ratio. The amalgamation of the Transferor Co. 1 and Transferor Co. 2 with Transferee Company was dependent on the issuance of a banking license by the RBI and, in turn, the issuance of license was dependent on the Court sanctioning the Scheme.
The Court further observed that Section 394 of the Companies Act, 1956 provided leeway to the Companies to draft the Scheme in such manner and sanctioning of a compromise or arrangement did not necessarily fetter the Court from delaying the date of actual amalgamation/merger of entities.
The Madras High Court by way of its order dated 6 June 2016 permitted petitions filed by Transferor Companies and Transferee Company with leeway (freedom) to the companies to fix the appointed date and the effective date. Further, there was no express requirement of mentioning the share-exchange ratio in the scheme. The scheme inter alia can specify the ratio being arrived at based on the book value of the shares.
The above judgment would encourage companies to consider formulating schemes having appointed as well as effective dates conditional upon happening / non-happening of certain events. This leeway however, can be exercised only until sections 391-394 of the Companies Act, 1956 are in place as the merger provisions under the Companies Act, 2013 (specifically section 232(6)) require companies to make an explicit mention of appointed date in the scheme.