The Corporate & Commercial Law Society Blog, HNLU

Category: Mergers and Acquisitions

From Approval To Autonomy: SEBI’s New Framework For Stock Brokers In GIFT-IFSC
BY Vishvajeet Rastogi, SECOND-YEAR STUDENT AT CNLU, PATNA

INTRODUCTION

The Gujarat International Finance Tec-City – International Financial Services Centre (‘GIFT-IFSC’) is India’s ambitious bid to develop a globally competitive financial centre catering to international markets and investors. A major regulator of securities markets in India, the Securities and Exchange Board of India (‘SEBI’) has inducted significant regulatory reform to ease the operational environment for stock brokers who seek to operate in GIFT-IFSC.

On May 2, 2025, SEBI released a circular titled “Measure for Ease of Doing Business – Facilitation to SEBI registered Stock Brokers to undertake securities market related activities in Gujarat International Finance Tech-city – International Financial Services Centre (GIFT-IFSC) under a Separate Business Unit” (‘SEBI Circular’) abolishing pre-approval for stock brokers for conducting securities market activities in GIFT-IFSC and enabling them to conduct such activities through a Separate Business Unit (‘SBU’) of their existing structure. This transition from a strict approval regime approach to an autonomous regime is likely to promote ease of doing business and support the internationalization of India’s financial services.

This article assesses the salient provisions of the SEBI Circular, discusses its regulatory and legal implications, and reviews the opportunities and issues it throws for stock brokers’ foray into the GIFT-IFSC.

KEY CHANGES

The SEBI Circular brings in major reforms in order to ease the functioning of stock brokers in the GIFT-IFSC. It does away with the mandatory condition under which stock brokers have to take SEBI’s advance approval for starting securities market activities in GIFT-IFSC. The reform eases the entrance process and enables brokers to get started sooner with less procedural complexity.

`In place of the previous approval mechanism, stockbrokers can now conduct activities through an SBU within their existing organizational structure. An SBU can be created in the form of an exclusive branch or division, providing more flexibility in organizing the business of brokers. Although the SEBI Circular encourages the utilization of SBUs, it also leaves the choice for stockbrokers to carry on through subsidiaries or through joint ventures if desired. Similarly, brokers who have already established subsidiaries or joint ventures in the GIFT-IFSC can choose to wind them down and bring their activities under an SBU if it aligns with their business strategy.

The SEBI Circular also defines regulatory contours by bringing the operations of the SBU under the ambit of the International Financial Services Centres Authority (‘IFSCA’). That is to say that policy issues, risk management, grievance redressal, and enforcement in relation to the SBU will be regulated by IFSCA rules, not SEBI. SEBI’s jurisdiction will continue to extend only to Indian securities market activities. For the purposes of clear demarcation between the two activities, the SEBI Circular requires activities of the SBU to be segregated from the stockbrokers’ domestic activities at arm’s length. This requires maintaining separate accounts and operational autonomy to prevent regulatory overlap.

Financial segregation has also come with the condition that the net worth of the SBU must be held separate from the stock broking entity dealing in the Indian market. The net worth of the stockbroker for Indian operations will be computed excluding the finances of the SBU, and the SBU itself will have to fulfil capital adequacy norms as per IFSCA’s regulatory guidelines.

Finally, the SEBI Circular makes it clear that the investors dealing with the SBU will not be subject to SEBI’s grievance redressal platforms like the SEBI’s Complaints Redress System (‘SCORES’) or the Investor Protection Fund operated by the stock exchanges. Their protections and redressal of grievances will instead come under the framework of the regulation of IFSCA, strengthening the operational autonomy of the unit in the GIFT-IFSC.

Together, these amendments constitute a policy shift towards regulatory clarity and increased operational autonomy with well-codified governance norms to allow stock brokers to successfully increase their presence in international financial services.

Regulatory Rationale and Objective
This SEBI Circular outlines the new strategy to promote operational efficiency and regulatory clarity for the stock brokers in the GIFT-IFSC. Removal of the requirement of prior approval from SEBI enhances the regulatory ease of doing business by reducing barriers to entry for brokers to conduct cross-border securities activities. This reform aligns with the larger vision of transforming the GIFT-IFSC into an internationally competitive financial centre at the global stage with international capital and global-level market players.

The setting up of SBUs in existing stock-broking establishments brings about an objective definitional and regulatory distinction between transactions in domestic business and activities under the jurisdiction of GIFT-IFSC. Segregation does away with regulatory overlap, demarcates the areas of oversight between SEBI and the IFSCA, and protects against conflict of interest.

Segregation requirements for finances as well as separate net worth requirements and accounting methods further specify that risk and obligation are properly segmented. These requirements increase transparency and the integrity of domestic and foreign market segments.

In addition to this, the SEBI Circular specifically defines the extent of investor protection and vests grievance redressal and resolution of disputes in the jurisdiction of IFSCA and thereby strengthens jurisdictional certainty.

Legal and Compliance Implication

This SEBI Circular represents an important jurisdiction shift for stock brokers who are present in the GIFT-IFSC from SEBI to the IFSCA for business transacted through SBUs. This requires strict adherence to the dual regime of regulation where domestic business continues to be under SEBI’s jurisdiction while SBUs in the GIFT-IFSC operate in terms of IFSCA’s separate regulatory regime.

The keystone of such a structure is the rigorous ring-fencing requirement with financial, operational, and legal separation between domestic and GIFT-IFSC activities of the stock broker. Financial ring-fencing implies separate accounts maintained by the SBU and separate net worth standards as governed by IFSCA to have clear delineation of assets and liabilities. Operationally, the SEBI Circular stipulates separation of SBUs through arm’s-length management to avoid inappropriately influencing control and mixing of resources. Legally too, separation enforces jurisdiction-related divisions, reduces regulatory arbitrage, and limits system risk.

This regulatory framework replicates international best practices in influential global financial hubs like the Dubai International Financial Centre (‘DIFC’) and Singapore Monetary Authority-regulated centres. These jurisdictions all prioritize unambiguous jurisdictional demarcation, independence in operations of international financial institutions as well as strong investor protection systems, which support integrity in the marketplace and investor confidence.

Emulating such principles, SEBI’s SEBI Circular establishes GIFT-IFSC as a compliant and competitive global hub, weighing deregulation against essential safeguards to preserve financial stability and regulatory oversight.

Opportunities and Challenges for Stock Brokers

These new guidelines offer stock brokers some strategic options. Most significant among them is greater operational independence, enabling brokers to carry out international securities activities in the GIFT-IFSC with the help of SBUs without obtaining SEBI approval in advance. This independence allows for quicker entry into the market, where brokers can leverage new opportunities in the international markets more easily. Also, carrying out business in the GIFT-IFSC exposes brokers to more international customers and varied financial products, largely opening them up to an extended marketplace and new revenue streams.

But these advantages carry built-in difficulties. Dual regulatory compliances present a nuanced challenge in that stock brokers have to manage the regulatory conditions of SEBI for their Indian operations as well as IFSCA for their activities in the GIFT-IFSC. This duplicity requires evolved compliance structures and internal controls for maintaining conformity with separate law regimes. In addition, the investor dealing with SBUs will not be able to enjoy SEBI’s prescribed grievance redressals like SCORES, which can potentially create investor protection and redress concerns.

Internally, stock brokers also need to have strict ring-fencing of resources and finances to have clean separation of both domestic and international operations. Proper management of the segregation is important in order not to have operational overlaps, to protect financial integrity, and to guard against commingling of assets and liabilities. While the SEBI Circular paves the way for internationalization and growth, it also necessitates enhancing the risk management capacities and the regulatory infrastructure of the stock brokers.

Conclusion and Way Forward

The SEBI Circular is a forward-looking step towards increasing the regulatory independence of stock brokers in GIFT-IFSC by doing away with previous approval systems and permitting activities in terms of SBUs. The reform not just makes it easier to enter the market but also strengthens India’s vision of promoting GIFT-IFSC as an international financial centre powered by well-defined regulatory lines between SEBI and IFSCA.

While it introduces new opportunities, it also poses issues like managing the dual regulatory compliances and lack of SEBI’s grievance redressals for investors transacting with SBUs. The author suggests that the stock brokers need to pre-emptively enhance their systems of compliance and risk management in order to be able to manage such complexity. In addition, having closer collaboration between SEBI and IFSCA on regulatory harmonization, particularly investor protection, would increase the confidence of the markets. Proper communication to the investor about the grievance mechanism applicable under IFSCA is also needed to inculcate trust and transparency in the new ecosystem. Using these steps, stock brokers can reap the maximum advantage of this regulatory change and promote sustained development and international integration of India’s financial markets.
July 5, 2025
India’s New Digital Personal Data Protection Laws & Its Implications For M&A Compliance

BY DEVINA SOMANI, FOURTH-YEAR STUDENT AT JGLS, HARYANA

Introduction

India’s recently implemented Digital Personal Data Protection Act, 2023 (DPDP Act)on 11^th August, 2023 exclusively pertains to the processing of personal data, regardless of its initial form (digital or analog subsequently converted into digital format). Under the Act, ‘personal data,’ is described as ‘any information relating to a recognizable individual.‘

The Act introduces ‘significant data fiduciaries’ (“SDFs”) with added duties based on data scale, sensitivity and impact. SDFs appoint a Data Protection Officer (“DPO”) and face transfer restrictions. ‘Data processors’ handle data for fiduciaries, ‘data principals’ being the subjects. The ‘Consent manager,’ registered with the Data Protection Board, centralizes consent management as a Data Fiduciary (holds responsibility for processing personal data), ensuring transparent and accessible handling.

The DPDP Act does not apply to handling the personal data of individuals located offshore if processed in India based on a contract between an entity in India and one located outside it. This exclusion aims to support Indian outsourcing firms regularly managing data of individuals outside India. However, it might hinder the chances of the European Union (“EU”) and similar regions considering India as offering sufficient protection for data transferred to such firms. Therefore, under the Act, Cross-border data transfers are generally allowed unless restricted by the government, benefiting IT companies by enabling uninterrupted operations. Moreover, the Act prioritizes existing restrictions on the transfer of personal data abroad including mandates from RBI to store payment data within India.

The Impact of the New Data Privacy and Protection laws on Mergers and Acquisitions

When it comes to Mergers & Acquisitions, evaluating the Act’s impact would primarily involve determining whether the chosen M&A structure falls within exempted M&A Scenarios, allowing a focused compliance effort on the applicable provisions. Section 17(e) of the Act states that the rules concerning the obligations of Data Fiduciaries and the rights and responsibilities of Data Principals in Chapters II and III will not be applicable in situations where data processing is essential for certain corporate actions like mergers, amalgamations, reconstructions, or transfers of undertakings between companies that are authorized and approved by a court, tribunal, or competent authority as per prevailing laws. However, any sharing or processing of personal data for M&A purposes outside the scope of a court-approved scheme must adhere to the Act’s provisions.

Should the structure not align, comprehensive compliance measures spanning the entire M&A lifecycle become necessary. This entails identifying personal data footprints through an in-depth discovery process, where records of processing are established, customer consent protocols are navigated for conflicting data, and data privacy policies for the merged entity are implemented. The buyer will have to scrutinize the type of data relevant to the target’s business and its significance in their operations. Similarly, it will need to assess whether the target company’s business model presents additional complexities or unexpected privacy vulnerabilities compared to the buyer’s current model. For instance, if specific privacy regulations apply to a particular sector of the business (such as financial institutions or insurance companies), this will likely alter the approach to how the due diligence is conducted. It becomes crucial to consider these sector-specific regulations and responsibilities when assessing the transaction’s risks and implications under the Act. Moreover, in a transaction involving a party where the primary business of the entity involves data processing (like an advertising agency or a company focused on big data and artificial intelligence), the significance of the data handled in their operations becomes even more pronounced.

Similarily, different considerations arise regarding data protection in Share sales and Asset sale transactions. For share sales, where only the shares of a company are transferred to the buyer, the company retains control over its personal data, such as employee records and customer contact details. As this control does not shift, there is no obligation to inform data subjects about post-transfer data processing unless the nature or purpose changes. However, it is advisable for the company to notify data subjects about the change in ownership to prevent any potential confusion or distrust. Any alterations to the buyer’s data protection documents post-transfer, like privacy policies, should be communicated to data subjects if they are significant. On the other hand, during Asset sales, unlike Share sales, personal data often moves from the seller to the buyer, where it becomes necessary to inform the data subjects as the controller’s identity changes. If the buyer obtains personal data, it must furnish privacy policies or other data protection documents to the concerned data subjects. This aligns with transparency principle followed by the General Data Protection Regulation (“GDPR”). The seller might agree to implement new policies before the sale’s completion. The specifics outlined in the privacy policy or other applicable data protection documents, especially regarding employees, are crucial.

Data Privacy Considerations in the Pre-Acquisition Phase

M&A deals involve handling extensive Personal Data of the target company, where a buyer’s due diligence will involve inquiry into information about data tied to the acquired target like data on employees, customers, vendors, contractors, suppliers, and business partners (Data Principals). If the seller or target discloses this personal data during the due diligence, compliance with the Act’s consent requirements (Section 6 of the DPDP Act, 2023) is necessary at that stage. Additionally, in a business transfer like a ‘slump sale,‘ where the entire business is transferred, processing personal data of customers and vendors requires consent. The seller, as the Data Fiduciary, must obtain consent before processing such data, issue notices and seek fresh consent if necessary. Since getting approvals during mergers and acquisitions can be challenging at times, alternative options may include Data Sharing Agreements(“DSAs”) which establish the specific terms and conditions governing data sharing, regardless of whether the data is transmitted within India or abroad.

In order to spot potential privacy risks, the buyer must initially comprehend the kinds of personal data handled by the target company. To assure and safeguard the buyer, the seller can provide assurances through Representations and Warranties. Additionally, the buyer should seek indemnification specifically concerning any repercussions resulting from identified non-compliance with data protection laws uncovered during due diligence. A prerequisite condition mandating the target to secure consent from pertinent data subjects. Can be incorporated into the transaction documents as condition precedents which might necessitate rectification of any non-compliance with relevant laws discovered during due diligence before finalization.

As an acquiring entity, it is vital to grasp the involvement of third-party processors linked to the target company and ascertain the scale of international data transfers. Significant focus should center on any cloud service providers engaged, the methods and locations of data storage, and the array of contracts and data processing agreements (“DPAs”) the company has in place.

In the course of an M&A deal, companies must restrict the handling of employee data to what is essential for the transaction’s objectives. Upholding principles like data minimization and purpose limitation safeguards employee privacy during this process. The Act specifies that processing Personal Data for employment purposes is deemed a ‘legitimate’ utilization. This implies that an employee’s Personal Data could potentially undergo processing without their explicit consent under certain conditions, namely: (1) Utilization of the Data Principal’s information for their employment. (2) Employing the data to shield the employer against potential loss or legal responsibility, (3) Providing any service or benefit requested by an employee who acts as a Data Principal. In a scenario where a seller might argue for the necessity of divulging such information, their rationale could be centered on ensuring that a potential buyer extends comparable offers to employees for recruitment purposes. As this disclosure directly links to the employment status of the Data Principal, it falls within the purview of legitimate use and, therefore, stands exempted from the necessity of seeking consent as outlined in the Data Protection Act.

Moreover, the legislation emphasizes the criticality of maintaining the accuracy and consistency of employee data, particularly when these data influence decisions impacting employee. Employers are further required to promptly report any breaches of personal data to the Data Protection Board (“DPB”) and affected individuals. Additionally, they must facilitate the erasure of personal data once its intended purpose is fulfilled, aligning with the overarching principles of the Act. To fulfill the transition to the Act, employers are granted the leeway to continue processing employee data until consent for such data is withdrawn. However, they are mandated to furnish employees with a comprehensive notice detailing the types of personal data being processed, the procedures to exercise their rights under the new regulations, and avenues for lodging complaints as per the guidelines under the Act.

Data Privacy Related-Risks Upon Completion of Transaction

Upon the completion of the transaction, the buyer typically expects to receive all personal data associated with the acquired business. In cases where there is a cross-border transfer of data at closing, there may be risks associated with conflict between such transfer and stricter regulations imposed by existing Indian laws on transferring personal data outside India, such as the Reserve Bank of India’s mandate for payment system data storage within the country. Section 16(2) of the Act explicitly states that it does not override current transfer restrictions set by various sector-specific laws or administrative regulations in India. Depending on the transaction’s nature, such as a spin-off of an independent subsidiary, the transferred personal data might continue to be hosted on the target’s systems sold as part of the deal.

In M&A transactions, the involvement of a third-party entity gaining access to personal data constitutes a “transfer” that could potentially breach the consent requirements under Section 6(1) of the DPDP Act. Hence, it becomes crucial to inform data subjects about such transfers. The seller should provide specific information to data subjects about the transfer of their data to a third party at the time of the transfer. After the transaction’s closure, the buyer must consider the necessary steps to utilize the acquired data while ensuring compliance with the DPDP Act, 2023.

Henceforth, it becomes crucial for the buyer to safeguard the information as mandated by DPDP Act and refrain from further disclosing the personal data without consent of the data principals as under Section 6 of the DPDP Act. As such, the seller may establish a “Data Protection Agreement” with the buyer concerning these obligations, which can also include adherence to any restrictions in the seller’s contracts with third parties regarding the shared personal data before closing.

Conclusion

India’s Digital Personal Data Protection Act, 2023 (“DPDP Act”) has a significant impact on Mergers and Acquisitions (M&A). Replacing earlier regulations, the DPDP Act governs data handling, emphasizing consent, legitimate use, and the role of Data Fiduciaries. In M&A, it prompts necessary consent requirements during a due diligence, affecting both Share and Asset sale transactions. Employment-related data processing under the Act demands adherence to the consent framework under the Act even during transitions. Post-transaction risks emerge concerning cross-border data transfers and compliance with sector-specific Indian laws. Navigating these complexities demands proactive compliance measures to adapt to India’s ever evolving landscape in Data Privacy Laws during such M&A transactions.

February 23, 2024
COVID-19 and M&A: Reshaping The Deal Making Process

BY HARSH KUMRA AND HARSH MITTAL, FIFTH-YEAR STUDENTS AT AMITY LAW SCHOOL, DELHI (GGS IP UNIVERSITY)

COVID-19 has strongly affected the M&A scenario in India. Corporates are facing difficulties in going through deals due to various factors led by economic deterioration by lockdown. Some of the thrusting factors for business decisions regarding such transactions are changes in business sentiment, valuation concerns as well as liquidity constraints due to reduced lending by banks especially after suspension of IBC. For April 2020, Grant Thornton India’s deal tracker reported a 37% fall in aggregate M&A volumes and 22% fall in aggregate Private Equity deals compared to April 2019 and March 2020. However, the deal activity across different industries such as Telecommunications, Healthcare and Consumer Staples has carried on despite lockdown restrictions and COVID-19 will give rise to more opportunities in M&A sector.

This article addresses certain key issues and concerns that the companies have had to focus on due to the ongoing pandemic and it looks at the future of deal making process.

Deal Considerations

An important concern here would be to decide the kind of deal the companies are willing to enter into. Several factors will play a role in coming to this decision – valuation concerns, lending ability of banks and financial institutions, liquidity crunch faced by the company etc. In India, it is the inveterate mindset of companies to opt for a cash deal, given the fact that they are easier and offer lesser hurdles as compared to its counterpart. However, the times have changed substantially, and on this verge, companies have had to use their cash reserves on a number of other operations and to keep their business going. While cash-rich companies have been able to enter-into M&A transactions easily, the same has not been the case for most companies who require external financing. Additionally, in light of the recent changes and amendments, the lending capacity of banks and financial institutions has been impaired to some extent. The Insolvency and Bankruptcy Code, 2016 has been suspended and the RBI announced a special COVID-19 Regulatory Package through which – it allowed rescheduling of payments; lenders have been permitted to defer the recovery of interest in respect of cash credit and overdraft facilities and lenders were allowed to give a three month moratorium on term loans.

With this being said, the companies would try to rely more on stock deals and the buyer would be able to keep its cash reserves for other operations. This will also help the companies and its shareholders in saving the tax component in the sense that they may save on payment of transfer taxes. Companies might also consider investing using hybrid instruments featuring both cash and stock. The market is likely to see new forms of hybrid instruments. In the deal of JSW Energy, acquisition of Jindal Steel and Power witnessed such a structure combining both asset sale and share acquisition. However, the deal was called off by JSW Energy before it could be closed. A report published by the International Financial Law Review states that such hybrid structures provide the necessary balance between the regulatory constraints and commercial objectives.

Further, some companies might prefer slump sale to avoid the extra hassles of due diligence and approvals from minority shareholders. This could be beneficial for buyers as the exposure to unknown liabilities is comparatively lesser and hence, the buyer need not expend much time on due diligence.

Regulatory Framework

With the ongoing pandemic still in place, India has seen regulators stepping in time and again to do their best to limit its impact on the economy. If we look at the measures that have been taken, we could say that the regulatory environment of our country is trying to facilitate the deal making process.

The regulators such as Securities and Exchange Board of India (‘SEBI’), Ministry of Corporate Affairs (‘MCA’), Reserve Bank of India (‘RBI’) and Competition Commission of India (‘CCI’)have made relaxations and exemptions in terms of compliances and taxations. They have stepped up to facilitate e-filing procedures of applications, ultimately easing the transaction process for companies.

As a major relief for corporates, the MCA has eased the rules with respect to the way the Board Meetings are conducted. In March, an amendment was introduced to the Companies (Meeting of Board and its Powers) Rules, 2014 and directors of the companies were allowed to participate in the Board meetings through video conferencing or other audio-visual means, for issues such as Approval of the matters relating to amalgamation, merger, demerger, acquisition and takeover. Additionally, it also allowed companies to hold Annual General Meetings through video conferencing for the entire year.

Apart from this, SEBI asked all listed companies to make endeavors to ensure that investors are provided with timely and adequate information with respect to the impact of the pandemic on the company’s financial statements under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. This will help the investors in making decisions in terms of company’s financials and will give the right valuation of the companies.

Valuation

The pandemic has created an atmosphere of uncertainty and volatility, leading to ambiguities in terms of company valuations. For deals that were initiated before the COVID-19 outbreak, buyers and sellers are back to the negotiation tables to deliberate upon the valuation of the buyer. For the companies who just began negotiating the deal, they are likely to face difficulties in reaching at an appropriate valuation. In the former case, buyers would try to reconsider and renegotiate the valuation, while in the latter; they would attempt to leverage the lower valuation of the target company. Additionally, both the parties would want to bridge the time gap between signing and closing the deal in order to lessen the impact of volatility on the deal.

Due Diligence & Representation and Warranties

This aspect of transaction is going to face deviations since there is a lesser scope of physical inspection and more reliance on virtual due diligence and video conferences for discussions on Seller’s financial statements and analysis of all material aspects to search for financial risk indicators and compliance lapses, operating results and cash flows, seller’s default on key contracts and leases, termination rights under various contracts, data protection concerns etc. The Representation and warranties (R&Ws) hold the seller to the confirmation provided regarding the Buyer’s due diligence findings, audited and unaudited financial statements, seller’s liabilities & obligations, and material contracts. If the R&Ws are misleading, the buyer may terminate the acquisition and may even entitle them to post-closing indemnities. Although it is impossible to predict the long-term effects of the pandemic, due diligence process could be altered in such a way that it facilitates quicker transactions rather than causing hindrance through engaging advisors as early as possible, preparing for the reality of dealing with more unknown factors than usual and appropriate measures in planning.

Mitigation and Allocation of Risks

Once the Memorandum of Understanding (‘MOU’)/ letter of intent, term sheet, Non-Disclosure Agreement (‘NDA’) and other non-binding preliminary agreements are entered, the next step is to work towards a definitive agreement. Pandemic driven provisions should be added to address closing risk and closing certainty. Although each agreement is specifically tailored to transaction’s structure, several clauses can be common such as R&Ws, covenants, and conditions which mutually address the allocation of risk in such transactions. R&Ws regarding ownership, contractual arrangements of Intellectual Property (‘IP’) as well as non-infringement of IP rights are some of the most significant clauses.

Material Adverse Change (‘MAC’) is another important clause which now includes the events such as pandemics, lockdowns, and interruption of international trade in the transaction and functions between the signing of acquisition agreement and closing of the deal. This clause transfers the risk to the seller and therefore they push for a lenient MAC clause. Furthermore, the central government declared the COVID-19 outbreak as a “natural calamity” and directed that delays on account of the pandemic be treated as Force Majeure; however the direct effect of this on private contracts is absent. Although, the Force Majeure clause is common in conventional commercial contracts, the same cannot be said in case of M&A transactions as this provision is relatively rare in such agreements. Considering that the courts have expansively interpreted Force Majeure clauses and are not going to apply the defenses available outside of the terms of contract, the Force Majeure clauses could be included and tweaked to specifically address the threshold for invocation, methods of invocation, list of included events and consequences thereof.

Conclusion

While the world economy has taken a hit due to the pandemic, it has affected all the sectors in a very different manner. The deal making as a process is likely to see a new face and will emerge in a very different shape and manner. There are sectors like hospitality and tourism, that are fighting to keep their place, and then there are sectors like e-commerce and e-pharmacy that have shown ample amount of growth. It is most likely that in each sector, fewer players will survive. We will see an enormous amount of M&A with the buy side being influenced by ambition and the sell side by its stress and survival instincts.

This being said, India is going to experience a fundamental shift in the M&A landscape. The companies will have to adjust with certain realities that have become the new normal for the country. The unpredictable nature of COVID-19 has made it difficult for companies to evaluate the targets accurately and they will have to come up with ways to make adjustments accordingly.

The companies would want to go for acquisition as the mode of structure instead of schemes of compromise or arrangement, since they require NCLT approvals which are bound to delay the process further. Additionally, the time taken to complete the entire process might also get prolonged due to various other unresolved regulatory and technical hurdles.

September 15, 2020
Employees’ Rights Arising Out Of Mergers & Acquisitions: The Indian Judiciary’s Perspective

By Shauree Gaikwad, fourth-year student at MNLU, AURANGABAD

Introduction

Merger and Acquisition (‘M&A’) is an activity undertaken as part of the restructuring of a company. With such M&A activity, the resources which get impacted the most are the human resources of the firm, i.e. the employees of the company. In order to cope up with the M&A activity and see towards it that the company follows fair practices, specific provisions have been laid down by the legislation addressing the rights of the employees. This article shall be discussing the impact of M&A on employees as well as the employees’ rights arising from an M&A.

Types of Mergers & Acquisitions and its Impact on Employees

Mergers and Acquisitions are denoted as “combinations” under the Competition Act, 2002 and denoted as “amalgamations” the Companies Act, 2013.

The Impact of Horizontal Amalgamations on Employees

When an amalgamation takes place between rival businesses, it is known as a ‘horizontal amalgamation’. As a horizontal amalgamation takes place within the same industry, it is strictly assessed by the Competition Commission of India (“CCI”) under section 6 (1) of the Competition Act, 2002 as the amalgamation of two rival industries narrows down the competition in an industry’s market and reaches closer towards having a monopoly in that industry.

A result of a horizontal amalgamation is the amalgamation resulting in twin departments, i.e. the same type of department or team is present in both businesses as they are from rivalling industries. A possible negative effect of a horizontal amalgamation on the employees of that amalgamated entity is that they risk losing their jobs if the amalgamated entity decides to only keep either one of the two twin departments. It also increases the stress on the employees to work harder in order to be better than the employee’s counterpart in order to save themselves from being terminated. The answer regarding whether employees shall be terminated after an amalgamation lies in the vision of the company. If it is envisioned by the amalgamated company to increase its volume of work it takes on, it will undertake the corporate strategy of integrating the twin departments with each other so that they can work seamlessly with each other and also towards the goal of the company. This vision is often reflected in the proposed amalgamation plan, which needs to be mandatorily approved by the necessary authorities before it is implemented.

The Impact of Vertical Amalgamations on Employees

When an amalgamation takes place between unrelated businesses which do not belong to the same industry, then it is known as a ‘vertical amalgamation’. An example of a vertical amalgamation would be wherein one entity is into the business of making pencils, and another entity would be into the business of making the lead. An amalgamation of these two entities would result in ‘vertical amalgamation’. In horizontal amalgamations, the same kinds of roles or departments are doubled, and hence, in most of these cases, there is a likely chance that the extra set of employees are fired on the basis of select criteria such as preferred branch, experience, adaptability to the amalgamation. The case is not the same in case of vertical mergers wherein two businesses playing different roles in the supply chain amalgamate because there are no overlaps in roles or departments of the businesses. Rather, departments of the businesses would complement each other and the Board of the amalgamated company would work on a corporate strategy integration of all employees to work towards the amalgamated company’s business goals.

Employees’ Rights arising out of Mergers & Acquisitions: The Judiciary’s Perspective

In the United States, a federal act, known as the the Worker Adjustment and Retraining Notification Act (‘WARN Act’), 1988, mandates an employer to provide a two month notice to employees if the employer is going to either lay off more than fifty employees or shut down. Therefore, if an amalgamation results in fifty or more employees’ employment to be terminated, a US company shall be obligated to inform the employees two months in advance under the WARN Act. However, there are no other obligations of the employer to inform the employees regarding a merger if the thresholds under the WARN Act are not met.

In the United Kingdom, the Transfer of Undertaking (Protection of Employees) Regulations, 2006, (‘TUPE Regulations’) mandates the employers to retain all employees during an amalgamation, inform the employees prior to the amalgamation, and also provides the employees a choice to terminate their employment in case the employee objects to being employed by the transferee company. Therefore, the TUPE Regulations in an employee friendly law which aims to safeguard the rights of employees and lay out the obligations of employers during an amalgamation.

Meanwhile in India, only one section of the Industrial Disputes Act, 1947 deals with employees’ rights coincidental to an amalgamation. According to section 25FF of the Industrial Disputes Act, 1947, in case the employee is transferred to another company due to an amalgamation resulting in the transfer of management and ownership, then the employee shall be entitled to notice of change and compensation provided that the employee has been working for at least one year, his employment has not become any less favourable than it was earlier, and his services have not been interrupted.

It should be noted that section 25FF did not originally feature a compensation clause. It was the landmark judgement ofHariprasad Shivshankar Shukla vs. A.D. Divikar in 1956 which led to section 25FF being replaced by a new section altogether by The Industrial Disputes (Amendment) Act, 1957 (Act. 81 of 1957). The amended section 25FF is the one that is still into effect till date. This amended section included the provision of compensation to a worker in case his employment is terminated as a result of a transfer in ownership or management.

In Maruti Udyog Ltd. v. Ram Lal & Ors., the Supreme Court clarified that “..Section 25FF envisages payments of compensation to a workman in case of transfer of undertakings, the quantum whereof is to be determined in accordance with the provisions contained in Section 25F, as if the workman had been retrenched…”

In Bombay Garage Ltd. v. Industrial Tribunal, the Bombay High Court held that the employer of the transferee company is bound to recognise and make the payment of gratuity for the services rendered by employees while they were employed by the transferor company.

When it comes to employees’ consent to an amalgamation, in Sunil Kr. Ghosh vs. K. Ram Chandran, the Supreme Court, held that in case of a transfer of employees as a result of an amalgamation, the old employer needs to take the consent of employees to be transferred to the new employer. In case of employees’ lack of consent to being transferred, he is entitled to compensation under section 25FF of the Industrial Disputes Act, 1947.

In Gurmail Singh and Ors. vs. State of Punjab and Ors., the Supreme Court interpreted Section 25FF of the Industrial Disputes Act, 1947 as a guarantee to the employees of either compensation from their former employees after termination of their employment, or continuity of service after his transfer, but not both. The Supreme Court stated that “The industrial law, however, safeguarded his interests by inserting Section 25FF and giving him a right to compensation against his former employer on the basis of a notional retrenchment except in cases where the successor, under the contract of the transfer itself, adequately safeguarded them by assuring them of continuity of service and of employment terms and conditions. In the result, he can get compensation or continuity but not both.”

The Supreme Court’s judgement in the Gurmail Singh case was upheld by the Bombay High Court in Air India Aircraft Engineers’ Association and Ors. vs. Air India Ltd. and Ors. wherein it also reiterated the fact that, in case of an amalgamation, an employee is entitled to compensation or continuity of employment, but not more.

Conclusion

As highlighted earlier, unlike the US and the UK, in India, when it comes to mergers and acquisitions, the employees are largely left to have one right given by section 25FF of the Industrial Disputes Act, 1947 and two choices given under it – to get compensation or to get guaranteed continued employment after transfer resulting from an amalgamation. The Judiciary’s verdicts make it clear that an employee can only choose either of the two options provided under section 25FF and not both of them. However, the Supreme Court has affirmed that no employee can be forced to be transferred and the employee’s consent is necessary even if there are no changes to the work environment and responsibilities of the employee as a result of the employee’s transfer. Therefore, a logical step to getting an employee’s consent to transfer would be a notice of change that needs to be given to the employee at least 21 days in advance of the estimated transfer date under section 9A of the Industrial Disputes Act, 1947. Therefore, given the drastic rise of M&A in India and the lack of a law addressing the rights and responsibilities of employees and employers during an amalgamation, a national law similar to the TUPE Regulations of the UK, should be considered to be made by either the Ministry of Corporate Affairs or the Parliament of India.

September 4, 2020
Converting Preference Shares into Debts: Tax Evasion or Tax Planning?

BY YASH MORE AND HITOISHI SARKAR, THIRD-YEAR STUDENTS AT GNLU, GANDHINAGAR

In December 2019, the National Company Law Appellate Tribunal (“NCLAT“) in Joint Commissioner of Income Tax v. Reliance Jio Infocomm Ltd. & Ors., while approving a demerger under s. 230-232 of the Companies Act, 2013, allowed the conversion of preference shares of a company into debt during the scheme of arrangement. However, the tribunal failed to adjudicate and determine the legal validity of such a transaction. The ramifications of such conversion include a considerable reduction in the profitability of the demerged company and a consequent estimated loss of Rs 258.16 crores to the public exchequer which would otherwise have received such payment in the form of dividend distribution tax under s. 2(22)(a) of the Income Tax Act.

The main thrust of the argument before the NCLAT was that by the scheme of arrangement, the transferor company sought to convert the redeemable preference shares into loans, i.e., conversion of equity into debt, which is contrary to the principles in s. 55 of the Companies Act, 2013. However, the NCLAT dismissed this contention stating such a determination is not a subject matter of the Income Tax Department. It noted that such an objection could be raised only by the competent authorities, i.e., Regional Director, North Western Region and the Registrar of Companies.

This article aims to determine the legality of such a conversion of preference shares into debt under the scheme of the Companies Act. In doing so, the authors have first expounded on the nature of preference shares and delineated on the vanishing line of distinction between tax evasion and tax planning. The authors have concluded the discussion by highlighting the problems faced in law while such conversion transactions are carried out.

Preference Shares under Companies Act

As per Explanation (ii) to s. 43 of the Companies Act, 2013, preference share capital refers to those shares which carry a preferential right with respect to (a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, and (b) repayment, in the case of a winding-up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up.

The problem that arises when preference shares are converted into a loan is that the shareholders turn into creditors of the company. This leads to two main consequences – firstly, the shareholders who are now creditors can seek payment of the loan irrespective of whether there are accumulated profits or not and secondly, the company would be liable to pay interest on the loans to its creditors, which it otherwise would not have had to do to its shareholders.

Tax Evasion v. Tax Planning

S. 2(22)(a) of the Income Tax Act, 1961, taxes any distribution of accumulated profits by a company to its shareholders, if such distribution entails the release of all or any part of the assets of the company. By way of converting preference shares into loans, there is an “indirect release” of assets by the demerged company to its shareholders without appropriating funds from the accumulated profits of the company. Thus, the conversion aid companies to circumvent payment of dividend distribution tax which would have otherwise been attracted in light of s. 2(22)(a). Further, the payment of interest on such vast amounts of loans would lead to a reduction in the company’s total income in an artificial manner.

The order of the NCLAT reminds one of the Supreme Court’s landmark verdict in Vodafone International Holdings BV v. Union of India wherein the Court had frowned upon artifice, which leads to tax avoidance. However, this has to be read in consonance with the ruling of the Gujarat High Court in Vodafone Essar Gujarat Ltd. v. Department of Income Tax, where it was held that the mere fact that a scheme may result in a reduction of tax liability does not furnish a basis for challenging the validity of the same.

The Supreme Court in McDowell & Co. Ltd. v. CTO had acknowledged and dwelled upon the fine although significant distinction between tax planning and tax evasion and expounded that ‘tax planning may be legitimate, provided it is within the framework of the law.’ Therefore, in order for us to determine the validity of the scheme of arrangement, we must look into the legality of the conversion of equity into debt under the scheme of s. 55 of the Companies Act.

Legal Validity of the Conversion under the Companies Act, 2013

The pertinent question that needs to be addressed is whether such a conversion of preference shares to a loan is in contravention of s. 55 of the Companies Act, 2013. It deals with the issue and redemption of preference shares. However, it does not state anything about the conversion of preference shares. In fact, in the event where a company is not in a position to redeem any preference shares or to pay dividend, it may either (a) further issue redeemable preference shares equal to the amount due, including the dividend thereon, or (b) convert the preference shares into equity shares.

S. 55(2)(a) of the Companies Act, 2013, necessitates the requirement that preference shares cannot be redeemed except out of the profits of the company. Likewise, s. 80(1) of the Companies Act, 1956, provided a similar requirement. Thus, when the preference shares are converted into loans, the problem lies in the fact that shareholders who would now have become the creditors of the company will have to be paid irrespective of the availability of profits, thereby presenting a prima facie conflict with provisions of the Companies Act, 2013.

However, the courts have refused to construe such a conversion as a contravention of company law. In PSI Data Systems Ltd., the Kerala High Court while adjudicating upon a conversion held that the requirement under s. 80(1) of the Companies Act, 1956, is to protect the preference shareholders from a company’s unilateral action. However, if the preference shareholders consent to such a conversion of preference shares into loans, no contravention of s. 80(1) can be established. The same has been affirmed by the Andhra Pradesh High Court in In Re: SJK Steel Plant Ltd., where the Court refused to read a conversion of preference shares into Funded Interest Term Loan (FITL) as a contravention of the law.

Did the NCLAT erroneously sanction the Scheme of Arrangement?

It is beyond doubt that any scheme of arrangement needs to satisfy the requirements of s. 230-232 of the Companies Act, 2013, so as to be sanctioned by a competent court. The corresponding provisions of the erstwhile Companies Act, 1956 in this regard were s. 391-394 of the Companies Act, 1956. Thus, for a scheme of arrangement to be denied sanction, a violation of the aforementioned statutory provisions must be established.

It is a well-settled position of law post the Supreme Court’s ruling in Miheer H. Mafatlal v. Mafatlal Industries that a scheme of compromise and arrangement which is in violation of any provision of law cannot be sanctioned and the Court has to first satisfy itself that any scheme of arrangement does not contravene any law or such compromise is not entered into in breach of any law. However, juxtaposing the legal pronouncements in PSI Data Systems Ltd. and SJK Steel Plant Ltd., it is evident that s. 55 nowhere prohibits conversion of the preference shares into a loan.

A pertinent objection which was raised before both the NCLT and NCLAT was that the conversion of preference shares by canceling them and converting them into a loan would substantially reduce the profitability of the demerged company. The Andhra Pradesh High Court in In Re: T.C.I. Industries Ltd., laid down that while exercising powers under s. 391 and 394 of the Companies Act, 1956 the Court cannot sit in appeal over the decision arrived at by the shareholders or the secured creditors or the unsecured creditors, and minutely examine whether the proposed scheme as approved by the shareholders should be sanctioned or not. Thus, it is beyond the powers of a court under s. 230-232 of the Companies Act, 2013, to examine the implications of a particular scheme on the profitability of the company.

Conclusion

The authors duly acknowledge that conversion of preference shares into loans may lead to a massive loss to the public exchequer as the payment of loans to the creditors (who were formerly preference shareholders) cannot be taxed as opposed to payment of dividend under s. 2(22)(a) of the Income Tax Act. However, as detrimental as it may be to the exchequer, the courts have not found any explicit or implicit statutory provision that prohibits such transactions. The opposite, i.e., conversion of loan into shares, although, has statutory recognition under s. 62(3) of the Companies Act, 2013 by way of issuance of convertible debentures.

Nevertheless, the NCLAT should have been careful while allowing such conversion and must not have dismissed the contention of Income Tax Authorities merely on the grounds of locus standi. The NCLAT alone is empowered and responsible for ensuring that no scheme of arrangement is carried out in contravention of any law even though shareholders or creditors agree to such terms. At the same time, there is a need to further deliberate upon the legality of such conversion and courts must not approve of such transactions merely because they have not been expressly prohibited.

August 6, 2020