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Explain the procedure for Merger and demerger

Answer Posted / pooja barot

PROCEDURE OF MERGER

1. Observing Memorandum of Association of Transferee
Company.
It has to be ensured that the objects of the MOA of the
transferee company cover the objects of the Transferor
Company or companies. If not then it will be necessary to
follow the procedure for amendment of objects by passing a
special resolution at an EGM convened for this purpose.
It has been held by various decisions of the courts that
there is no necessity to have special power in the object
clause of the MOA of a company for its amalgamation with
another company. It has been laid down that to amalgamate
with another company is power of the company and not an
object of the company.

2. Convening a Board Meeting
Board Meeting is to be convened and held to consider and
approve in principle amalgamation and appoint an expert for
valuation of shares to determine the share exchange ratio.
Consequent upon finalization of scheme of amalgamation
anther Board Meeting is to be held to approve the scheme.

3. Preparation of Valuation Report
Chartered Accountants are requested to prepare a Valuation
Report & the swap ratio for consideration by the Boards of
both the companies and if necessary it may be prudent to
obtain confirmation from merchant bankers on the valuation
to be made by the Chartered Accountants.

4. Preparation of scheme of amalgamation or merger
Auditors, legal advisors and Practicing Company Secretary
of both the companies must interact with each other and
should report the result of their interaction to their
respective BOD. The Boards of the involved Companies should
discuss and determine details of the proposed scheme of
amalgamation and merger. The draft of the scheme finally
prepared by the Boards of both the companies should be
exchanged and discussed in their respective Board meetings.
After such meetings a final draft scheme will emerge.

Contents of Amalgamation scheme
1. Transfer date:
This is a cut off date from which all the movable and
immovable properties including all rights, powers,
privileges of every kind, nature and description of the
transferor company shall be transferred or deemed to be
transferred without any further act, deed or thing to the
transferee company.

2. Effective date:
This is the date on which the transfer and vesting
of the undertaking of the
Transferor company shall take effect i.e. all the requisite
approvals would have been obtained.

The scheme should suitably provide for:

1. Brief details of transferor and transferee
companies
2. Appointed date
3. Main terms of transfer of assets and liabilities
from transferor to transferee.
4. Effective date of the scheme
5. Details of happenings and consequences of the
scheme coming into effect on effective date
6. The terms of carrying on the business activities by
transferor between ‘appointed date’ and ‘effective date’
7. Details of Share capital of transferor and
transferee company
8. Proposed share exchange ratio, conditions attached
thereto fractional certificates to be issued to Transferee
Company, approvals and consent required etc.
9. Conditions about payment of dividend, ranking of
equity shares, prorata dividend declaration and
distribution.
10. Status of employees of transferor companies and
various schemes or funds created for their benefit from the
effective date
11. Agreement between transferor and transferee
companies towards making applications/petitions under
sec.391 and 394 and other provisions to the respective High
Courts
12. Impact of various provisions covering income tax
dues, contingencies and other accounting entries deserving
attention.
13. Statement to bear costs, expenses etc. in
connection with the scheme by transferee company
14. Qualifications attached to the scheme requiring
various approvals and sanctions.
15. Enhancement of borrowing limit of the transferee
company upon the scheme coming into effect
16. Surrender of shares by Shareholders of Transferor
Company for exchange into new share certificates.

5. Approvals of scheme
Approvals of BOD, Stock Exchanges, Share holders,
creditors, financial institutions, Land holders, high
courts and RBI are required.

6. Application to High Court seeking direction to hold
meetings
Rule 67 of the Companies (court) Rules, 1959 lays down that
an application under section 391(1) of the Companies Act,
1956 for an order seeking direction for convening meetings
of creditors and/or members or any class of them shall be
by way of judge’s summons supported by an affidavit. A copy
of the proposed scheme should be annexed to the affidavit
as an exhibit thereto. The summons should be moved ex parte
in Form no.33 of the Companies (court) Rules, 1959. The
affidavit in support of the application should be in Form
No. 34.

7. Jurisdiction of High Court
Joint application or separate applications should be moved
to the High Court having jurisdiction over the state in
which registered offices of the companies are situated.


8. Obtaining order of the court for holding class meetings.
On receiving a petition the court may order meetings of the
members/creditors to be called, held and conducted in such
manner as the court directs. Once the ordered meetings are
duly convened, held and conducted and the scheme is
approved by the prescribed majority in value of the
members/creditors, the court is bound to sanction scheme.
Notice of the meeting(s) should be in Form no.36 must be
sent by the person authorized by the court at their last
known addresses at least 21 clear days before the day fixed
for the meeting. The notice must be accompanied by a copy
of the scheme for the proposed compromise or arrangement.

9. Notice by advertisement
Where the court has directed that the notice of the
meetings should also be given by newspaper, advertisements,
and such notices are required to be given in the prescribed
Form no. 38 and published once in an English newspaper and
once in the regional language of the state in which the
registered office of the company is situated.

10. Convening of General Meeting
At the General meeting convened by the High Court
resolution will be passed approving the scheme of
amalgamation with such modification as may be proposed and
agreed to at the meeting.
The resolution relating to the approval of amalgamation has
to be approved by a majority of members representing 3/4th
in value of the creditors or class of creditors or members
or class of members as the case may be present and voting
either in person or by proxy.
The minutes of the meeting should be finalized in
consultation with the Chairman of the meeting and should be
signed by him once it is finalized and approved. Copies of
such minutes are required to be furnished to the Stock
Exchange in terms of the Listing Agreement.


11. Reporting of the results
The Chairman of the meeting will submit report of the
meeting indicating the results to the concerned High Court
in Form no.39 within 7 days of the conclusion of the
meeting. The Report must state:
a) The no. of creditors/members or class of
creditors/members who were present at the meeting and who
voted.
b) Their individual values and the way they voted

12. Petition to court for confirmation of scheme
When the scheme is agreed to, with or without modification
a petition must be made to the court for confirmation of
the scheme on the Form no.40
The court also directs that notices of petition be sent to
the concerned Regional Director, ROC and the official
liquidator.
On hearing the petition the court shall fix the date of
hearing and it shall be published in the same newspaper in
which notice of the meetings was advertised or in such
other papers, not less than 10 days before the date of
hearing.

13. Obtaining order of the court sanctioning the scheme
An order of the court on summons for directions should be
obtained which will be in obtained which will be in Form
no.41.

14. Filing of copy of court’s order with ROC
A certified copy of the order passed by the court under
both the section 391(3) and 394(3) is required to be filed
with concerned ROC in E-form no.21.
If default is made in complying with this sub-section the
company and every officer of the company who is in default,
shall be punishable with fine which may extend to five
hundred rupees. According to sub-section (3) of section 391
the court order shall not have effect unless a certified
copy of the order has been filed with the Registrar.

15. Transfer of the Assets & Liabilities
Section-394(2) vests power in the High Court to order for
the transfer of any property or liabilities from Transferor
Company to Transferee Company. In pursuance of and by
virtue of such order such properties and liabilities of the
transferor shall automatically stand transferred to
transferee company without any further act or deed from the
date the Court’s Order is filed with ROC.

16. Allotment of Shares to Shareholders of Transferor
Company
Pursuant to the sanctioned scheme of amalgamation, the
share-holders of the
Transferor company are entitled to get shares in the
transferee company in the
Exchange ratio provided under the said scheme. There are
three different situations in which allotment could be
given effect:-

i) Where Transferor Company is not a listed company, the
formalities prescribed under listing agreement do not exist
and the allotment could take place without setting the
record date or giving any advance notice to shareholders
except asking them to surrender their old share
certificates for exchange by the new ones;

ii) The second situation will emerge different where
transferor company is a listed company. In this case, the
stock exchange is to be intimated of the record date by
giving at least 42 days notice or such notice as provided
in the listing agreement ;

iii) The third situation is where allotment to Non-Resident
Indians is involved and permission of Reserve Bank of India
is necessary. The allotment will take place only on receipt
of RBI permission. In this connection refer to Regulations-
7, 9 & 10B of Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident outside India)
Regulations, 2000 as and where applicable.

Having made the allotment, the transferee company is
required to file with ROC with return of allotment in Form
No-2 appended to the Companies (Central
Government’s) General Rules and Forms within 30 days from
the date of allotment in terms of Sec-75 of the Act.

Transferee Company shall having issued the new share
certificates in lieu of and in exchange of old ones,
surrendered by transferor’s shareholders should make
necessary entries in the register of members and index of
members for the shares so allotted in terms of Sec-150 and
151 respectively of the Companies Act,1



17. Listing of the Shares at Stock Exchange
After the amalgamation is effected, the company which takes
over the assets and liabilities of the transferor company
should apply to the stock exchanges where its securities
are listed, for listing the new shares allotted to the
shareholders of the transferor company.


18. Court order to be annexed to Memorandum of
Transferee Company
It is the mandatory requirement vide Sec-391(4) of the
Companies Act, 1956 that after the certified copy of the
Court’s Order sanctioning the scheme of amalgamation is
filed with Registrar, it should be annexed to every copy of
the Memorandum issued by the transferee company. Failure to
comply with requirement renders the company and its
officers liable to punishment.

19. Preservation of Books & Papers of Amalgamated
Company

Sec-396A of the Act requires that the books and papers of
the amalgamated Company should be preserved and not be
disposed of without prior permission of the Central
Government.

20. The Post Merger Secretarial Obligations

There are various formalities to be complied with after
amalgamation of the companies is given effect to and
allotment of shares to the shareholders of the transferor
Company is over. These formalities include filing of the
returns with Registrar of Companies, transfer of
investments of transferor company in; the name of the
transferee, intimating banks and financial institutions,
creditors and debtors about the transfer of the transferor
company’s assets and liabilities in the name of the
transferee company, transfer of employees, gratuity, PF and
Pension funds etc.


21. Withdrawal of the Scheme not permissible

Once the scheme for merger has been approved by requisite
majority of
Shareholders and creditors, the scheme cannot be with-drawn
by subsequent meeting of shareholders by passing Resolution
for withdrawal of the petition submitted to the court U/s-
391 for sanctioning the scheme.

PROCEDURE OF DEMERGER
The procedure is as follows:
1. Incorporate the company which will be the Resulting
Company.
2. Frame a scheme of Demerger
3. File a Judges Summons in the High Court praying for
an Order convening separate meetings of the Creditors,
Share-holders, or any class of them. Each such Judges
summons must be supported by an
Affidavit and a copy of the Scheme must be annexed to the
Affidavit. If all the Creditors agree to the Scheme, the
meeting may be dispensed with. In the case of a Demerger,
it would not be possible to dispense with a meeting of the
share-holders, since under Section 293 (1)(a) of the
Companies Act, a general meeting of the share-holders would
be essential before any such Demerger can take place.
4. Notice of the meeting must be given to the
Creditors and /or members and sent individually to each
Share-holder/Creditor. Each notice must be accompanied by a
copy of the scheme, explanatory statement as required by
Section 393 of the Companies Act and a proxy form.
5. The notice of meeting must be advertised in such
newspapers and in such manner as the judge may direct. The
Advertisement must take place at least 21 clear days before
the date of the meeting,i.e. 21 days notice must be given
excluding the date of advertising of the notice and the
date of the meeting.
6. The Chairman of the meeting or other person
directed to issue the Advertisement and notices must file
an Affidavit not less than 7 days before the date of the
meeting showing that the directions reg: issue of notices
and advertisements have been duly complied with.
7. On the date of the meeting, the decisions of the
meetings must be ascertained only be taking a poll.
8. The Chairman of each meeting must file a report in
the Court within that time fixed by the Judge or where no
time has been fixed, within 7 days after the conclusion of
the meeting. The report must state accurately the number of
creditors or class of creditors or number of members or
class of members as the case may be who were present and
who voted at the meeting either in person or by proxy,
their individual values and the way they voted. The report
shall be in Form 39 annexed to the Companies (Court) Rules,
1959.
9. Where the proposed Demerger is approved by the
various meetings with or without modification, the company
must present the petition to the Court, for confirmation of
the Demerger within 7 days of the filing of the Chairman's
Report.
10. The Court shall fix a date for hearing of the
Petition and direct advertising in the same newspapers in
which the notices of the meetings were advertised or in
such other papers as the Court might direct. The notice
must be given not less than 10 days before the date of the
hearing.
11. If the Court sanctions the Demerger, it may give
such directions as it considers necessary for the proper
working of the Demerger. The certified copy of the Order
must be filed within 14 days from the date of the Order or
such other time, as may be fixed by the Court.
12. Applications for Orders in connection with the
Demerger or for any variation, etc. shall be made under
Section 394 by Judges Summons supported by an Affidavit for
directions as to the proceedings to be taken. Notice of the
summons shall be given in such manner and to such person as
the Court may direct. On hearing the Summons, the Court may
make such Order or Directions as may be necessary.
13. The Company or any Creditor or Member thereof may
at any time after the passing of the Order sanctioning
Demerger, apply to the Court for determination of any
question relating to the working of the compromise or
arrangement. Notices and Advertisements shall be as the
Court may direct. The Court may pass such Orders, give such
Directions as it may think necessary

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