The last few decades have seen a spate of Mergers and Amalgamations on a global scale, involving

major corporations and billions of dollars 1. Indian corporations were not free from this scenario. The rapid
growth of the global economy with liberalized economic and legal environments has resulted in
restructuring of commercial entities along more profitable lines so as to with stand global competition and
to strengthen the business with the objective to maximize share holder value. Mergers and acquisitions
are an important area of capital market activity in restructuring a corporation and had lately become one
of the favored routes for growth and consolidation. The reasons to merge, amalgamate and acquire are
varied, ranging from acquiring market share to restructuring the corporation to meet global competition. In
recent years, India has seen a manifold growth in mergers and amalgamations, largely encouraged by
liberalization measures, which have substantially relaxed restrictions on international mergers and
amalgamation transactions2. The acquisition of market control and extension of the product ranges are
one of the additional reasons for a cross-country merger apart from globalization of the corporation.
Merger in the Indian and American contexts is similar and can be classified into three categories;

Two corporate entities amalgamate and form a new entity (amalgamating entities being
dissolved);

A small and less profitable company merges with a big company (small company loses its
identity);

A relatively big and profitable company merges with a smaller company or a unprofitable
company, which is popularly known as reverse merger( in which case the small or the
unprofitable company survives)

The usual form of consideration for a merger in both the U.S. and Indian context is an exchange of shares
by the acquiring corporation for the shares of the target company and cash.
Legal framework
First, it is not possible to merge a U.S. company with an Indian Company, as the U.S. Company is an
entity under the U.S. laws and the Indian Company is registered under the Indian laws 3. As such these
two entities cannot be merged and made as one entity. However, the U.S. company can take-over the
Indian company, which results in the Indian company becoming the subsidiary of the U.S. company, or a
merger can be effected by setting up a subsidiary of the U.S. company in India which in turn will merge
with the Indian company.
A statutory merger is the basic form of transaction. The statutory provisions of the state or states in which
the parties to the merger are charted govern the transaction. In America the main elements of a statutory
merger are the percentage of the votes required for the approval of the transaction by the shareholders
that are entitled to vote, how the votes are counted and the rights of the voters who object to the
transaction or its terms4. Merger provisions found in most of the states in America are based on the
Delaware statute5. The procedure adopted in a corporation for a merger is that the boards of directors
have to initially approve the transaction and then it is submitted for the ratification to the shareholders of
the respective corporations. The state laws require a majority vote to ratify the transaction, however, the
state of New York requires a two third majority for the approval the any such proposal. The interests of the
minority shareholders are protected in a scheme of merger though the majority rule is the traditional legal
doctrine.
Legal framework in India

A merger of a U.S. and an Indian company is impacted by several Indian laws pertaining to foreign
investment in India. An attempt has been in the paper to enlighten those applicable laws randomly
besides raising questions that have been not clear or unapprised.
Modus operandi

If the Indian Company is an unlisted6 private company, then private arrangement can be made
between the shareholders of the Indian Company and the US company for the purchase of
shares. Necessary approvals under the Foreign Exchange Management Act should be obtained
in India7.
The Indian Company has to pass appropriate resolutions in its board to give effect to the
transfers, subject to the Foreign Exchange Management Act 8.

In the case of listed companies, the procedure will be bit cumbersome and has to follow the
guidelines on takeover and substantial acquisition of shares discussed later in the paper. This
involves appointing a merchant banker, valuation of shares as per the guidelines, advertisements,
offer to existing shareholders and opening of an escrow account.
The Foreign Exchange Regulation Act of 1973 (repealed) was primarily intended to regulate
certain payment and dealings in foreign exchange and security transactions indirectly affecting
foreign exchange, and to ensure the conservation of foreign exchange resources of the country,
however in the wake of liberalization measures, those provisions were scraped and a new
Foreign Exchange Management Act replaced it.
The Companies Act of 1956 regulates the law relating to the formation and administration of
companies in India as well as the operation of foreign companies, in India. 9 The Securities and
Exchange Board of India (substantial acquisition of shares and take-overs) regulations are also
an important set of regulations that govern mergers and amalgamations. Another important Act
which has an impact on mergers of U.S. and Indian Companies is the Income Tax Act which
governs the taxation of companies, domestic as well as foreign.

The merger/acquisition proposals are coupled with the policy guidelines of the Government of India and
the conditions under which foreign capital is welcomed are as follows:

All foreign and Indian undertakings have to conform to the general requirements of the
governments Industrial policy.10

Foreign enterprises can be treated on par with the Indian enterprises.

Foreign enterprises should have the freedom to remit profits and repatriate capital, subject to
foreign exchange consideration.

The objective of setting up the corporate acquisition vehicle in India has to be conformed with industrial
policy below:
(a) Approval will be given for direct foreign investment up to 51% foreign equity in 36 high priority
industries11.
(b) Other foreign equity proposals including proposals involving 51% foreign equity which do not
meet the criteria in para (a) above will need prior clearance of The Secretariat of Industrial
Approvals and Reserve Bank of India.

(c) To provide access to international markets majority equity holding up to 51% equity will be
allowed for trading companies primarily engaged in export activities and such trading houses
should be on par with domestic trading and export houses in accordance with the import export
policy12
The Foreign participation is available in the Indian companies up to 51% on an automatic basis; where
significant contribution is made to import, foreign holdings can be higher even up to 100% 13.
TAX CONSIDERATIONS
A scheme of merger/acquisition can be structured differently and each have their own tax and regulatory
issues.The following scheme of Merger/Acquisition raises some important legal issues for our discussion.
At times an Indian resident, holding the entire share capital of an Indian company, intends to transfer his
entire share holding to a foreign company in exchange for shares in the latter. This makes the Indian
Company a 100% subsidiary of the foreign corporation. The transfer of shares of the foreign corporation
would result in capital gain tax as for shareholders in Indian Company. The consideration received by the
shareholders of the Indian Company would have to be reduced from the cost of acquisition of the
shares14. The important legal issue to be considered here is that consideration received would have to be
computed based on the values of shares in the foreign corporation received and not on the value of the
shares of the Indian Company, that have been parted with. The amount of tax depends on the valuation of
the shares of the foreign company. If the US corporation is a listed 15 company, the market value of the
shares in foreign company received could be considered for the valuation; however, if the foreign
company is a unlisted company, the authenticity of the valuation of shares is in question and often
shareholders are deprived from raising their voice, as there is no proper forum to address these issues.
Effect of cross border mergers on the developing economy
International mergers in the context of developing economies like India need to be discouraged if they
reduce or harm competition or are prejudicial to the interests of the investors and consumers. Very few
Indian companies are of international size and that in the light of continuing economic reforms opening up
of trade and foreign investment, a great deal of corporate restructuring is taking place in the country which
allows the Indian corporations to be on an equal footing to compete with global giants, but at the same
time, cross border mergers beyond a threshold limit would harm competition and are prejudicial to the
interests of the investors and consumers. The investment potential of the US giant corporations will lead
to predatory pricing, which is a situation where a firm with global market power, prices below costs so as
to drive the domestic competitors out of the market which is generally prejudicial to the consumers
interest .To allow such cross border mergers, acquisitions, take-overs might help the US corporate giants
to increase their global market share, which shall result in undue concentration in global industry.
The domestic regulations governing such restrictive trade practices are confined to the investigation of the
exclusionary practices and their anti-economic effect only within the country. The monitoring and control
of global monopoly is also another important legal issue that hasnt been addressed so far.
International corporate commission
The number and power of the multinational corporations has grown rapidly and steadily throughout this
century. According to United Nations estimates, there are over 35,000 multinational corporations
worldwide that control about one third of all private sector assets. 16 The multinational corporations have
discovered the complexity in operating in several legal systems. It is too complex and perplexing to file a
notice in every country that has nothing to do with the deal in this country. In the present scenario, there is
a need for progressive harmonization and unification of the international corporate law. There is no
consensus, however, on a preferred course of action. Ideas range from creating an accountability of
reliable information on the laws of all jurisdictions, to the standardization of forms and procedures, to the
adoption of common core principles, such as the prohibition of cartels. The question is who would do this

and what charter of authority would they receive to do it? Should it be a part of the WTO Governance
mechanism? Should it be something established under the auspicious of a group such as the
Organization for Economic Co operation and Development? Do we need to create another multinational
institution to perform any of these functions? In the light of international economic developments and
emerging global economy, where the multinational corporations have their existence beyond borders, it is
necessary to establish an "International corporate commission" to promote, regulate and provide for the
settlement of the disputes arising in cross-border operation of multinational corporations. It is the next
reasonable step to share information, promote common processes, and seek substantive harmonization.
The International corporate commissionshould be vested with the investigative, prosecutorial and
adjudicative functions to address various international legal issues arising in the operation of the
multinational corporations. The international corporate commission should be a multinational member
body comprised of eminent and erudite persons of integrity and objectivity from the field of judiciary,
economics, law and international trade.
The commission should have necessary regulatory investigative and prosecutorial wings to address
various legal issues arising in the field of international corporate, securities and competition laws.The
commission shall strive for the international investor protection besides acting as a catalyst for the
multinational companies to play efficiently in the global economy. An attempt to describe the objectives of
the "International corporate commission" has been made here;
The International corporate commission should be the core legal body within in the field of
international corporate law. International corporate commission should be tasked with
progressive harmonization and unification of the international corporate law.
1. Preparing or promoting the adoption of new international conventions, model laws and
uniform laws and promoting the codification and wider acceptance of international
corporate laws in collaboration, where appropriate, with the organizations operating in
this field;
2. Promoting ways and means of ensuring a uniform interpretation and application of
international conventions and uniform laws applicable to Multi national corporations
3. Collecting and disseminating information on national legislations and modern legal
developments, including case law, applicable to multi national corporations
4. Maintaining liaison with other Nations, organs and specialized agencies concerned with
multinational corporations
5. Taking any other action it may deem useful to fulfil its functions.