Acquisition&MergerofSickCompaniesthroughBIFR

Takeover of sick industrial units is often seen as a promising alternative to building a business from
scratch. A 'sick industrial company' means an industrial company that has been registered with the
RegisterofCompaniesforminimumoffiveyearsandattheendofanyfinancialyearitsaccumulated
lossesisequaltoorexceedingitsentirenetworth(i.e.,thesumofthecompany'spaidsharecapitaland
free reserves). An industrial company is defined as a company that is engaged in any scheduled
industry specified in the First Schedule to Industries (Development and Regulation) Act, 1951 (for ex.
Metallurgical industries, telecommunications, transportation, chemicals, textiles but not include
financial services, software services etc). The above definitions also exclude small scale or ancillary
undertakings.
The revival and rehabilitation of sick industrial units is governed by Sick Industrial Companies (Special
Provisions) Act, 1985 (SICA) and it constituted Board for Industrial and Financial Reconstruction
(BIFR) for this purpose. One of the significant powers of BIFR is to sanction a scheme of
amalgamation/reorganization/takeoverofmanagementbetweenasickunitandahealthycompany.
SICAestablishesanelaborateregimetodealwithsickindustrialunits.Ifacompanyatanypointqualifies
underthedefinitionofsickcompanyareferencetoBIFRismadebyitsboardofdirectors.BIFRmay
evenonthebasisofitsownknowledgeoranyinformationreceivedaboutthefinancialpositionofany
company,canrequireanOperatingAgency(OA)toinquireintoitsworkingandsubmitareport.The
OAisusuallyaleadfinancialinstitutionorbank(suchasIDBI,ICICI,IFCI,andSFC)thathadfinancedthe
unit.Afterinquiry,iftheunitisconsideredsickbyBIFR,itmaydirectOAtorecommendmeasuresor
prepare a scheme of rehabilitation for the company. A scheme of merger may also be prepared, and
such schemes are framed by the OAs in consultation with the companies being merged and the lead
bankwhichtakesinitiativetodecidethetermsandconditionsoftherestructuring.
First, OA submits a draft scheme to BIFR and then, BIFR sends the same to the abovementioned
stakeholders and publishes it in a local daily newspaper to invite any suggestions or objections from
shareholders, creditors or employees. The merger scheme must be approved by shareholders of the
healthy company in a general meeting through a special resolution. Finally, after BIFR has made
necessary modifications as per opinions received and shareholders have granted approval, it has to
sanctionandmonitortheimplementationofthescheme.Inpast,theBombayHighCourthasheldthat
notwithstandingareferencependingwithBIFR,Courtshavejurisdictiontograntsanctiontoascheme
underSection391and394oftheCompaniesAct.Thus,acquisitionofasickcompanycanalsotakeplace
outsideSICAwhileitsreferenceispending.
In the initial period of the SICA regime it was left to OA to find healthy companies. Now, BIFR also
resortstothemethodofpublicadvertisementstomovetowardspotentialarrangements.Ifmorethan
one acquirer is interested, BIFR obtains detailed offers from the parties and assesses them on factors
such as financial health, management track record, synergy and the degree of their dominance in the
industry. Another alternative method used is to first frame a scheme of rehabilitation and then invite
offers publicly. In October 2010, BIFR framed guidelines for change of management (COM) of sick
companiesdetailingprocedureofacquisitionthroughBIFR.ItstatesthatfollowingaBIFRorderforCOM,
companyshouldsubmitfulldetailsofitsassetsandliabilitiesonthebasisofwhichOAshallpreparea
profileofthecompany.TheOAis thenrequiredtoadvertisethesamein newspapersanditswebsite
within15daysofreceiptofinformationfromcompany,seekingoffersforchangeofmanagementofthe
company by way of amalgamation. Copies are also to be supplied to leading Chambers of Commerce
andIndustry.2%oftheoutstandingprincipalsecureddebtofbanks/FIsofthecompanyisrequiredtobe


depositedwithin15daysoftheadvertisement,bytheinterestedacquirersasearnestmoneydepositat
the time of submitting expression of interest. OA should thereafter facilitate the interested parties to
visit factory premises, machineries, land, buildings etc. of the company. Within 60 days of the
advertisement they have to submit their bid outlining draft revival proposal for the company. OA
shortlists the potential acquirers for approval of the board within 2 months from close the offer who
shalldepositanadditionalamountof10%ofoutstandingprincipaldebt.

TaxBenefitsunderIncomeTaxAct,1961
AnacquisitionunderaBIFRapprovedschemeiseligibleforvariousrelaxationsinlaw.Amajorincentive
for acquiring companies is the tax benefits given consequent to amalgamation. Sometimes, the
approachistoanalyzetheconcessionsfirstandthengetanorderofrehabilitationfromBIFR.
Section 72A of the Income Tax Act, 1961 provides that the accumulated losses and unabsorbed
depreciationofamalgamatingcompanyshallbedeemedtobethelossesorallowanceforunabsorbed
depreciationofamalgamatedcompanyforthepreviousyearinwhichtheamalgamationwaseffected.
Toavailthebenefitsofthisprovisionitisrequiredthattheamalgamatingcompanyhasbeenengagedin
thelosscausingbusinessforatleastthreeyearsand,hasheldcontinuouslyasonamalgamationdateat
least threefourths of the fixed assets which it has already held for two years. The amalgamated
company is required to continue the business and continuously hold from the amalgamation date at
least threefourths of the fixed assets of the amalgamating company for five years. SICA also
incorporates that 72A of the Income Tax Act, 1961 shall apply relation to amalgamations under BIFR
schemes.SupremeCourthasgonefurtherinIndianShavingProductsLtdv.BIFRbyholdingthatsanction
of a scheme of amalgamation under Section 18 of SICA necessarily implies that the requirements of
Section72Ahavebeenmetwith,andBIFRmustexerciseitspowerconferredbySection32ofSICAas
the benefit is a cooccurrence. In some circumstances, it may be prudent that the amalgamating
company is the healthy company and the amalgamated company is the sick company. This form of
restructuringisknownasareversemergerandithasbeenmadepossibleafteranamendmenttoSICA
in1994.

OtherRelaxationsforAcquirer
SpecialtreatmenthasalsobeengiventoBIFRacquisitionsintheSEBI(SubstantialAcquisitionofShares
andTakeovers)Regulations,2011(takeovercode)andthelistingagreement.Continuingexemptionsin
the older regulations, the new takeover code provides that acquisitions pursuant to the SICA act are
exemptfromtheobligationtomakeapublicannouncementofopenofferunderRegulation3fortake
overofsharesorvotingrights;andfortheacquisitionofcontrolunderRegulation4.
Clause 40A of the listing agreement requires a company to maintain on a continuous basis, public
shareholdingofatleast25%ofthetotalnumberofissuedsharesofaclassorkind,foreverysuchclass
orkindofitsshareswhicharelisted.SecuritiesandExchangeBoardofIndia(SEBI)amendedClause
40Aofthelistingagreementin2006tomakeanexemptionforcompaniesinrespectofwhichreference
had been made to the BIFR, or any such company in respect of which any rehabilitation scheme was
sanctioned,andsuchreferenceorimplementationoranappealagainsttheschemewaspending.Thus,
inthesesituationsthenonpromotersshareholdingcanbebelow25%.

Conclusion


TheBIFRrouteavoidstheneedtoapplyforlettersofintentandindustriallicenses,eliminatesgestation
periodsandmakesavailableproductionfacilitiesathistoricalcost.Moreover,BIFRitselfiscompetentto
approve mergers/acquisitions and sanction tax reliefs which it does much faster than the Courts.
NeverthelessitisimportanttonotethatCompanies(SecondAmendment)Act,2002bringstheprocess
of dealing with sick industries under the purview of the Companies Act. The Companies (Second
Amendment)Act,2002establishesNationalCompanyLawTribunal(NCLT)withregionalbenchesthat
are empowered with the powers earlier vested with BIFR. The bill to repeal SICA has been passed,
howeverSICAshallremaininforceuntiltheNCLTisconstituted.LastyearinMay,2010SupremeCourt
hadapprovedsettingupofNCLTinR.Gandhiv.UnionofIndiaandsoonwemaywitnesstremendous
changeinthecurrentlawasthenewprovisionsfocusonearlydetectionofsickunitsandintroducethe
inabilitytopaydebtsclauseasayardsticktomeasuresickness.