Modes of Corporate Restructuring and Acquisitions

[YAGAY andSUN]

Corporate restructuring is a strategic tool employed by companies to achieve operational efficiency, financial stability, or to pursue growth opportunities. The following are the commonly recognized modes through which such restructuring may be effected under Indian corporate law:

(a) Amalgamation or Merger

Amalgamation refers to the combination of two or more companies into a single entity, wherein either a new company is formed or one company absorbs the other(s). It results in the transfer of all assets, liabilities, and undertakings of the amalgamating company to the amalgamated entity.

• Legal Basis: Governed under Sections 230–232 of the Companies Act, 2013.
• Regulatory Requirement: Mandatory approval of the National Company Law Tribunal (NCLT).
• Objective: Consolidation of businesses, economies of scale, or acquisition of market share.

(b) Demerger

A demerger entails the segregation of one or more business undertakings of a company into another company, either newly formed or pre-existing. This is commonly adopted to separate unrelated or distinct business verticals.

• Legal Basis: Also governed under Sections 230–232 of the Companies Act, 2013.
• NCLT Approval: Required, as it constitutes a compromise or arrangement between the company and its stakeholders.
• Outcome: The transferring company continues to exist, while the undertaking is transferred on a going concern basis.

(c) Share Purchase

A share purchase is a method of acquiring control over a target company by purchasing its shares directly from existing shareholders. This results in a change in shareholding but does not affect the existence or operations of the target entity.

• Legal Simplicity: Does not require NCLT approval.
• Regulatory Oversight: Subject to SEBI regulations (if listed), and reporting under the Companies Act, FEMA (for cross-border transactions), and the Competition Act, where applicable.
• Flexibility: Common in private equity and strategic acquisitions.

(d) Slump Sale

A slump sale involves the transfer of an undertaking as a going concern for a lump sum consideration, without assigning values to individual assets or liabilities.

• Legal Basis: Defined under Section 2(42C) of the Income Tax Act, 1961.
• Taxation: Treated as a transfer for capital gains purposes; requires careful valuation and tax planning.
• Advantages: Simple execution through a Business Transfer Agreement; no court approval required.

(e) Asset Sale

Under an asset sale, specific assets of a company (such as land, plant, machinery, or intellectual property) are individually sold to a purchaser. Unlike a slump sale, it does not transfer the business as a going concern.

• Applicability: Often used to dispose of non-core or redundant assets.
• Contractual Nature: Governed by the terms of the asset sale agreement and general contract law.
• Valuation: Each asset is separately valued and taxed accordingly.

Here's a comparative chart summarizing key aspects of various corporate restructuring methods:

🧾 Comparative Chart: Corporate Restructuring Methods

Particulars	Amalgamation / Merger	Demerger	Share Purchase	Slump Sale	Asset Sale
Definition	Combining two or more companies into one entity	Transfer of one or more undertakings into another entity	Purchase of shares of the target company	Transfer of an undertaking as a going concern	Sale of specific assets individually
Governing Law	Companies Act, 2013 (Sec. 230–232)	Companies Act, 2013 (Sec. 230–232)	Companies Act, SEBI, FEMA, Competition Act (as applicable)	Income Tax Act, 1961 (Sec. 2(42C)), Contract Law	Contract Law, Companies Act, Tax Laws
NCLT Approval Required	✔ Yes	✔ Yes	✘ No	✘ No	✘ No
Resulting Entity	One merged entity (or absorption into existing company)	Demerged entity continues; receiving company gains undertaking	No change in legal entity of target	Business transferred; seller company continues	Seller retains remaining business
Continuity of Business	✔ Generally continues	✔ Generally continues	✔ Target continues operations	✔ Business continues with buyer	✘ Only assets transferred, not business
Consideration Form	Shares / Cash / Combination	Shares / Cash	Cash or shares to shareholders	Lump sum amount	Based on asset value
Tax Implications	Tax neutral if conditions under Sec. 47 (IT Act) are met	Tax neutral if Sec. 47(vi) or (vib) conditions are met	Capital gains on transfer of shares	Capital gains taxed under Slump Sale rules	Taxed individually per asset transferred
Stamp Duty	✔ Applicable	✔ Applicable	✔ Applicable on share transfer (depends on mode)	✔ May apply based on asset class	✔ Asset-wise applicable
Due Diligence Required	✔ Extensive	✔ Extensive	✔ Moderate to Extensive	✔ Moderate	✔ Selective
Speed of Execution	Slow (due to court approval)	Slow (due to court approval)	Fast	Moderate	Fast
Regulatory Approvals	NCLT, ROC, SEBI (if listed), CCI (if applicable)	NCLT, ROC, SEBI, CCI (if applicable)	SEBI, FEMA, CCI (as applicable)	CCI, if thresholds met	As per sector or value involved

📌 Quick Summary:

• Use Amalgamation/Demerger: For long-term strategic consolidation or vertical separation.
• Use Share Purchase: For acquiring control quickly without affecting the legal entity.
• Use Slump Sale: When transferring entire business units with operational continuity.
• Use Asset Sale: For selective asset disposal or non-core business divestment.

Conclusion

The choice of restructuring mechanism depends on several factors including the strategic objectives, tax implications, legal formalities, and regulatory constraints. While mergers and demergers require court approval and involve comprehensive compliance, share and asset purchases offer quicker, more flexible alternatives. Proper legal and financial due diligence is essential to select and execute the most appropriate route.