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Part 01 Lecture series on ''Basics of M&A by Mr Siddharth Marwah — Transcript

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0:01all right so i think we should start uh
0:03a very good morning to everyone
0:05to siddhartha and to everyone who has
0:07joined for this webinar firstly or
0:10on behalf of pak i welcome all of you
0:12and we are very grateful that all of you
0:14showed such great enthusiasm for this
0:16lecture series
0:18uh to start with the session introducing
0:20our speaker introducing our mentor mr
0:22siddharth malwa who is currently a
0:23principal associate at caitanya
0:26sir is a 2015 pass out of campus law
0:29center itself and during first time in
0:32campus law center the the sheer uh
0:35participation that he undertook in
0:36campus law center could be watching the
0:38fact that he served as the vice
0:39president of the students union and he's
0:41also currently the treasurer of the clc
0:43alumni association which i believe has
0:46done some wonderful work during the
0:47covert times and supporting students of
0:49campus law center
0:51before joining katana and coaster has
0:53worked with amarcha mangaldas and also
0:55in this law
0:57as a student itself his hard work was
0:59quite prominent when he was interning
1:01with creme de la creme phones like
1:02tri-legal and sir has gone on to attain
1:05a great level of mastery when it comes
1:07to merchants and acquisition the whole
1:09sphere of mergers and acquisition and i
1:11do not believe that there could have
1:12been anyone better to introduce us to
1:15this particular field of law
1:17for third years i believe it will be
1:18extremely important because we are in
1:20the process of deciding we feel that we
1:22want to work on once graduating so this
1:24would be a good primer for all of us to
1:26get a background to get an insight into
1:28what constitutes mergers and
1:29acquisitions in india
1:31for my first years you will be reading
1:33some of the most uh engaging and
1:35interesting legislations in your third
1:37and fourth semester company law
1:39competition law which you will get a
1:41brief overview here because all of them
1:43are very important
2:02uh is it only for me or i think uh aaron
2:05is stuck so maybe there is some issue
2:06with arushi's network
2:08okay nobody
2:10just wait for a couple of minutes
2:14so thank you so much for coming back to
2:16the campus
2:18and
2:18always at this idea because so much for
2:20having me and thanks to everybody for
2:22joining on a holiday morning it's a
2:25national holiday everybody's joined in
2:27the morning
2:28right
2:29back
2:30i'm so sorry electricity power cuts
2:32however my only request is to make the
2:34session as interactive as possible asks
2:37her as many questions as possible i am
2:39assuming that sir will be thrilled to
2:40answer this
2:42so he is with us for two days get all
2:44your doubts cleared into whatever doubts
2:46you have regarding the law regarding the
2:48practice regarding how to get how to
2:51streamline yourself into this field and
2:53we are hoping to have a very rewarding
2:55and uh enriching session sir i would
2:58pass on the mic to you now and to start
3:00with the session now thank you so much
3:03and mayank for your kind words and uh
3:05thank you everybody good morning
3:07thank you for joining in the morning
3:10ah the idea is that you know when we
3:12decided deciding about having this
3:13lecture series the idea was that
3:16everybody who's in campus law center i
3:17know and i've been in clc we get a lot
3:19of exposure to litigation and how to go
3:22about it and you know when everybody
3:24joins the legal profession there is a
3:26particular idea about the type of law
3:28you're going to practice you know so and
3:30mostly the time of exposure which we get
3:32at least in my time which you were
3:33getting in clc was towards the
3:36litigation side but now over the years a
3:38lot of our alumni a lot of people have
3:40they started venturing into the
3:41corporate law side as well and they've
3:43started joining law firms they want to
3:45make a career in corporate law
3:47so and during this course of the series
3:49the idea is that we give you a brief of
3:51what is corporate law what do it is that
3:53we as corporate lawyers do so
3:56you know what is that we are doing how
3:58is it that the work that we are doing is
4:00going to you know progress
4:02i will be very happy to answer any
4:03queries that you have in relation to
4:05corporate law law firms how to get
4:08through them etc etc those general
4:10questions i would you know love to
4:12answer all of them
4:13the idea of this series is to give you a
4:16brief of what are mergers and
4:18acquisitions in india what is the regime
4:20of mergers and acquisitions in india
4:22so you know these are terms which we
4:24hear a lot you keep on reading that you
4:26know a company has acquired b company
4:29so recently you would have read that you
4:31know z and sony are merging together so
4:34a lot of these words we keep on reading
4:36about acquisitions happening we you you
4:38would hear a news article or read a news
4:40article that say by jews acquired akash
4:44at a certain amount or a lot of these
4:46companies a lot of these startups they
4:47keep on getting acquired by bigger
4:49companies a lot of companies keep on
4:51getting merged with each other so what
4:53is the process behind it so what is the
4:56law behind it and what is the process
4:57behind it and what is it that we lawyers
5:00bring to the table when it comes to all
5:01of this
5:02with a lot of these things they appear
5:04to be very commercial when you see to it
5:06right so you were buying a company or
5:08you're doing something so all of these
5:10things end up being very commercial but
5:12what is the legal aspect of it and what
5:14is it that we lawyers bring to the table
5:17so i will also just project i have a
5:20presentation prepared although i've
5:22shared so i actually have shared the
5:24presentation with the pack email as well
5:27if you can collect it from there right
5:29so so really
5:30if you're logged in from the placement
5:32id could you just uh
5:34enter that presentation we can take down
5:36this particular one
5:38so i'll just get it
5:42yeah it'll just be easier for people to
5:44navigate through the entire process
5:52have we gotten the final
5:54results for this semester till now i
5:56know we're waiting for it
6:02so for the graduating match of 2021 we
6:05have and i so i think all the results
6:08still are here that's basically the ones
6:10that are going in third year out there
6:12the first years are yet to have their
6:13second some exams
6:15okay yeah i heard somewhere that it will
6:17happen in the first week of october or
6:19something like that yeah yeah so they're
6:20in a bit of a
6:22in a middle state that is there so
6:24hopefully they'll be done by mid-october
6:26we are assuming
6:32uh sanya you can take somebody's help
6:34also
6:35if you can help with coordinating the
6:37presentation
6:43otherwise wait do i have access of
6:45sharing it
6:47okay somebody is presenting fine perfect
6:59yeah okay we can move on to the next
7:01slide
7:04so what is mna now m a in itself so you
7:07see mergers and acquisitions so there
7:09are two aspects to it there is a merger
7:11and there is an acquisition and both of
7:13them are distinct with each other now a
7:15merger as the word goes is basically the
7:18coming together of two or more entities
7:20and combining and actually forming one
7:22business so in india how it works is
7:25that we have a proper merger regime
7:26which is a court-approved merger regime
7:28which is there in india so your
7:30company's act under sections 230 to 234
7:34it deals with what is a merger
7:36and you know how a merger process is
7:38done in india so how it technically
7:40works is that two companies which want
7:42to come together they form a merger
7:44scheme
7:45the idea is that as a culmination of
7:47this merger process you will have one
7:49entity in place
7:51now why do companies do for mergers you
7:53go for mergers because you want
7:55economies of scale the different types
7:56of mergers there is a horizontal merger
7:58there can be a vertical measure etc etc
8:01a horizontal merger will be when two
8:03competing companies they come together
8:06say and at the same level of business
8:08say like you would have read right now
8:10like a z and a sony they're merging
8:12together so that is what you call a
8:14horizontal merger when two competing
8:16companies are coming together merging to
8:18form one entity
8:19you do this because a it helps you with
8:21economies of scale it gives you a bigger
8:23war chest to fight it helps you
8:26consolidate all your clients all your
8:27customers streamline your processes
8:30so it helps you get a bigger market so a
8:32lot of people go for these horizontal
8:34mergers
8:35there is a different type of merge and
8:36again these are not defined terms
8:38anywhere so these are just colloquial
8:40terms and normal day-to-day usage words
8:42that we use then there is something
8:44called a vertical merger a vertical
8:46measure will be that if today i am in an
8:49automobile manufacturing industry and we
8:51are manufacturing automobiles and my
8:53company and then there is another
8:55company which is say producing the raw
8:57materials for this business so what we
9:00do is that if we end up merging these
9:01two companies that one business which we
9:03have will help us because then we are
9:06making the raw materials in-house
9:08and at the same time we have the
9:10production manufacturing with us as well
9:12so sometimes companies go keeping that
9:14in mind they go for a vertical measure
9:16there is something called a co generic
9:18merger as well
9:20and a co-generic merger is specifically
9:22when two companies which are in the same
9:24field or same industry decide that we
9:26want to merge it from one company now
9:29this can be say if you are in the fmcg
9:32industry doing food manufacturing and so
9:36i am making so my company makes biscuits
9:38you have a company which is making say
9:41cakes or manufacturing i don't know tea
9:44leaves or something that's not in the
9:45same industry so you have the same
9:47supply channels you have the same
9:49distribution channels so you decide that
9:51why not let's combine our two companies
9:53it's in the same field as it is and then
9:55both of us can use our own distribution
9:57channels and our own supply chain to
9:59make sure that we increase our sales and
10:01plus we get increased budgets so
10:03sometimes people go in that sense as
10:06well then obviously there is something
10:08called a conglomerate merger in which
10:10you are a big business house you as it
10:12is have a lot of businesses and
10:14different types of businesses which your
10:15company is undertaking and then you go
10:18and pick up another diversified business
10:20and merge it with your company
10:22so there are different different types
10:23of mergers which are there and different
10:24different reasons why companies prefer
10:26to go for a merger now picking up where
10:29i left in india whether when you come to
10:31comes to a merger the merger regime is
10:34basically code driven process
10:36under the companies that two companies
10:38which want to merge together they'll
10:40firstly be required to file a merger
10:42scheme with the nclt which sets out the
10:45details and the various parameters of
10:47how that merger is supposed to take
10:48place
10:50then after that what happens is that the
10:52code tells you and obviously as this
10:54course progresses we'll discuss all the
10:56laws involved and everything in great
10:58detail the idea right now
11:01and i think just to take a step back
11:04how we structured this entire lecture
11:05series is into four lectures
11:08the first lecture which we are having
11:09right now is to give you a basic idea
11:12about the entire merger regime the
11:14different types of mergers which are
11:16there the different type of acquisitions
11:18which are there the documents which we
11:20use for all of this
11:22to basically run you through a deal
11:24cycle from negotiation to due diligence
11:27to give you an idea about what all it
11:29entails in a merger process so this is
11:31more of an introductory lecture to just
11:33give you an outline a brief outline
11:35about what all you're going to study uh
11:37and what are you going to uh we're going
11:39to discuss over the next three lectures
11:42give you a basic outline of the entire
11:44process
11:45then after the introductory lecture what
11:47we have is that we develop into the law
11:50so the next two hours after that we'll
11:52be discussing the laws involved you know
11:54and the company's act income tax act the
11:57competition act and the key provisions
11:59of these acts and how we use them as
12:02part of our merger and acquisition
12:04regime and you know what are the
12:05important so it won't be a very verbose
12:08thing where we are going clause by
12:09clause but just to give you an idea what
12:12are the important provisions that you
12:13should be aware of so tomorrow even if
12:15you're going for an interview and you go
12:17for an interview at a law firm and they
12:19ask you some you know abstract questions
12:22or something you should at least know
12:23what all you would have read or what you
12:25should have read so that also gives you
12:27an idea so then it's basically doing the
12:30legal regime
12:31then what we will proceed after that is
12:34that we will study about what is the due
12:35diligence process
12:37in any law firm when you will be going
12:39as an intern or as an a0 just as a
12:42fresher a lot of work which people will
12:44make you do is to do a legal due
12:46diligence now what is the legal due
12:48diligence illegal due diligence is
12:49nothing but it's a mere investigation
12:51exercise so if today i want to buy
12:54another company or if i want to buy the
12:56assets of another company
12:58i would want to know what am i buying
13:00because on paper everything sounds good
13:03are you telling me oh you're a very big
13:05company everything's hunky-dory there's
13:07no problem
13:08etc etc on paper everything is looking
13:10fine
13:11but this company has been running for 20
13:13years now in the past 20 years there may
13:15be a lot of non-compliances which the
13:17company has done
13:19some knowingly some unknowingly there
13:21may be some lapses you know as part of
13:23the legal process which the company has
13:25not followed
13:26as a result of which if i end up buying
13:28the company i will be liable to that
13:31penalty
13:32there may be some ongoing litigations
13:34against that company it's possible that
13:36somebody in some court in india has
13:38filed a say 100 crore case against this
13:42company or something of that sort which
13:44has not been brought to my notice so i
13:46will have my legal team conduct a legal
13:48due diligence in which they will check
13:50that if this has this company followed
13:52all the legal provisions has it the
13:54company been run as per law and what are
13:57the non-compliances
13:58and then looking at the quantum of the
14:00non-compliances if something can be
14:03remedied well and good if something
14:04cannot be remedied then i take a
14:06business risk so if my lawyers come and
14:09tell me that okay so this company it's
14:11been carrying out exports
14:13you know with these countries which is
14:15not allowed or this company has been
14:17doing this particular kind of business
14:20and has been raising foreign capital but
14:22under the indian law
14:24if you have raised foreign investment
14:26you cannot carry out this particular
14:28type of business so this is a breach and
14:29tomorrow if the rbi comes after you you
14:32can have a hefty penalty of up to say 30
14:34crores
14:35so then it's up to me to see that okay
14:37if the deal size is that if i'm buying
14:39this company for 3000 crores then maybe
14:4230 crores is not that big an amount for
14:43me and i can take that risk because what
14:45i see the advantages that i am seeing
14:47are much more then it obviously comes
14:49down to business risks that i'm taking
14:52but as lawyers and we as lawyers what
14:53our work is to project a picture to the
14:56client to tell them what exactly is so
14:59then we will discuss what it legal due
15:01diligence is what is the due diligence
15:03process how to conduct it
15:05what all do you look at in the company
15:06when you're conducting your due
15:07diligence because it's not like you're
15:09doing an audit you don't have to look at
15:11each and everything and it's not even
15:12possible to look at each and everything
15:14so what are the basic things that you
15:15need to look at
15:17due diligence process and then lastly
15:19you know
15:20how to draft a contract so you have your
15:23share purchase agreement you have your
15:24asset purchase agreements you have a
15:26business transfer agreement and you know
15:28all these other fancy words which you
15:29hear when you are talking about any
15:32corporate transaction but what is it so
15:35we will just discuss a brief outline of
15:37what all of the prominent clauses and
15:39provisions which these contracts have
15:41and how to go about that
15:43so the idea is that by the end of this
15:46eight hours lecture series that we're
15:48going to have you have a basic idea
15:50about everything that is there so that
15:52tomorrow if you are sitting for an
15:54interview or you are going for an
15:55internship and you are sitting when
15:58somebody asks you these questions you
16:00are not blank about it you know what is
16:02there
16:03ultimately what will happen is that like
16:05anything and like any aspect of law
16:08everything you learn
16:10is based out of practice
16:12as in when you start working you just
16:14need to have that confidence in yourself
16:16because when you start working and as in
16:18when you start working so obviously you
16:20pick up a lot of work as you go along
16:24not all of it is taught to us when we're
16:26studying in college you know it's very
16:27different from how it runs practically
16:30so the idea today is to give you a
16:31practical idea about how things work and
16:34what are the practical things which you
16:35need to look at
16:36from
16:38an m a perspective and because that is
16:40what you will be expected to do as a
16:42corporate lawyer if at all you tomorrow
16:44decide that you know this is the path
16:46you want to take
16:48now coming back so this code approved
16:51process that i was talking about so now
16:53when two companies they want to merge
16:54together they file an application they
16:56make an application and then they file
16:58it with the nclt
17:00so now that application will set up the
17:02various parameters of the merger who is
17:05getting how many shares what is the
17:06consideration at which the merger is
17:08taking place etc etc
17:10then the court asks the company to hold
17:12a creditor meeting and a shareholder
17:14meeting
17:15now obviously if you have creditors in
17:18the company anything that you're doing
17:20you will have to take their
17:23consent because obviously they owe you
17:25money they should be fine with the idea
17:27that your merger scheme deals with how
17:29their money is going to be repaid to
17:31them or if the company you're merging
17:33with has enough funds that tomorrow if
17:35you merge with them the company will
17:37have enough money to pay you back so you
17:40obviously the creditor so you need
17:41three-fourths of the creditor approval
17:43and you need three fourths so that's a
17:45little more than 75
17:47of your shareholders to approve the
17:50uh merger scheme and then once the
17:52scheme is approved by the shareholders
17:54and the creditors then the court also
17:57ultimately ends up approving the merger
17:58scheme and once the merger scheme is
18:00approved
18:01you can go ahead with the merger
18:04mostly in mergers they're cashless
18:06mergers which happen there's no monetary
18:08transaction which takes place
18:09ultimately what we do is that we provide
18:12shares in the merged company to the
18:15shareholders of the merging company so
18:16say if a
18:18if b is merging with a then ultimately
18:21you will only have one entity in place
18:23that is the company a
18:25so the shareholders of company b will be
18:27provided shares in the uh
18:30of company a so that way in the ultimate
18:33shareholding of company a they will also
18:35be shareholders so instead of giving
18:37them money they are provided with shares
18:39it's ca you know instead of in you of
18:41cash you get shares of that company so
18:43that's mostly how that merger regime
18:45will work
18:46and that is
18:48the merger aspect of it
18:50now before going back and acquisition on
18:53the other hand is when you end up buying
18:55either the shares of a company or the
18:58assets of the company all are assets so
19:00it may be possible that i may just want
19:02to buy that company but i don't want to
19:04merge it with my own company i want to
19:06run it as a separate company
19:08now i can do that because they i like
19:10really like the business of that company
19:11and i think that's a very clean and nice
19:13company which is in place so either i
19:15can buy out the entire company in which
19:17case i'll go
19:18i pay the money to the shareholders of
19:20the company and those shareholders of
19:22that company will sell the shares of
19:24that company to me correct
19:26now i have not gotten into the basic
19:28detail of what a share is and i can do
19:30that for the benefit of the first-year
19:32people so in a company the ownership of
19:35a company if i'm to say that i own a
19:38part of the company that ownership is
19:40part of these units which are there
19:41which are called shares
19:43so say if a company has hundred shares
19:46and i own one percent of that company so
19:48i will be given one share of that
19:50company
19:51right similarly if i was to own 10 of
19:54that company and that company only has
19:56100 shares i would be given 10 shares of
19:58that company
20:00so accordingly if i want to buy out that
20:02company i will have to buy the shares of
20:04the company from the shareholders the
20:06people who are holding those shares
20:08and then i make the payment to the
20:09shareholders and end up buying the
20:11shares of that company so that's an
20:13acquisition which takes place
20:15now sometimes it may be possible that i
20:17don't want to buy the entire company
20:20because say that company actually has
20:22been running for 20 30 years and i don't
20:24know what all is there in that company
20:26what all hidden costs are there i don't
20:28know if there are any disputes which
20:30that company has with people and it's
20:32not so i don't have that kind of an idea
20:34but i really like your business which is
20:36there i really like the fact that you
20:38have two factories which i recently did
20:40so i did a deal with somebody and that
20:42company had the same problem the
20:44promoters what they thought were very
20:45shady people who had a lot of
20:48different cases going against them and
20:50they had different different problems
20:52which were happening so that company did
20:54not want to buy out that entire company
20:55because they frankly did not know what
20:57they were entering into but they knew
20:59the fact that that company has two
21:01factories in uttarakhand which have
21:03those licenses to manufacture
21:07and they have plants and employees to
21:09manufacture wooden products which is
21:11very beneficial for them if they start
21:13if they would have opened this plant and
21:15they would have done everything from
21:16scratch it would have taken them five
21:18years but they can you know buy this
21:20ready-made from them
21:22instead of buying the company they
21:24decided that they just want to buy the
21:25assets of that company because then the
21:27zeroed in that all we need from this
21:29company is this these two factories
21:31which are there
21:32so fair enough they went for the acid uh
21:35asset deal
21:36now sometimes you instead of cherry
21:39picking these assets
21:40you can people what they do is and they
21:42buy the entire business of the company
21:44that is they buy everything on a going
21:46concern basis without actually cherry
21:48picking the assets that is when you
21:50enter into a business transfer agreement
21:52again everything
21:54in more detail as in when we progress
21:57so this is just to give you an idea
21:58about what a merger is as opposed to
22:00what an acquisition is so that's what
22:03mna
22:04latest trends of eminent in india
22:07no you know a lot of time when last year
22:09the pandemic hit us the idea was and
22:12everybody was really scared that you
22:14know how will this affect the corporate
22:16market you know there was a lot of
22:17uncertainty amongst the law students
22:19also and everybody in the fraternity
22:21even people who were practicing that if
22:24this adversely affects the market
22:26because if people and don't have money
22:28to buy companies if there's no mergers
22:30happening
22:31no acquisitions happening you know so
22:33how will it work out
22:35but
22:36contrary to everything we've had in fact
22:39you know uh katan as a law firm did one
22:42of its best business in 100 years so you
22:45know it was that good that in the past
22:47hundred years the company had not done
22:49that kind of a business which we did in
22:51the pandemic year because there's been
22:52so much business activity which has been
22:54taking place so left right and center
22:56people are coming they're buying
22:58companies and we're getting a lot of
22:59foreign investment you know people are
23:01showing uh more initiative than ever in
23:04buying companies obviously the idea is
23:06that these are big companies which have
23:08huge watches
23:10and you know they had uh saved money for
23:12a rainy day and when they saw an
23:14opportunity in the form of the pandemic
23:16that's you know saying that people may
23:18want to actually
23:20buy out these companies and they might
23:23get good rates for these companies so
23:24they've gone really aggressive and we've
23:26seen a lot of uh m a taking place over
23:30the past few years obviously the sectors
23:33which have seen a rise and these are the
23:36sectors which are obviously because the
23:38nature of the pandemic
23:40the sectors which have seen the most
23:42rise
23:43are your you know fintech sector at tech
23:47sector and technology why because
23:48obviously these are the sectors which
23:50got which got in the greater push before
23:52the pandemic uh this idea of digital
23:55india was mostly a slogan you know
23:57obviously there was a lot of push by the
23:59government but people are bit hesitant
24:01to accept the technology
24:03but such is the thing about time that
24:05you know this pandemic has actually
24:07forced everybody to adopt
24:10this entire digital regime so all these
24:13apps you have your fintech apps which
24:14are there from your paytm to phone pay
24:18to there a lot so many others which have
24:20come up you know their valuations have
24:22hit through the roof they've got so much
24:24investment because everybody is using
24:26them nowadays
24:27because everything was shut down for the
24:29longest period of time all our ed tech
24:32companies because everything is now
24:33online education today we are also you
24:36know i would have loved to be present
24:38physically and have this uh lecture
24:40series with everybody over there because
24:42i feel that somewhere more
24:44interactive but uh here we are so
24:47everything's happening online so these
24:49edtech companies they've gotten
24:51brilliant valuations a lot of them have
24:53become unicorns
24:57except for and obviously and then other
24:59iet companies which are there
25:01so you know we've seen a great amount of
25:03business which is happening so that's
25:05been very good and those are you know in
25:07the m a sector which we are seeing
25:10now what is the journey of an m a
25:12transaction and where in this journey do
25:15we as lawyers fit in
25:17now
25:18once we discuss this we'll take a pause
25:21and we'll actually ask for questions and
25:24that you know people are the initial
25:25questions which people have so those can
25:27be taking place because like aaron she
25:29said the idea is to keep it as
25:30interactive as possible it's it's for
25:32you to clear all your doubts which you
25:34have and
25:36no doubt is right or wrong or you know
25:38important and not important every doubt
25:41is the doubt so just ask whatever you
25:43want to
25:44so what is this journey of an m a
25:48now if you see
25:49before the lawyers come into place a lot
25:52of commercials have already taken place
25:54now if today i have a company
25:57firstly i need to have an acquisition
25:58strategy and an acquisition criteria now
26:01say as part of my business team sitting
26:03in a company you want to you decide that
26:06you want to expand your business now if
26:08i you want to expand your business there
26:10are two three ways of going about it you
26:13know that you your company currently is
26:16you are market leaders you've done
26:17brilliantly well within north india so
26:20say in delhi or in up and all these
26:23states and punjab you have a very good
26:25customer base you have a good supply
26:27chain of over there of distributors who
26:29are helping you sell your products to
26:31other people
26:32except so you've done value for yourself
26:34within these two three places
26:36now you want to expand as a company
26:38now for that expansion there are two
26:40ways to go about it either you can start
26:43from a scratch
26:44enter the certain market start from
26:46scratch find new suppliers for yourself
26:49build customer relations you know try
26:51and make a brand out of yourself except
26:53for except people do that but that takes
26:56time for you to expand into a new market
26:58because what you will need is you need
27:00to get to the end customer you need
27:03supply chains you if you set up a
27:05factory over there you need to you know
27:07figure out a local procurement of raw
27:09materials etcetera etcetera there is a
27:11lot of things which happen which go into
27:13it
27:14but now what so that's one option which
27:16is a time consuming option the other
27:18option which you have is that you have
27:20enough funds and you've made enough
27:22profits that you maybe and maybe if you
27:24actually raise some more money you feel
27:27that there is a competitor which you
27:29have a company which is doing exactly
27:31the same business in the southern region
27:34you are bigger than that company you
27:36have more money but if you buy out that
27:38company
27:40overnight you get trained employees
27:43you get a proper factory premise you get
27:45plant and machinery you get their supply
27:48chain you get their distributors so all
27:51you need to do is buy out that company
27:54correct
27:55so that is your acquisition strategy so
27:57you need to figure out what is the idea
27:59what are you looking for and what are
28:01the criteria you have so the criteria in
28:03this case is that you want to expand to
28:05new markets so the potential
28:10targets that you'll be looking at to buy
28:12out are the targets which actually give
28:15you those things so which which have
28:16strong presence in that area which have
28:18a good customer base which have good and
28:21strong supply channels which are there
28:23etc
28:25then obviously like a third pepsi is
28:26searching for the target based on the
28:28criteria
28:29and now once you've found the target
28:31this acquisition planning how do you go
28:33about it what am i doing am i emerging
28:36that company with myself
28:39as an entity what are the advantages and
28:41what are the disadvantages of that
28:43am i
28:45thinking of buying out that entire
28:47company from its shareholders again what
28:49are the advantages or disadvantages of
28:50that that needs to be thought of
28:53then what happens is that is it that all
28:56i want is just to buy a few assets out
28:58and i don't need anything else
29:00so then your acquisition planning takes
29:03place now that's fine now i figured out
29:05that i want to buy out this entire
29:06company through an acquisition share
29:08purchase agreement is what i'll do i'll
29:09buy out their entire shares of their
29:11company
29:12then comes the valuation stage so then
29:15the commercial people this all sit on
29:17the table they come and you know this is
29:19decide what are the commercials of the
29:21deal
29:22the commercials of the deal are decided
29:24you come to a value that okay finally
29:26i'm going to buy this company for 100
29:28crores basis you because the target
29:30company will give you projections to say
29:32this is what we are doing this is our
29:34this has been a business cycle for the
29:36past five years this is these are the
29:38projections because in the next 10 years
29:40we feel that if you put in money or if
29:42you buy out this company with the kind
29:44of money you have we can really expand
29:46this
29:47then these are this valuation happens
29:49their negotiation states take place
29:51now it is when this takes place that you
29:54mostly have a term sheet in place
29:57basically the parties sit and they jot
29:59down 10-15 strong commercial points on
30:02the basis of which they are happy to go
30:03ahead and do the deal
30:05this is at this stage
30:07of the deal when you know all this
30:09background work has taken place then the
30:11lawyers come into the picture
30:13now what these people will tell you
30:14these business people will tell you is
30:16that okay fine we've discussed we know
30:18that we want to buy this company and we
30:20want to buy this for 100 crores that's
30:22it
30:22now you as lawyers figure out do a due
30:25diligence
30:27figure out what is wrong with this
30:28company are there any potential
30:30roadblocks in this company because say
30:32imagine that you are buying this company
30:34because that company has two factories
30:36correct and those two factories are two
30:38plants are there and you want to buy it
30:40because once you buy those factories of
30:42wired those plants you will know you can
30:44really expand and that will really help
30:45you increase your production
30:47but if today as a lawyer when i'm doing
30:49the due diligence i find out that that
30:52property in which those two factories
30:54are
30:55firstly they are on disputed land so
30:58there is already a legal case which is
30:59going on in relation to those two
31:01factories
31:02so there is a dispute which is going on
31:05and it is that some indigenous people
31:08have made a claim that that land
31:09originally belonged to them
31:11so there is a lot of dispute going on as
31:13to the ownership of that factory
31:16now
31:17again and now my hundred crore valuation
31:20was mostly based on the fact that those
31:21two land is acquired by you is owned by
31:24you and that that will help me expand
31:26but today if i find out that you don't
31:28have proper title to that land and it's
31:30under dispute then it changes the
31:32scenario because then if tomorrow i
31:34actually need buy out end up buying that
31:36company and i lose the case in court i
31:39will not have those two factories with
31:41me so again that adds a risk to it so
31:43that's when lawyers are doing they try
31:45to figure out what all are the loopholes
31:47what are the problems in that company so
31:50that's when the due diligence takes
31:52place
31:53then once the due diligence takes place
31:55there are a lot of concepts now bases my
31:58findings of these due on the due
32:00diligence process
32:01we end up drafting the agreement
32:04so either it's a shared purchase
32:05agreement in this case because we want
32:07to buy out the company or if the
32:10client would have decided that they want
32:12to go either for a share purchase
32:14for an asset purchase or a business
32:17transfer
32:18we would have gone for that and we
32:20delve into what makes you decide if an
32:23asset which is better than a business
32:25transfer
32:26as compared to
32:28buying out the company in a bid
32:31so then basis that we end up drafting it
32:33basis that due diligence
32:35whatever we found out so if i found out
32:37that say the company has not been making
32:39its filings with the labor authorities
32:41in india or if the company had say more
32:44than 100 employees and it was supposed
32:46to give them these many leads in a year
32:48but as per law and they've not been
32:50given those many leaks so we can i ask
32:52them to
32:53rectify those mistakes as part of
32:56conditions precedent saying that these
32:58are the 10 faults in your company if you
33:00can rectify them within the say 30 to 60
33:02days
33:04fine then we'll end up buying the
33:05company
33:06or sometimes you feel that you know even
33:08after those faults have been rectified
33:10the government can still come and find
33:12if i you know find you for this and put
33:14a penalty on the company in which case
33:16you end up taking an indemnity provision
33:18because see the idea of the idea is that
33:20the chance of that happening maybe say
33:23100
33:24that the government can come and sue you
33:26for it but still there is a chance so
33:28you end up taking an indemnity saying
33:30that if tomorrow we are sued for this by
33:33the government and we have to pay the
33:34government 100 crores you will repay us
33:37that hundred crores so that is an
33:39indemnity which you take from that so we
33:41do that
33:42then once the purchase and sales
33:44contract is done then the again the
33:46business uh has to decide how do they
33:48need to finance it and are they taking a
33:50loan or how are they financing this
33:52transaction basis which again
33:55your financing takes place if they're
33:57taking a loan to actually buy out the
33:59company then we end up have help them in
34:02making the loan documentation
34:04and then obviously finally once the
34:06merger and acquisition takes place the
34:08implementation part which is again a
34:09commercial process
34:11so this is how lawyers fit into the
34:14entire m a d process so you know that
34:17the drafting because even when you're
34:19drafting those contracts when you're
34:20drafting a share purchase agreement or
34:22say if it's not a hundred percent
34:24acquisition but nearly a fact that i
34:26view what eighty percent of the company
34:28so you own the majority of the company
34:30but twenty percent you still kept for
34:32the promoters telling them that listen
34:34we know that your startup or your
34:36company is very good
34:38but it is also very good in this plan
34:40that you've told us this five-year plan
34:42that you've told us very good we buy
34:44eighty percent of the company you remain
34:46fit for 20
34:48okay and
34:50you help us achieve these targets in the
34:52next five years and once you achieve
34:54these targets in the next five years and
34:56if you are able to achieve these targets
34:57in the next five years we will pay you
34:59an extra 100 crores and buy out your
35:02remaining twenty percent so even if i
35:04have paid hundred crores for the first
35:05eighty percent if you're able to meet
35:07these targets in the next five years we
35:09pay you 100 crores for the remaining
35:10twenty percent and buy you out so you
35:13keep them in the game
35:14now when say so the idea is that when
35:17you have other shareholders also in the
35:19company you have something called a
35:20shareholders agreement in place
35:22now that shareholder agreement
35:25has to have all these terms and
35:26conditions which you have and the
35:28negotiation so that's where a lot of
35:31negotiation takes place because that
35:33sets out the governance structure of the
35:34company that who will have what say in
35:36the company can those 20 shareholders
35:40stop us from doing anything or what are
35:42the rights which those 20 shareholders
35:43will have because those promoters may
35:46say that okay listen that because we if
35:48you want us to run the company for the
35:50next five years and give you the results
35:52then we want a free hand
35:54so we want that we should be able to
35:56take these hundred decisions of the
35:57company without coming to you every time
35:59because you should only be concerned
36:01about the result
36:02but obviously if we are still tomorrow
36:04taking a thousand rupee loan will
36:06obviously you need your approval we need
36:08you everything for that but otherwise if
36:10it's something within a small amount of
36:12money please give us a free hand to do
36:14whatever we want
36:16so that we can achieve our goals so
36:18there's a lot of negotiation which
36:19happens about the rights the legal
36:21rights in the information rights
36:24basically and risk protection
36:25perspective because if you're buying a
36:27company and as a lawyer if you are
36:29representing a buyer in a company you
36:32have to be very sure
36:33that you are doing this risk mitigation
36:36and that you are making your buyer if
36:40you know have the least risk when he's
36:42buying that company because this simple
36:44logic of any acquisition is
36:47that the risk and the liabilities of
36:49that company before the date you're
36:51buying them out
36:53is on the sellers
36:54and after the day you buy the company is
36:56on you
36:57so if there is any case any penalty any
37:00liability by the government you know
37:02anything which the government comes
37:04after you which relates to something
37:07which was which had taken place before
37:08the date of purchase that should be on
37:11the seller and then we as lawyers have
37:13to make sure that the documents clearly
37:15state this out so there's a lot of
37:17negotiation and everything which happens
37:20so yeah this is how a lawyer as a
37:22corporate lawyer you fit into the entire
37:25mna cycle
37:27now we can take a few minutes to take a
37:29few questions before we proceed because
37:31otherwise this becomes a monologue
37:34have any of you done an internship
37:36before in corporate law firms do you
37:38know how animal process works have you
37:41seen anything happening do you have any
37:43questions about what all we've discussed
37:45till now
37:46things maybe you want to learn
37:48or you know for you want me to discuss
37:51in the next
37:52you know over the next few days a couple
37:54of days
37:55yeah
37:57so
37:58anyone who has a question can raise
38:00their hand and we can like they can
38:02switch on the mic so they can drop the
38:03question in the chat box either way
38:05works
38:06uh hello sir good morning uh so you
38:09mentioned about the term sheets my
38:10question to you is whether these term
38:12sheets are legally enforceable or not
38:14are they legally binding or what
38:16so a lot of times how companies wanted
38:19commercially is that they go for a
38:21non-binding term sheet
38:22so how we will structure a term sheet is
38:24that we will say that this is a
38:26non-binding term sheet it does not mind
38:28the parties to go as per the terms of
38:30this term sheet and this is just a
38:32commercial framework for everybody to go
38:34about it
38:35but if you commercially want and the
38:38intention is that no we've sat on this
38:40table for five hours to come up with
38:42this term sheet so this has to be a
38:44binding document
38:46a lot of times you can put it in the
38:48term sheet that this is a this the terms
38:50of these term sheet will be binding on
38:52the parties and that's what you
38:53contractually agree
38:55but mostly and typically the customary
38:58practice is that term sheets are
39:00non-binding in nature
39:02because the idea is that at the time
39:04when we are discussing purely numbers a
39:06lot of it is just based on
39:08you know random projections and a lot of
39:10these startups they'll come with you
39:11with these 10-year projections to say
39:13that if you put 100 crores in us or 10
39:15crores or 50 crores or whatever amount
39:17we can convert it into 500 crores which
39:19sounds very good on paper when you're
39:21discussing it but as and when your
39:23diligence starts now diligence is not
39:25only legal it's a financial diligence
39:28also because one thing is that you
39:30showed me papers the other thing is that
39:32when i decide to buy the companies i
39:34actually have my finance people and my
39:36accountants look into your books to see
39:38that if those figures are correct or not
39:40so a lot of things take place or in a
39:42lot of things may come up going down the
39:44line basis my findings as part of the
39:46due diligence in which case i may want
39:49to revise the price or i may want to
39:51revise the terms
39:53and it's possible that you know in 50 60
39:55days today and finding this deal to be
39:57lucrative but say 560 days down the line
39:59things change and i don't want to go
40:00ahead with it so a lot of time what
40:02happens is that you enter into a term
40:04sheet which is non-binding in nature the
40:07term sheet will specifically mention
40:08that this term sheet is non-binding in
40:10nature
40:11and you have an exclusivity period that
40:14post the signing of this term sheet for
40:15the next 60 days the parties will try to
40:17negotiate contracts basis this term
40:20sheet and if something reaches a logical
40:23conclusion well and good otherwise the
40:25deal goes off
40:27so yes so does that answer your question
40:29yes sir thank you so much thank you
40:33anyone else
40:39okay
40:42uh
40:43so i think we can move forward and yeah
40:45we can move forward if there is
40:47oh so we have i think someone has raised
40:49a hand if you can just take it up yes
40:52you could and nude yourselves in
40:56um yes thank you for your address sir
40:58i just want i had one question so after
41:01all the negotiation takes place
41:04and the m a process it is uh being close
41:07to all the documents that are signed to
41:10the end of this entire process to
41:12finalize everything
41:16now if we are thank you for your
41:18question now if we are buying the
41:20company completely if i am acquiring all
41:23the shares of the company
41:25in that case we will enter into what you
41:27call a shared purchase agreement
41:29that share purchase agreement will set
41:31out
41:32on an spa as you call it
41:34i will set out the number of shares that
41:36i'm buying
41:38what are the conditions pieces subject
41:41to which i will buy those shares
41:43what are the obligations of the party
41:45as you as a seller are selling me your
41:47company as a shareholder if tomorrow i
41:50suffer any loss because anything which
41:52is false which you've told me
41:54then how who will pay for it
41:56and how much will you pay for it
41:59you know it carries out all these things
42:01so because a lot of times as a seller
42:03you will say that listen you have paid
42:05me 100 rupees to buy this company
42:07so if tomorrow you cannot claim anything
42:10more than that from me because that's
42:12what you paid for
42:13so my liability under this agreement is
42:16limited to the amount that you've paid
42:17me so tomorrow you can't come and tell
42:20me that the government of india is
42:21fining you 200 crores and you know
42:24levied a penalty of 200 crores on you
42:26you can't come after me for all those
42:28200 crores i want protection and i want
42:30my peace of mind so if you are paying me
42:32this amount of money this is where my
42:34limitation of liability stands
42:36obviously this is highly negotiated
42:39because the buyer will want that you
42:40bear everything that is there all the
42:42loss that is there and then you as
42:44lawyers or for the sellers will have to
42:46push back and then commercially
42:47negotiate a common ground
42:50but yes so in that case you have a
42:51shared purchase agreement
42:52now i imagine if i'm not buying the
42:54company and i'm just buying a few assets
42:56of your company
42:58for example i'm just buying two ip see
43:01your company has developed a lot of
43:03softwares but you have two ip which you
43:05generated or two you know uh recently i
43:07did a gaming transaction and that
43:09company you know it was it made games
43:12two of which uh titles were extremely
43:14popular so maybe you just want to buy
43:16those two gaming titles and nothing else
43:18from the company so you go for an asset
43:20purchase
43:21or you like the entire business of the
43:23company as a going concern everything
43:25you know lock stock barrel like it is
43:27there
43:28but you don't want to buy the asset you
43:30just you don't want to buy this company
43:32as a whole because you don't know about
43:34the historic liability but you still
43:36want to buy each and every asset of the
43:38company and all the employees and
43:39everything as it is
43:41in which case you enter into a business
43:43transfer agreement where you buy the
43:45company as a going concern
43:47so that in that case it's a business
43:49transfer agreement or you have an asset
43:51purchase agreement or you have a share
43:53purchase agreement
43:55these are cases where i'm buying out the
43:57entire company now imagine that in
43:59addition to a share purchase agreement a
44:01lot of times like i was discussing you
44:03may also have a shareholders agreement
44:06now why do i have a shareholders
44:07agreement because it's possible that
44:10even after i'm buying the majority of
44:12the shares of the company a majority is
44:1451 or more okay 50 or more basically
44:18even if it's 50.1 i own the majority of
44:21the companies if i'm the change in
44:22control and i'm buying a majority of the
44:24company but i may not buy the entire
44:26company so in which case there are more
44:29than you know there are different people
44:30or different investors on board in that
44:32company you enter into shareholders
44:34agreement setting out how will the
44:36company be governed because obviously
44:38there are different people with
44:39different ideologies different mindsets
44:41were sitting in the company and you will
44:42have disputes today i'm buying the
44:44company everything's hunky-dory
44:46everything is good fair enough but
44:48tomorrow if you end up fighting with
44:50each other you should have a legal
44:52document which says how to go about it
44:54tomorrow it should not be that if i uh
44:57want to start a new business i am a
44:59majority shareholder and i want to start
45:01a new business and i want to stop the
45:03business which is currently being run
45:05so that should not be the case that the
45:08minority shareholder the 30 shareholder
45:10has no say in it whatsoever so you can
45:12legally negotiate under the shareholders
45:14agreement your right that okay you run
45:17the company as as you want i am not
45:20interfering you're the majority
45:21shareholder
45:22but these are the 10 items
45:25which i which are generally called as
45:27affirmative voting items or reserved
45:29matters if you are doing any of these 10
45:31items please take my permission
45:34because obviously i am in this company
45:36because your company is making cars
45:39or your company is because your company
45:41is making steel or bricks or whatever if
45:44tomorrow you are closing down that
45:46business and you're starting a new
45:47business
45:48i will you will have to take my
45:50permission because that is directly
45:52linked to my value in the shareholding
45:54value in the company because this
45:55company is a hundred crore or thousand
45:57group company because you're making cars
45:59but tomorrow if you stop making cars and
46:01do something else then i may lose the
46:03value that i have today in which case
46:06please take my permission or if tomorrow
46:08you are taking a hundred thousand crore
46:09loan or whatever amount loan you're
46:11taking which is a very excessive loan
46:13and that may lead to the company going
46:15bankrupt
46:16you have to take my permission so you
46:18can legally negotiate a lot of things
46:20regarding the governance of the company
46:21and we will discuss when we discuss
46:23contract drafting in the final uh
46:25session we will discuss the outline of
46:28what all the basic clauses that you need
46:29to look out for in all these documents
46:32but yes so these are the different types
46:34of documents you have so you have a
46:35shared purchase agreement you have an
46:37asset purchase agreement you have a
46:38business transfer agreement and in case
46:41there are if you're not buying 100 of
46:43the company and there are some other
46:44shareholders there is also a
46:46shareholders agreement so that's from an
46:48mna perspective
46:49so that is that
46:52thank you and i think there was one more
46:54person
47:08i had actually read an article about a
47:10simple agreement for future equity which
47:12is being uh
47:14used in the us for new and up and up and
47:16coming startups how they work and how
47:19they are being used as a convertible
47:20share so i was wondering if
47:23there is a similar provision in india
47:24also for new startups
47:27basically
47:29for future equity so that is when i am
47:31giving a loan right now to the company
47:33and tomorrow i can convert it into
47:35equity
47:43what we have started is that even in the
47:46foreign exchange regime we have
47:47something called convertible nodes which
47:50you can give now it obviously
47:51convertible notes means that i'm giving
47:53you a loan right now for certain amount
47:55and tomorrow you can convert that loan
47:57into equity
47:58and even and domestically also every
48:01loan you can enter into contractually at
48:04the time of giving the loan a term which
48:06says that you can convert that loan into
48:08equity
48:09companies act says that if you have a
48:11provision section 62 of the company that
48:13says that if you have a provision which
48:15says that your loan can get converted
48:17into an equity you require a special
48:19special resolution to be passed
48:21initially at the time of giving that
48:23loan to get that condition passed
48:25approved
48:26but in india also you can do it but uh
48:28frankly as a market practice that's not
48:31what startups want startups want because
48:34see see your startup and you are an
48:36up-and-coming startup in addition to the
48:38money you would also want a good name
48:40attached to you so you would want this
48:42big so you would want a soft bank to if
48:45be an investor on your vote because if
48:47they're an investor they're sitting on
48:49your board of directors you know they're
48:50part of the company they bring in a lot
48:52more for you and it adds a good brand
48:54value for you so in india currently the
48:57idea is that when people they want to
48:59raise funding and they want to do
49:01startups they go for pure funding only
49:04they they were there ready to give you
49:05so the instruments which they give you
49:07may vary now not every time they will
49:10give you an equity share in the company
49:12i may end up giving you a debenture in
49:14the company then a dementia is a convert
49:17convertible dementia ccd in the company
49:19or what you call a preference share
49:22both of these you can convert them into
49:24equity shares at a future point of time
49:26but obviously but they give them the
49:28holders the right to vote and also all
49:30those voting rights and all can be
49:31agreed to but in yeah but in india right
49:34now i think convertible notes and giving
49:36it as a pure loan as a concept is not
49:38that prevalent in indian startups the
49:40people look for pure equity when they're
49:42going forward the concepts are there
49:45legally you can structure it as a loan
49:47which gets converted into equity or you
49:49can give a convertible note or a warrant
49:52which can get converted into equity
49:53going down or it is possible in which a
49:56lot of companies in the largest scale
49:58also do is that you can take ncds
50:00instead of a loan and those so ncds
50:02although do not convert into equity it
50:05has to be a ccd a ccd is a compulsory
50:07convertible debenture and nct is a
50:09non-convertible dimension so a
50:11non-convertible dementia obviously
50:12cannot be converted into equity into the
50:14shares of the company but if you i've
50:16issued them a ccd that is a
50:19compulsory convertible debenture that
50:21will convert into equity shares of the
50:23company
50:24similarly there are other instruments
50:25which are there but the most prevalent
50:27form of funding is pure funding which
50:29happens we don't have a concept of i
50:31mean although legally you can do it but
50:33it's not something which is typically
50:35done
50:36okay so like you mentioned regular
50:38funding so um as for my understanding it
50:41would be applicable the valuation of the
50:43company will be approximately done but
50:45for your startups
50:47so for new startups like the article
50:49that i had it mentioned that uh safe
50:51mode or the simple agreement for future
50:52equity it is used for those startups
50:55which cannot be valued approximately so
50:58the companies prefer to buy uh
51:00convertible notes and then they after a
51:02few years down the line then they
51:03convert them into future equity so
51:05that's what that's what i did
51:07so that's right you can do it see it's a
51:09way of structuring a transaction you can
51:11do it and i can give you as a loan right
51:14now or i can give you a convertible note
51:15right now with the conversion being
51:17linked to the fact that the company
51:19achieves a certain amount of valuation
51:21at a future date
51:22i can enter into a ccps with you i can
51:25say a convertible preference share with
51:27you or any convertible instrument with
51:30the idea that if your company in the
51:32next five years
51:33goes for a new round so you're raising a
51:36new round of funding and at that round
51:38of funding if the valuation is more than
51:40an x amount of money my shares will also
51:42convert in that amount or a certain
51:45discount to that amount so you can
51:47structure it as that way a lot of times
51:49what happens in india if you go to
51:51valuations right so we
51:53follow this dcf method of valuation or
51:56projection based method evaluation where
51:58a lot of times these valuations are
52:00based on the projections which you're
52:02making so obviously one thing is these
52:04past
52:04valuations which you have business which
52:06you've done and one thing is the future
52:08projections which you have a lot of
52:10these startups these valuations which
52:11are there in india and which is a
52:13problem is that that's why a lot of
52:15these startups they go bust and you know
52:17and they go bankrupt also and a lot of
52:19these investors lose out on their
52:20investment is that these valuations are
52:22all made in air because today you have
52:25just have a concept in place and then
52:27you're raising money and funding basis
52:29that so the valuation evaluation while
52:32you may put a lot of science behind it
52:35frankly ultimately it's just the faith
52:37which you have in the promoters of that
52:38company and the faith in their vision
52:40because uh see like you said if your
52:43company has been made just yesterday and
52:45it's just a plan
52:47but you know that okay
52:48or someone very good is backing this
52:50company they've just made it yesterday
52:52but maybe it's a very good company or
52:53maybe these people are the five founders
52:55of you know this very huge startup they
52:57sold that startup and now they're
52:59starting a new startup so you know maybe
53:01the idea is that this company right now
53:04has nothing on paper and there is no
53:05future projection but if they are asking
53:08for this valuation you can sometimes put
53:10in money basis that only bases the
53:12credibility which they have but yes if
53:14you don't have that credibility in those
53:16founders and you still want to play a
53:17wait and watch game
53:19like in a transaction which i've done
53:20very recently what we did was that we've
53:23linked the conversion price to the price
53:25at the next round
53:27so in the next round so we've told them
53:29that if in the next three years
53:31you are able to raise a hundred crores
53:34or more amount at a particular valuation
53:37so if you post money if your valuation
53:39of the company at that time is 1100
53:41crores and more
53:42then our conversion rate for that
53:44convertible notes that we have or the
53:46ccps which we have
53:48will be linked to the price at which you
53:50are raising the funding because at that
53:52time you would have done three years of
53:53work you will have a very uh you know
53:56probable valuation at hand
53:58we linked it with that so you can
54:00actually structure it in a lot of ways
54:02basis of what is the commercial
54:03understanding that you have
54:05a lot of times you may not want to link
54:08it to another valuation is because if
54:10i'm actually linking it to another
54:12valuation today you can buy 50 of this
54:15company
54:16your shares for at a lower valuation
54:19because the company has just started but
54:21if i'm linking it to a future round of
54:23funding or a future valuation the
54:25company may do brilliantly well in the
54:26next three years and if your conversion
54:29at that point is linked to a very high
54:31rate of
54:32valuation which the company has been
54:34able to achieve three years down the
54:35line even at a discount
54:37you will your number of shares that
54:38you'll end up getting will be lesser
54:41because if today if you would have
54:42directly bought the equity at 100 rupees
54:45per share because the company is just
54:46starting out and you can get a lower
54:48valuation but you want to play a wait
54:50and watch game and say that three years
54:51down the line whatever is the valuation
54:54i may you know take a
54:56say you give me the shares at that
54:58valuation with the 10 20 discount now
55:01that company may do brilliantly well in
55:02the next three years and that valuation
55:05means skyrocketing in which case you
55:07could have bought 50 of that company at
55:1050 crores at that time but now that
55:13company valuation is close to 1000
55:15crores and even at a 20 discount at 800
55:18crores you're hardly getting a few
55:19shares in the company so it's a
55:21commercial risk again all these
55:23decisions end up being that what is your
55:25ultimate goal are you in it for a
55:27strategic investor where you want to
55:29play long term in the company in which
55:31case you go all in or are you nearly as
55:34you know financial investor that you
55:36want to just make a quick buck that in
55:39the next four five years you just make a
55:41profit on your investment and just get
55:42out of the company so it depends on a
55:44lot of that commercial considerations
55:46the amount of trust you have on the
55:48promoters the people who are running the
55:49company and yeah that's how you make
55:52these decisions basically but yes i mean
55:55just to answer your question it's not an
55:57alien concept in india you have that
56:00and people do structure it like that
56:02maybe not use the exact terminology that
56:04is used in the us but some form of that
56:07conceptually is already being done in
56:08the indian markets but again that's not
56:11the preferred way
56:13forward
56:15okay answer how would uh due diligence
56:17work in this
56:18new startups regime
56:21but it's the same right so in a new
56:23startup regime basic due diligence so
56:25i'll do but if you've just opened the
56:26company today then what i would need to
56:29see is that fine you may not have any
56:31historic liability but
56:33still as part of the due diligence if
56:35you want to run this company now if you
56:37have started a company in a particular
56:39sector say in an insurance sector or
56:42some other sector where you require some
56:45very specific licenses in order to run
56:47your business then as part of the legal
56:49due diligence it is my job to make sure
56:51that you have all the licenses in place
56:53you have all the permissions in place to
56:55actually undertake that business so that
56:57tomorrow it is not that you've told me
56:59that you know you have and say sometimes
57:02if i'm buying this company from you
57:04because you have this patent or this
57:05copyright or intellectual property or
57:07trademark that you know which is very
57:09good and exclusive so i just need to
57:11make sure that you're the actual owner
57:13of that trademark you're the actual
57:14owner of that intellectual property as
57:16part of my diligence to save the assets
57:18which i'm buying or which my client is
57:20buying those are clean assets which to
57:22which you have clean
57:24title so that becomes very important
57:26on obviously as a new company have you
57:29taken any loan or something which
57:31prohibits me from buying the company
57:33because a lot of times if you've taken a
57:35loan to start your company the creditor
57:37may have as part of the loan
57:39documentation a term which says that
57:41without their consent you cannot do
57:43anything with the company and you cannot
57:45sell out the company
57:47so then obviously i need to make sure
57:48that there are no impediments in me
57:50buying the company that tomorrow and
57:52it's not like you know because you're
57:53starting the company today you've gone
57:55around promising to people that you know
57:57right now help me set up the company and
58:00as and when i make something big i will
58:02give you 10 shares i will give you 20
58:04shares you know so you've been going
58:06around
58:07just distributing your shares of the
58:09company orally promising it to a lot of
58:11people so i don't want it to be a case
58:13that tomorrow buy your company
58:16and we keep on getting hundreds of
58:17claims from people so again the legal
58:20due diligence even for a new company
58:23you have to make sure that everything is
58:24in place for them to actually expand and
58:27go what they're saying so what they're
58:29telling you on paper should be what is
58:30there actually so you still have to do
58:32that maybe yes it makes our job and life
58:36much easier because there's no historic
58:37non-compliance that we have to look at
58:39but you would still have to figure out
58:41what all is there in the company and do
58:43they even have things which they're
58:45claiming for to carry out that
58:46particular type of business
58:49okay so thank you so much thank you so
58:51we have two more questions
58:55and then suresh you could go
58:58yes thanks arushi um
59:00so so my question um is related to you
59:04know the practical aspect of how a m a
59:06lawyer would work um
59:08so what are the
59:10what are the teams within an
59:11organization and many lawyer would
59:13closely work with
59:14for example
59:16during auditing process uh the auditor
59:19might need to contact different teams
59:20within the organization or the client
59:22for information
59:23um
59:25yes that's much right so i'll tell you
59:27so how it works is that as part of when
59:29we're working with a company now in a
59:32transaction we mostly work with the
59:34finance team of the company and their
59:36legal team a lot of these companies have
59:38announced legal teams so they will have
59:40an in-house council so their dc or
59:43general counsel and all of that company
59:44so obviously we work very closely with
59:46the legal team but we also work very
59:48closely with the finance team of the
59:49company and the people who are calling
59:51the shorts because like i said a lot of
59:54times when you're having discussions
59:56with your clients a lot of times when
59:58you're having these uh you know this
1:00:00entire discussion on
1:00:02uh what to do how to do about it you're
1:00:05having discussions with the other
1:00:06lawyers not everything can the lawyers
1:00:08legislate among themselves you require
1:00:10financial sign-off because like i said
1:00:13there may be a particular risk which is
1:00:15a 30 crore risk so for me on paper
1:00:18that's a huge risk that is there but
1:00:20then i will have to discuss it with the
1:00:22financial team of that company which may
1:00:24say that listen that we are expecting
1:00:26that this company will give us say
1:00:28i don't know
1:00:29300 crore per annum business or whatever
1:00:32you know amount of huge number business
1:00:35over the next couple of years so it
1:00:37doesn't matter that even if there is
1:00:39this risk of 30 crores we still want to
1:00:42go ahead so let don't make it a huge
1:00:44deal out of it if they're ready to bear
1:00:46it as in specific indemnity and pay us
1:00:48for it
1:00:49well and would even if that's not the
1:00:51case we don't care in which case
1:00:53obviously they've taken a commercial
1:00:54decision and they're ready to move ahead
1:00:56with it
1:00:57so you don't bother so we obviously have
1:00:59to uh
1:01:01interact with the finance team of the
1:01:02company in the legal team of the company
1:01:04also another department through which we
1:01:07closely will be interacting is the hr
1:01:09department of the company a lot of times
1:01:12a lot of your labor compliances in a
1:01:14company are done by the hr department of
1:01:16that company and not just by the you
1:01:18know legal team of the company when
1:01:20you're on boarding employees you have to
1:01:22do a lot of paperwork you have to every
1:01:26you know under the law you have to pay
1:01:28employee state insurance your esi your
1:01:31epf a lot of contributions need to be
1:01:33made so these all these
1:01:36labor law related compliances and
1:01:37sometimes they're under the hr
1:01:38department so with that department you
1:01:40have to coordinate a lot
1:01:42so mostly this only so your finance
1:01:44department your hr department
1:01:46and your
1:01:48you know finance hr obviously the legal
1:01:51team which is there and then sometimes
1:01:53there are issues which even they cannot
1:01:54take a call on and you know say today
1:01:57we've been negotiating this deal for the
1:01:58past one month and one for the past you
1:02:00know two months and now we've just come
1:02:03down to one or two very critical points
1:02:05which lawyers on both sides are not
1:02:07willing to give up
1:02:08i tell this finance team over here that
1:02:10listen this is huge if tomorrow
1:02:12something happens the government of
1:02:14india can change its policy and if they
1:02:16come after you you
1:02:18you know you may end up jeopardizing
1:02:20your other businesses as well because
1:02:22then the government will have an inquiry
1:02:24against this one business and as part of
1:02:26it they'll go and dig into your other
1:02:28businesses as well
1:02:30so it's very problematic for you so then
1:02:32the finance team may not be able to take
1:02:33the decision themselves because i've you
1:02:35know taken it to that level and
1:02:37similarly the other side lawyers may say
1:02:39that no no this is highly unlikely that
1:02:41the government will level do this so we
1:02:43are not ready to take the risk for this
1:02:45because it's highly unlikely that the
1:02:46government will ever do this so the
1:02:48lawyers are not able to reach a
1:02:49consensus the finance teams also because
1:02:51i've raised it to such a level saying
1:02:53that you know if you end up doing this
1:02:54or if you say this is okay it may lead
1:02:56to a huge loss for you
1:02:58they're also not doing it so then
1:03:00ultimately then we have to then have a
1:03:02call with the main management of the
1:03:04company the ceos the cfos or who
1:03:07whosoever is calling the main shots of
1:03:08the company to figure out and when
1:03:11people that's called a principal level
1:03:12decision has to be taken
1:03:14for something but yes in an organization
1:03:17from a day-to-day legal perspective you
1:03:19will be dealing with their finance teams
1:03:21their hr teams and obviously the legal
1:03:24in-house team which they have
1:03:26thank you sir
1:03:28oh so if at this point if i could just
1:03:30ask a question for the benefit of the
1:03:32first year especially yes so in the
1:03:34practical sense how long is it that a
1:03:37merger processes for so for example what
1:03:39is the cycle that is required for one
1:03:41merger
1:03:42and on that during the process of the
1:03:45transfers of
1:03:47say uh the control or say the ss what
1:03:51happens if a merger midway is set back
1:03:53so how does how do the two companies
1:03:56resolve the situation because it's not
1:03:58like that at one particular day
1:04:00everything gets transferred so how is
1:04:02this process regulated if you could uh
1:04:04so when you talk about merger merger per
1:04:07se so that's the code driven process the
1:04:09tribunal process which we are talking
1:04:10about right so when two entities are
1:04:12merging together to form one combined
1:04:14entity
1:04:15now that merger process in india
1:04:17generally takes six seven months minimum
1:04:19because it's a code driven process you
1:04:21will have your merger schemes the court
1:04:23will have questions your scheme has to
1:04:25be approved by the creditors and
1:04:27shareholders of the company
1:04:28now as part of the merger exercise you
1:04:31are actually combining two companies and
1:04:33you're forming one company the idea is
1:04:35that as part of this exercise ultimately
1:04:38you should have one running business
1:04:39which is there
1:04:40what does that entail
1:04:42firstly your assets have to be you know
1:04:44under the name of all that one company
1:04:46all your assets all your lease deeds all
1:04:49your contracts now today till today you
1:04:52were having a contract with this company
1:04:54b limited but after b limited has merged
1:04:57with a limited there is only one entity
1:04:59a limited which is left so your all your
1:05:01contracts have will get no weighted to a
1:05:04limited which are there all your assets
1:05:06have to be in the name of that company
1:05:08older employees will shift from the
1:05:10books of be limited to the books of a
1:05:12limited
1:05:14a lot of these processes will take place
1:05:15and obviously an implementation backend
1:05:17implementation takes time
1:05:19technically what happens is that from
1:05:21the date of the quote order is passed
1:05:24everything what it says is that will
1:05:26stand transferred to the other company
1:05:28so from the legal procedure once that
1:05:30merger order has been passed by the nclt
1:05:33your merger has taken place so that's a
1:05:35successful merger you can pull out from
1:05:38the time when you're filing if you're
1:05:39filing it till the time it's not been
1:05:41approved by the court you can pull out
1:05:43but once the code order has been filed
1:05:45then illegally it's one entity then you
1:05:48don't need to do anything then by
1:05:50operation of law you are one entity then
1:05:52it comes from the implementation
1:05:53perspective that implementation of that
1:05:55assets take place now if you are not
1:05:57doing it for whatsoever reason so today
1:06:00as per the court order and that code
1:06:02approved nclt scheme of merger you are
1:06:05supposed to transfer all these assets in
1:06:06the name of a limited but tomorrow be
1:06:08limited say now we don't want to do it
1:06:11that's not how it will work is because
1:06:12then i will have a legally binding
1:06:14document i've got the court order to
1:06:17compel you to do a specific performance
1:06:19of what you have to do so then that's
1:06:21again another litigation but it won't
1:06:23happen that halfway through it can only
1:06:26happen once
1:06:27commercially we are discussing and
1:06:28things are happening and the court has
1:06:30not passed the order till now
1:06:33but it's not like the quote has passed
1:06:35the order i have an order which says
1:06:37that everything will be merged into one
1:06:38entity and tomorrow after everything is
1:06:41being done you decide i don't want to do
1:06:43it so you can't unilaterally do that but
1:06:46then i will have a litigation against
1:06:48you
1:06:49right
1:06:50you have raised your hand do you have
1:06:52your questions
1:06:55thank you
1:07:09yes sir can the promoters raise the
1:07:11share in the company through open market
1:07:14in the exchange like the g promoters
1:07:16have been doing
1:07:17stock exchange what are you saying
1:07:21stock exchange where you can only uh
1:07:26sell your shares if you're actually a
1:07:27listed company right so if you're a
1:07:29publicly listed
1:07:31in that publicly listed company the
1:07:33process will be different yeah so if you
1:07:36just take a step back now a normal
1:07:38process would be talking about doing the
1:07:40pure spa buying the company and
1:07:42everything is a separate thing but if
1:07:44you're a publicly listed company so in
1:07:47india there are two things and when
1:07:48we'll be discussing uh in the next half
1:07:51of this today the legal process we'll
1:07:53discuss what happens in a public listed
1:07:55company as well public m a what is that
1:07:57but just to give you a flavor of it
1:07:59now if you are a company which is listed
1:08:01on the stock exchange in addition to the
1:08:03companies act you are also governed
1:08:06by the semi guidelines which are there
1:08:07and the semi regulations which are there
1:08:09the sebby has something called a
1:08:11takeover code so that's the semi
1:08:14takeover code is there now the takeover
1:08:16quote says that if today you as a buyer
1:08:19are making a offer for buying the shares
1:08:21of a company of 10 or more shares of the
1:08:24company then you have to go and make an
1:08:26open offer
1:08:27and that open offer has to be of a
1:08:29minimum percentage of shares of the
1:08:32company to all the public shareholders
1:08:34and the other shareholders of the
1:08:35company as well
1:08:36so then you have to follow this proper
1:08:39uh you know regime which is there so
1:08:41only the
1:08:43people of the publicly traded company
1:08:45those promoters can actually sell their
1:08:47shares in a stock exchange if you're not
1:08:50listed on a stock exchange the promoters
1:08:52can't go and sell their shares just like
1:08:54that in a stock exchange so there's a
1:08:56process so you have to probably listed
1:08:57company and then if you're a listed
1:08:58company and you're selling your shares
1:09:00you can sell it either through the stock
1:09:01exchange or offline from the stock
1:09:04exchange through another process which
1:09:05is there so sebi has different processes
1:09:07for these but it is only for public
1:09:09listed companies for if you're a private
1:09:11company a private companies cannot sell
1:09:14shares you can de-materialize your
1:09:16shares what can happen is that there are
1:09:19either physical shares or their shares
1:09:20in dmat account so dmacc shares are
1:09:22dematerialized shares which you have a
1:09:24depository participant but it's the same
1:09:27thing it's just not instead of having it
1:09:28as a physical share certificate you have
1:09:30dematerialized shares but for you to
1:09:32sell your shares in a stock market you
1:09:34have to be a listed company
1:09:39yes
1:09:40so we'll take one last question and then
1:09:43we can move on with the lecture or more
1:09:44almost if you could like
1:09:46open if
1:09:50yes so
1:09:51thank you for this uh so my question is
1:09:53regarding i have a confusion regarding
1:09:55the definition of merger itself like i
1:09:58read somewhere that differently
1:10:00that uh is it a merger is that only two
1:10:03entities a and b
1:10:05and they join together and they created
1:10:06a third entity c
1:10:08and this both a and b get seized out or
1:10:11like they cut off the from the registers
1:10:14or it's like it can be happened by a
1:10:16getting into b
1:10:18and a becoming ceased out is the both
1:10:21way
1:10:21up happens or like only
1:10:25so what you were talking about for two
1:10:27of them to emerge and form a new company
1:10:29no so merger what lassi in very in a
1:10:32practical sense the term merger
1:10:35is not defined either in the company's
1:10:37act or in the income tax act there is no
1:10:41definition of the term merger which is
1:10:42there as a concept merger is a
1:10:45combination of two or more entities into
1:10:47one
1:10:48basically and the desired effect being
1:10:50that you know not just the accumulation
1:10:52of assets and liabilities of the
1:10:53distinct entities but also organization
1:10:56of such entities into one business
1:10:58though with obviously like we discussed
1:11:00the possible objectives being economies
1:11:02of scale acquisition of technologies
1:11:04access to varied sectors etc etc
1:11:07so and generally in case of a merger how
1:11:09it will work is that the merging
1:11:10entities would cease to exist and you
1:11:13will have one single surviving entity so
1:11:15like i said a and b b merges into a so
1:11:18you have one single surviving entity in
1:11:20a
1:11:22again but the income tax act sets out a
1:11:24term called uh you know analogous term
1:11:27called amalgamation
1:11:28amalgamation is the merger of one or
1:11:30more companies with another company
1:11:32or the merger of two or more companies
1:11:34to form one company
1:11:36right
1:11:37now
1:11:39if you what like you are saying
1:11:41again i find part of my amalgamation
1:11:44process if that is how i want to play it
1:11:46that i want that you i have made a new
1:11:49company c
1:11:50and my merger will be then that a and b
1:11:54cumulatively combine into c
1:11:57to form one new business entity so then
1:12:00my amalgamation scheme in itself will
1:12:03have three entities
1:12:04getting so my imagination of three
1:12:06entities in which i am saying that i
1:12:08have made this new company c which is a
1:12:10joint venture between the two parties
1:12:12now as part of the joint venture you are
1:12:13entering into a amalgamation scheme and
1:12:16then both of them merge into c
1:12:18together in which case both a and b will
1:12:20cease to exist and the only company you
1:12:22will have remaining is c in which all
1:12:24the assets liabilities and everything of
1:12:26those two companies a and b merge into c
1:12:30but if you see the companies act per se
1:12:32the company's act does not have a
1:12:33definition of what is a merger
1:12:36even the
1:12:37sections which are there 230 to 234 and
1:12:39all it's called schemes of amalgamation
1:12:42and you know other compromises which the
1:12:44company's shareholders enter into
1:12:45because that way the companies act and
1:12:47the government gives you as shareholders
1:12:49a lot of flexibility on how you want to
1:12:51structure your amalgamation process
1:12:54obviously subject to it being passed by
1:12:56the nclt and
1:12:59the shareholders and creditors of the
1:13:00company
1:13:02okay so also is there any i mean have
1:13:05ever it happened in india that
1:13:07a and b joined together as you mentioned
1:13:10and then uh getting to see is it
1:13:12happening there like only
1:13:14the the first way
1:13:17it may have ci it's not something it's
1:13:20possible that would have happened
1:13:21previously but mostly typically what you
1:13:24would see a merger transaction is when
1:13:26two more companies come together to form
1:13:29one company and it's generally if you
1:13:31see so like if you would see if you
1:13:33would have read this latest one in which
1:13:34they're saying i think sony and z are
1:13:36merging the idea is that ultimately
1:13:38everything will merge into sony or
1:13:40everything will merge into z and you'll
1:13:41have one company which is left and not
1:13:43that both of them combine together to
1:13:45form another new entity
1:13:48okay sir thank you thank you sir thank
1:13:49you
1:13:51right so i think we can go ahead with
1:13:52the link yes now we can proceed
1:13:55so but no it's good i think that's
1:13:57what's good it's like you end up you
1:13:58know having all your doubts cleared and
1:14:00you have an interactive session that way
1:14:03now how you acquire is as important as
1:14:05what you acquire
1:14:07now
1:14:08again
1:14:09i want to buy the company but what are
1:14:12the parameters which will make me decide
1:14:14whether to go ahead and buy this company
1:14:17as a shared purchase agreement through
1:14:19acquiring the shares of the company
1:14:21or as an asset
1:14:23purchase or as a business transfer
1:14:26now there are different different
1:14:27reasons why
1:14:28you know people would go for a certain
1:14:30thing over the other
1:14:34so obviously my one of the most
1:14:36fundamental considerations in any
1:14:38m a transaction is the mode of
1:14:40acquisition so i something i just have
1:14:41water
1:15:03now
1:15:06firstly is
1:15:07nine like i discussed we have a shared
1:15:09purchase of an acquisition of a fully
1:15:12acquisition of a company
1:15:14now why would i want to do that
1:15:16i would want to buy the entire company
1:15:19because a it's very uh you know well
1:15:22done the company is working properly the
1:15:24company in itself has a very good
1:15:26business standing and it has a good
1:15:27goodwill the name is good you all your
1:15:30employees are in place a lot of time
1:15:32what happens is that you have specific
1:15:34licenses which are there like uh
1:15:36recently we were doing
1:15:38buying a company out
1:15:40and we were buying a company because
1:15:41that company had a particular forest
1:15:43license in place
1:15:45which is given to the company it's
1:15:47company specific right
1:15:50now so if you buy the company you get
1:15:52that forest license and because of the
1:15:54covet situation the new licenses were
1:15:56not being given out that easily so if
1:15:58our client wanted to get that new
1:16:00license it would have taken them two
1:16:01years so it was easier to buy that
1:16:03company
1:16:05so you know they wanted to buy the
1:16:06company
1:16:08but they only wanted that company
1:16:10because that company had those two
1:16:12factories which had those licenses which
1:16:13were there
1:16:15alternatively the other option which
1:16:17they could have used is they could have
1:16:18done an asset sale but
1:16:20in case of an asset sale what happens is
1:16:22that you buying the assets of the
1:16:24company but not the company itself so
1:16:27this license which is given to the
1:16:28company
1:16:30then it becomes you again useless for
1:16:32you because you have to go and take a
1:16:33new license so even if you have the
1:16:34factory you have the plant you have the
1:16:36employees you when you're buying the
1:16:38asset or the business of the company you
1:16:40will not have that license
1:16:42which brings you back to your zero
1:16:44position because what you need is that
1:16:45license in order to carry out the
1:16:47business
1:16:48so i go for a shared purchase in that
1:16:50case
1:16:52but like i said that you know and that
1:16:53is again becomes a business
1:16:54consideration because if i'm buying the
1:16:56company and if i'm buying the company
1:16:59and that company has a lot of historical
1:17:01liability
1:17:02i would you know still want to go ahead
1:17:05with it because the risk is that i lose
1:17:07out on two years of business because i'm
1:17:08not getting that license for the next
1:17:10two years so you would take that risk
1:17:12irrespective of the fact because you
1:17:14want that license which is there so
1:17:15there are many considerations which are
1:17:17there in case of an asset transfer
1:17:20so
1:17:23so if you can go to the next slide also
1:17:28some types of m a so there's tribunal
1:17:31share acquisitions and acid and business
1:17:33acquisitions share approved tribunal
1:17:36approved schemes we've discussed at
1:17:37length how those works tribunal approved
1:17:39schemes are you know when you're merging
1:17:41to company share acquisitions is when
1:17:44you buy out the company completely
1:17:46now just if you take a step back what
1:17:48happens when you're buying the complete
1:17:50company
1:17:51you get all the litigations of the
1:17:53company you get all the liabilities of
1:17:56the company all the loans of the company
1:17:58correct every non-compliance under law
1:18:01that you've done is in the name of a
1:18:03company a company is a separate legal
1:18:05entity now when you're buying that
1:18:07separate legal entity
1:18:09every liability of that company also
1:18:11comes on to you
1:18:12so tomorrow if somebody wants to sue the
1:18:14company they will come after you because
1:18:16it's your company you are the
1:18:18shareholders you are the owners of the
1:18:19company
1:18:21so there is a lot of liability and risk
1:18:22which comes while you're buying a
1:18:24company
1:18:25but still at that time a lot of times
1:18:26you want to buy the company because that
1:18:28company has everything you know in place
1:18:31it has all the licenses in place it has
1:18:33all the government approvals in place
1:18:35even smaller things if you're into going
1:18:37to if you're doing foreign exports right
1:18:39foreign exports you're doing under a lot
1:18:41of these government schemes so that
1:18:43company has entered into a lot of
1:18:44schemes with a lot of companies
1:18:47which are there and you know you are
1:18:49getting for the government under a lot
1:18:50of government schemes a lot of subsidy
1:18:52comes to those companies and you know
1:18:54that everything is going in a smooth
1:18:55smooth mechanism over there if you end
1:18:58up just buying the assets of the company
1:19:00not the company itself you will have to
1:19:02again start and do all those things from
1:19:04a scratch so maybe you don't want to do
1:19:06all of that so all you do is then that
1:19:08time you go and you buy the company as a
1:19:10whole
1:19:12it is possible that now you think that
1:19:14you already have that license in place
1:19:16for another factory of your because you
1:19:18running those other factories and saying
1:19:20suppose
1:19:34um no sir actually she was under a
1:19:36misconception that your internet is
1:19:39being erratic it was on her side we
1:19:40apologize
1:19:42no worries
1:19:45what i'm saying is that uh so then
1:19:47usually but then you are doing a part of
1:19:50the diligence what we find out is that
1:19:52that company has a lot of historical
1:19:54problems so maybe buying that company is
1:19:56not the correct thing to do
1:19:58in which case you can either buy just
1:20:01the assets of the company
1:20:03or you can buy the business of the
1:20:04company as a whole
1:20:06but
1:20:07in the problem with that is that when
1:20:09you just buying the assets of the
1:20:10company
1:20:11at that time you have a lot of tax
1:20:13implication now there is a tax
1:20:15implication from the seller side also
1:20:17and the buyer side also when you're
1:20:19buying this the assets of a company or
1:20:21when you buying the business as a whole
1:20:22as a slum sale when you buy just the
1:20:25assets of the company your capital gains
1:20:28tax your taxes payable
1:20:30or to both sides on each and every asset
1:20:33that you're buying
1:20:35right so then the value of each and
1:20:36every asset is taken into place when
1:20:39you're buying it
1:20:40now in india what happens is that you
1:20:42have a short-term capital gains tax and
1:20:44you have a long-term capital gains tax
1:20:46if i bought something which was in you
1:20:49know around more than if i've owned
1:20:51something for say 12 months or 20 more
1:20:53than 24 months and then i'm selling it
1:20:56the amount of tax is lower as compared
1:20:58to me buying something today and selling
1:21:00it tomorrow or within that small short
1:21:02period of span
1:21:03now when i'm doing just an asset
1:21:05purchase of a company i will have to pay
1:21:07the tax on each and every asset so
1:21:10depending on when that particular asset
1:21:11was bought i will have to pay the tax
1:21:13sometimes it turns out to be a large
1:21:15amount of money
1:21:16but if tomorrow i am doing the business
1:21:18acquisition in which i'm saying that i'm
1:21:20not buying the company but i'm buying
1:21:22the entire business of that company lock
1:21:24stock in barrel on a going concern basis
1:21:27then
1:21:28you know what they call a slum sale
1:21:30then that tax is payable only on the
1:21:33amount the overall amount of the slum
1:21:35sale and what is taken into picture is
1:21:37account is since when are you owning the
1:21:39business of the company and not when
1:21:41you've owned that particular asset so
1:21:43that helps you reduce your tax liability
1:21:46so generally why people prefer a
1:21:48business transfer agreement over an
1:21:50asset purchase agreement if assets are
1:21:52all you want and you're not buying the
1:21:54company is that they prefer a business
1:21:55transfer because in a slum sale the
1:21:57amount of tax is much lesser
1:21:59for you
1:22:00so given that a lot of these
1:22:02considerations which you have to
1:22:03consider
1:22:04on
1:22:05figuring out whether or not you want to
1:22:08buy the company
1:22:10again i think uh this would roshi was
1:22:13also uh had this question and now i can
1:22:16you can i'll give you two more minutes
1:22:17on this
1:22:18firstly then the nclt sanction machine
1:22:20just to recap tribunal approved schemes
1:22:23a and clt sanctions scheme you make a
1:22:25scheme you go to the nclt the nclt has
1:22:28to be okay with the nclt is the national
1:22:30corporate law uh tribunal which is there
1:22:33now what the government has done is a
1:22:35lot is these commercial things which are
1:22:37their company law related matters which
1:22:38are there or disputes which are there so
1:22:40instead of you going to the high courts
1:22:42and the district courts and all of these
1:22:44courts you specifically go to these
1:22:46tribunals so you have the nclt which is
1:22:48in place which
1:22:49looks after all of this
1:22:51shareholder and creditor approval is
1:22:52required in order for you to pass any
1:22:55scheme of amalgamation
1:22:57which is there you have to have a
1:22:59shareholder approval and a credit
1:23:01approval of three-fourths of the
1:23:02population
1:23:04of the shareholders and creditors which
1:23:06is 75 or more
1:23:08correct what the merger does give you is
1:23:10continuity because all the companies are
1:23:13seamlessly merged into one company so
1:23:15everything goes as usual those companies
1:23:17from one obviously is a lot amount of
1:23:20implementation which has to take place
1:23:22because one company has a different
1:23:24working style the other company has a
1:23:25different working style when you're
1:23:27merging them together you have to have a
1:23:29common philosophy you have to you know
1:23:31attune the people to your style of
1:23:33working so all that happens but
1:23:35obviously it gives you a sense of
1:23:36continuity because everything gets
1:23:38transferred into the name of the merged
1:23:39entity which is there
1:23:41in case of a tribunal scheme there is
1:23:43transfer of liabilities now
1:23:46you can't you know cherry pick when
1:23:48you're actually merging to companies to
1:23:50say that you know i will not be
1:23:52responsible for a or i will not be
1:23:54responsible for b when you're merging
1:23:55the two entities all the liabilities of
1:23:58that company the loans of that company
1:24:00the previous non-compliance of the
1:24:02company whatever is there all those
1:24:04liabilities end up getting transferred
1:24:06to you
1:24:07so you don't get to choose whether or
1:24:09not
1:24:11you know you are keeping it because one
1:24:13of the major ideas of this uh transfer
1:24:17process is that it's transferred as a
1:24:19going concern and the amalgamated
1:24:21company is issuing the shares to the
1:24:23shareholders of the amalgamating company
1:24:25on a proportional basis
1:24:26so
1:24:28you know it's on a going concern basis
1:24:30so you can't actually get to choose what
1:24:32you're doing all the employees will get
1:24:34transferred and as part of the merger
1:24:36scheme those employees all the previous
1:24:38benefits all the accrued benefits of
1:24:40that company are transferred on a
1:24:42continuity basis so if i am an employee
1:24:45of the company how it works is that
1:24:47under indian laws if you've been an
1:24:49employee of the company for more than a
1:24:51certain amount of time say i've been an
1:24:53employee in this company for more than
1:24:56five years and after five years i am
1:24:58entitled to graduating when i retire or
1:25:01when i leave the company
1:25:03but which will not be the case if i just
1:25:05leave this company and join a new
1:25:06company
1:25:07but in case of a merger there is
1:25:09continuity of your employment as well
1:25:12your employees are transferred there is
1:25:13continuity of employment which is there
1:25:16so it helps you also all these licenses
1:25:19and the government approvals which i'm
1:25:20telling you all of them will get
1:25:22transferred in your name correct
1:25:24obviously as part of the module and
1:25:26approval merger process also if you are
1:25:29in a regulated entity and if you were
1:25:30part of a regulated setup you would need
1:25:33to take approvals from all the
1:25:34government entities as well in relation
1:25:37to the merger so the nclt will require
1:25:39you to show them that you've taken an
1:25:40approval of merger because say in case
1:25:43two insurance companies are merging then
1:25:45it's not the nclt alone which can decide
1:25:47you have an insurance regulator you have
1:25:49the irda which is in place so that irda
1:25:52also has to give you an approval for
1:25:53merging your two companies together
1:25:56sometimes your two companies are so big
1:25:58and they're so huge that it can create a
1:26:00competition law problem so the
1:26:03competition law
1:26:05you know because what is competition law
1:26:06and you know is one of my
1:26:08you know my partner had told me that
1:26:10competition law is nothing but an
1:26:12apology to capitalism you know because
1:26:14you have two huge companies coming
1:26:15together and you want to uh make sure
1:26:18that that does not lead to any
1:26:20particular disadvantage to the smaller
1:26:22companies so in which case there are
1:26:24certain threshold limits which need to
1:26:26be checked and if those are being
1:26:27reached then you require a competition
1:26:29approval as well for that merger so a
1:26:31cci approval so then your
1:26:33scheme is subject to you getting a cci
1:26:35approval so a lot of these other
1:26:37third-party government administrative
1:26:39bodies which are there you require their
1:26:41approvals as well if you are in that
1:26:43regulated sector and once everything is
1:26:45done then this merger process takes
1:26:47place in a court approved merger
1:26:49by the passing of the nclt order the
1:26:51merger is effective from the date of the
1:26:55order which takes place
1:26:57and the payment of consideration in
1:26:59typically in case of a merger is through
1:27:02issuance of shares so there's a share
1:27:04swap per se that instead of me paying
1:27:07you money for buying out your company
1:27:09for merging your company the
1:27:10shareholders are given shares in the
1:27:12final new final entity which is there
1:27:15that is that in share acquisitions what
1:27:18happens is again your acquisition by
1:27:20purchase of shares and stocks of the
1:27:22company
1:27:23you go and buy the shares and stocks of
1:27:24the company which are the ownership
1:27:26units of that company
1:27:29purchases through a share purchase
1:27:30agreement or a security purchase
1:27:32agreement
1:27:33which is there
1:27:35which we've already discussed at length
1:27:37and purchase of the company as a whole
1:27:39with assets and liabilities
1:27:41like we discussed previously when you
1:27:43buy the entire company out you cannot
1:27:45pick and choose the liabilities which
1:27:47you are taking you take the company on
1:27:50the whole with all its assets all its
1:27:52liabilities so if tomorrow anything
1:27:54happens it's on you who's the new buyer
1:27:57you cannot choose that this is what
1:27:59you're taking or this is what you're not
1:28:00taking you take the entire assets
1:28:03as a whole as a concept
1:28:05the business continues on an as-is basis
1:28:07when you're doing a share purchase
1:28:08agreement because you bought over the
1:28:10company so the company remains the same
1:28:12i like you know that company is a
1:28:13separate legal entity so the company
1:28:16remains the same everything remains the
1:28:17same things go on as usual which are
1:28:20there
1:28:21but
1:28:22the uh you know only the owner changes
1:28:24at top
1:28:25in which case all the licenses
1:28:27government approvals and everything
1:28:29which you've taken the continue to exist
1:28:32what only happens is some of these
1:28:33licenses or some of these government
1:28:35bodies they require you to take their
1:28:37prior approval in case of a change in
1:28:39control which is still an easier process
1:28:41than actually going and taking a fresh
1:28:43approval or starting something afresh
1:28:46correct so one of the advantages of
1:28:48buying this company through a share
1:28:49acquisition is that you buy the company
1:28:51on an as-is basis everything goes your
1:28:53employees were employees of that company
1:28:55yesterday also they remain the employees
1:28:56of the same company uh today and
1:28:58tomorrow as well so there's no change in
1:29:00the employees everything is going as
1:29:02usual for them from the you know
1:29:04everything is in place you're just the
1:29:06owner is changing so tomorrow instead of
1:29:09being the owner b is now the owner but
1:29:11everything else remains the same when
1:29:12you're doing the share acquisition and
1:29:13sphere
1:29:15obviously
1:29:17there are foreign exchange control
1:29:18implications and pricing guidelines need
1:29:20to be followed now what are these
1:29:22foreign exchange control implications
1:29:25so in india you have an exchange control
1:29:27regime
1:29:28right you have something called the fema
1:29:31foreign exchange management act which is
1:29:32there under the fema we have you know
1:29:35the government releases you have an fdi
1:29:37policy which comes into play
1:29:39and in addition to that fdi policy
1:29:42you have the ndi rules which are the
1:29:44non-net instrument rules which are there
1:29:46so the fdi policy along with the non-net
1:29:48instrument rules is what basically
1:29:51governs fdi in india foreign direct
1:29:53investment
1:29:55now in any case in india like in any
1:29:57other country you government wants to
1:29:59control the amount of foreign money
1:30:01which is coming into the company
1:30:03and the amount of foreign currency which
1:30:05is going outside the country
1:30:07now when money comes into india you
1:30:10there are the under fema there are
1:30:12certain sectors
1:30:13under the fda policy where money can
1:30:16come under 100
1:30:18automatic and there are certain sectors
1:30:21where you require government approval in
1:30:23order to take foreign money
1:30:26mostly now because we moving towards the
1:30:28liberalized uh you know con
1:30:30libertizing the economy more and more
1:30:32and the idea is to promote ease of doing
1:30:34business in the country
1:30:36so you don't uh you know so you would
1:30:38see that in a lot of sectors every day
1:30:40you keep on hearing that the government
1:30:42has made it hundred percent automatic
1:30:43group 100 automatic group means that you
1:30:46can get foreign investment into that
1:30:47company without
1:30:50actually uh
1:30:52doing anything in the sense taking any
1:30:54governmental approval
1:30:55but there's certain sectors say the
1:30:57media sector the digital media sector or
1:31:00the insurance sector or certain defense
1:31:02sector companies which are there in
1:31:05which if you are taking foreign
1:31:06investment above a certain threshold you
1:31:09will require the permission of the
1:31:10government
1:31:12mostly these things are done from a
1:31:13national security perspective that you
1:31:15want to keep things in control
1:31:17recently in the last one year a thing
1:31:20called pn3 which is press note 3 came
1:31:22out with the government which amended
1:31:24the indian foreign policy to say that
1:31:26every investment which is coming from a
1:31:28landlocked country you know a land
1:31:31sharing country a border sharing country
1:31:33mostly with china in mind so if a
1:31:36chinese company today is investing in
1:31:37india they would have to seek prior
1:31:40approval of the government so that's how
1:31:42they've noted there is a lot of you know
1:31:43gray area over there because it says
1:31:46that any company which has a
1:31:48chinese company a significant influence
1:31:50so then the definition of what is
1:31:52significant influence a lot of people
1:31:54try to play with but currently in the
1:31:56absence of any beneficial interest the
1:31:59definition coming from clarification
1:32:01coming from the government
1:32:02a view in the market is that any
1:32:04investment any company which has
1:32:06investment from a chinese company and in
1:32:08that company is putting in money in your
1:32:09company for an investment you would
1:32:12require prior governmental approval for
1:32:14it
1:32:15so as simple as that
1:32:16now pricing guidelines are also so when
1:32:19money is coming into india and when
1:32:21money is going out of india the
1:32:23considerations are different
1:32:25when money is coming into india
1:32:28the government will want that the indian
1:32:30company
1:32:31or an indian seller who's selling the
1:32:33shares of his his or her shares in the
1:32:35company
1:32:36gets a minimum of the fair market value
1:32:38of the company because obviously the
1:32:40government will want that as much money
1:32:42i can come into india and you're not
1:32:44under selling your shares so it's not
1:32:46like any foreign companies coming and
1:32:48buying indian shares at dirt prices and
1:32:50going back so that's not allowed you can
1:32:52only sell your share than a foreign
1:32:54company can only buy the shares of an
1:32:56indian company
1:32:57at a minimum of fair market value if an
1:33:00indian resident is selling to a
1:33:01non-resident the idea is that because
1:33:03you're selling your shares money is
1:33:05coming into india
1:33:07you should
1:33:08get maximum amount of money so there is
1:33:10a floor the floor is the family the fair
1:33:13market value of the shares you do a
1:33:15valuation of the company and bases the
1:33:17valuation of the company you cannot get
1:33:19lesser money than that when you're
1:33:20selling
1:33:22the opposite of it is that when an
1:33:25indian is buying shares of an indian
1:33:27company from a foreigner so say a
1:33:29foreigner had initially bought the
1:33:31foreign resident or a foreign company or
1:33:33initially bought the shares of the
1:33:34company and now they were selling that
1:33:35share
1:33:36so in that case what is happening money
1:33:38is going outside india so what will the
1:33:40government want the government want to
1:33:42put a ceiling on it so what the
1:33:44government says as part of the pricing
1:33:45guidelines is that if i am buying the
1:33:48shares of an indian company from a
1:33:50foreign company the maximum i can pay is
1:33:53the fmv
1:33:55so whatever is the valuation report is
1:33:57done and whatever the valuation of that
1:33:59company that is the maximum amount that
1:34:01i can pay
1:34:03above that i'm not allowed to pay
1:34:06so
1:34:06if you're doing corporate law and when
1:34:08you if you do working in law firms you
1:34:11will have to make the fdi policy your
1:34:13best friend you will have to read that
1:34:15fdi policy because that tells you what
1:34:18all are the restrictions which are there
1:34:20now a lot of these sectors like nowadays
1:34:22we get a lot of work because a lot of uh
1:34:25you know
1:34:26developments are happening the
1:34:27e-commerce space so a lot of these
1:34:29e-commerce entities
1:34:31and you know uh are getting in money and
1:34:34a lot of they're getting a lot of
1:34:35investment
1:34:36government has rules for it so
1:34:38government says that e-commerce may if
1:34:40you are if your if my company today is
1:34:43running an e-commerce platform then i
1:34:45can get hundred percent uh fda under
1:34:47automatic group because what is the
1:34:49e-commerce company knowing the
1:34:51e-commerce company is merely acting like
1:34:52a platform
1:34:54where a buyer it connects a buyer to a
1:34:56seller so you don't own the products
1:34:59that you're selling which is fine amazon
1:35:01doesn't mostly doesn't sell its own
1:35:02products amazon so i can as a seller
1:35:05register on amazon and i can sell it to
1:35:07the customer so amazon really acts as a
1:35:09platform which is allowed you can get
1:35:11100 mdi
1:35:12but the government says that the moment
1:35:14you own the inventory
1:35:16so if today amazon owns the products
1:35:18that it's selling and it's just onward
1:35:20selling through the
1:35:22its platform in that case single brand
1:35:25retail
1:35:26uh through e-commerce is not allowed so
1:35:29then i will not be able to inventory
1:35:30based model basically inventory based
1:35:33model you cannot get foreign funding the
1:35:36idea again is to protect the interests
1:35:38of the common uh you know your
1:35:40shopkeepers and the kirana stores which
1:35:42are there by not allowing foreign money
1:35:44into the
1:35:45country for this
1:35:47because as you would see now because
1:35:48then the amount of discounts these
1:35:50people gave the amount of you know the
1:35:52money which comes to foreign companies
1:35:53it puts everybody else at a disadvantage
1:35:56so as part of that protectionist regime
1:35:58which is there you have these things in
1:36:00place
1:36:01so you have to know whenever you're
1:36:03dealing with the client you have to know
1:36:05what is there in the fdi policy you have
1:36:08to see whether the sector in which this
1:36:09investment is being made and you're
1:36:11getting a foreign investment or a
1:36:12foreign buyer is it even allowed under
1:36:15the indian law to buy that company for a
1:36:17foreigner to buy that company if yes
1:36:20what are the restrictions and what are
1:36:22the conditionalities for that investment
1:36:23to come into place so when you're buying
1:36:25the shares of a company it all becomes
1:36:27very important for that as well
1:36:31lastly the pricing the pricing has to be
1:36:33done properly the foreign exchange has
1:36:35to be made sure that your government
1:36:36allows you to do that
1:36:38and etc etc lastly like we've discussed
1:36:41at length and you due diligence of
1:36:43historic liabilities becomes very
1:36:45important when you're buying a company
1:36:47or acquiring a company because again you
1:36:49buying the you will be responsible for
1:36:51everything upfront
1:36:53so destroy becomes important now asset
1:36:55and business acquisitions the other
1:36:57types which is there and so this is the
1:36:59last point which is which we'll discuss
1:37:02now post which uh you know
1:37:04we take a few questions and then we can
1:37:06take a break before we delve into the
1:37:08legal aspects now we'll discuss each and
1:37:10every section and on the laws which are
1:37:12there
1:37:13before that asset when business
1:37:15acquisition now acquisition of business
1:37:17can be through either the transfer of
1:37:18the entire undertaking as a going
1:37:20concern or transfer of just the cherry
1:37:23picked assets that are required for the
1:37:24business
1:37:25like i said the biggest difference
1:37:27between these two things is ultimately
1:37:30the fact that
1:37:31the tax implications which are there and
1:37:33also what's the ultimate intention of
1:37:35you buying that business is the ultimate
1:37:38intention of you buying the business
1:37:39that you want everything because if i'm
1:37:41buying this company and you feel that
1:37:43okay even if this company has a lot of
1:37:44historic liabilities and i don't want to
1:37:46buy the company per se but i still want
1:37:48the entire business as a going concern
1:37:51going concern will mean that i'm buying
1:37:53everything i'm buying things i'm buying
1:37:55the factory i'm buying the appliances of
1:37:58that company and i'm transferring all
1:38:00the employees of that company into my
1:38:02books i'm taking each and everything
1:38:04which is required to run that business
1:38:06as it is from their books to my book so
1:38:09i'm just buying everything out
1:38:11asset purchase will mean that i am just
1:38:13identifying that what i need to do is
1:38:17i need only your employees to get
1:38:19transferred to me
1:38:20you have 100 customers i don't need all
1:38:23hundred customers
1:38:24these 50 contracts that you have with 50
1:38:26customers you can no wait these
1:38:29contracts to me
1:38:31as part of the transaction
1:38:32and you have 10 factories i don't need
1:38:3510 factories i just want these three
1:38:37main factories or these three main
1:38:38businesses that your business
1:38:40establishments that you have i just want
1:38:42this so i cherry pick these assets and
1:38:45then i buy them
1:38:46because i don't need anything else i
1:38:48know that this company that i'm trying
1:38:50this company that i'm planning to buy or
1:38:52the assets from has businesses all over
1:38:55india has presence all over india but
1:38:58i'm already strong in north indian
1:38:59territory i don't need to buy that thing
1:39:01i only need it for the certain area
1:39:03which is there so i don't need to pay
1:39:05money for buying the entire business i
1:39:07can just cherry pick and say that this
1:39:09only this region of your business is
1:39:11what i want to buy and push maybe i can
1:39:13tell you that i just want top 10
1:39:15customers of 15 customers or whatever i
1:39:17want so you get the idea of cherry
1:39:19picking the assets so depending on what
1:39:21like we said when we discuss this cycle
1:39:23of an m a
1:39:25what your acquisition strategy is and
1:39:27what is the purpose of your acquisition
1:39:29basis that we decide what is the mode
1:39:31through which we are buying the company
1:39:33or buying the assets
1:39:36like we discussed in
1:39:37assets can be purchased through an asset
1:39:39purchase agreement and while business is
1:39:41untaken for a business transfer
1:39:43agreement
1:39:44it's basic it's called buying on a slum
1:39:46sale basis
1:39:47or through a quote approved
1:39:49now what go to d merger is that either i
1:39:52can actually enter into a business
1:39:53transfer agreement and buy these
1:39:55particular assets in business as the
1:39:57going concern from you
1:39:59or what happens is there's a
1:40:00court-approved deal merger process in
1:40:02which again ash part under section 230
1:40:05234 34 of the uh company that
1:40:10you go and you be merged an entity so
1:40:12you carve out the business so in my
1:40:14business today i have 100 units and you
1:40:17know different factories and everything
1:40:19i demarcate a particular area of my
1:40:21business which you want to buy
1:40:23and through the court proceedings we
1:40:25de-merge that into a separate business
1:40:27uh business
1:40:29company and then that companies either
1:40:31merge with your company or it becomes a
1:40:33separate company which you end up buying
1:40:35so
1:40:36business transfer can either be through
1:40:38a slump sale process through
1:40:39contractually or through a code approved
1:40:41re-merger process
1:40:43tax considerations between an asset
1:40:45purchase and business transfers
1:40:47ultimately end up being one of the most
1:40:49important differentiators
1:40:51when it comes to companies to decide
1:40:53whether or not they're doing an asset
1:40:54purchase or a business transfer
1:40:56agreement because this difference
1:40:57between 20 tax and 30 tax between long
1:41:01term short term whatever that
1:41:03figure is in a large scale transaction
1:41:06it ends up uh translating into a huge
1:41:08amount so you have to take a call basis
1:41:11what are the assets of the company that
1:41:12you want to buy on whether or not you
1:41:14want to go to business transfer route or
1:41:16an asset purchase because that will have
1:41:19tax consequences
1:41:21issues in relation to employee transfer
1:41:22now when i'm transferring the employee
1:41:24through an asset purchase agreement
1:41:27i would then have to figure out what is
1:41:30the whether i'm taking the employees on
1:41:32a continuation basis on a going concern
1:41:34basis or
1:41:36uh is it a fresh increase of employment
1:41:39a lot of times what happens is that
1:41:41under indian laws you have to pay a
1:41:43retrenchment fee to the employees
1:41:45employees are actually entitled to a lot
1:41:47of other benefits which are there
1:41:49as part of their employment
1:41:51now one way of going about it and which
1:41:54is the clean way of going about it is if
1:41:57you
1:41:57ask the employees to tender in their
1:41:59resignation letters
1:42:01and but then you accept their
1:42:03resignation and then offer them new
1:42:05employment under the new company where
1:42:07the assets are being transferred
1:42:10why people prefer to do that as a root
1:42:12rather than just dominating the employee
1:42:14and then asking them to join the other
1:42:16place
1:42:18is that because when you terminate an
1:42:19employee or when you are removing an
1:42:21employee under indian law you are
1:42:23required to
1:42:26give them a lot of uh
1:42:28retrenchment or severance bonus
1:42:30severance money which is required to be
1:42:32given the labor laws
1:42:33set out a lot of things that are
1:42:34required to be paid contractually plus
1:42:36it increases your liability so the
1:42:39cleaner way to do about that employee
1:42:40transfer is that if the employee
1:42:42obviously himself or herself is
1:42:43resigning then it's not a problem the
1:42:46labor laws will only kick in if you
1:42:48actually remove that employee so how you
1:42:49structure it also becomes important you
1:42:52need to make sure that the employees are
1:42:54given equal or better terms in the new
1:42:56company except for example again those
1:42:59asset and business transfer acquisitions
1:43:00you have to just structure the employee
1:43:02transfer as well to make sure that it's
1:43:03most cost efficient as opposed to just
1:43:06buying the company out in which case
1:43:08it's no problem you don't need to
1:43:09structure all of these issues
1:43:11continuity of contracts licenses etc in
1:43:14case of an asset transfer or business
1:43:16transfer the biggest problem is that you
1:43:17need to take the approval of each and
1:43:19every contract that you're
1:43:22transferring because it's not as easy as
1:43:25if i have a contract and i just tell
1:43:26them that okay as part of the asset
1:43:28transfer agreement these 50 contracts
1:43:30with these customers you take over
1:43:33no
1:43:34you will have to innovate those 50
1:43:35contracts and a lot of those contracts
1:43:37almost every contract will say that you
1:43:39cannot assign the rights under this
1:43:41contract without the prior approval of
1:43:43the other party
1:43:44correct so in which case then i have
1:43:47this new added headache of going to all
1:43:49those 50 customers taking their approval
1:43:51to transfer their contracts some of them
1:43:53may give an approval some of them will
1:43:55not give an approval some of them may
1:43:57use this as an opportunity to
1:43:58renegotiate their contracts to get
1:44:00better terms for themselves so that is
1:44:02an issue licenses like i told you
1:44:05majority of these licenses are in the
1:44:06name of the business in the name of the
1:44:08company and not not in the name of the
1:44:10app connected with the asset that you're
1:44:12buying in which case if you just mind
1:44:14the assets of that company you have to
1:44:16go and take a fresh
1:44:17license for that company
1:44:19etc so these are a lot of factors which
1:44:23go into place
1:44:25uh with when you're actually deciding
1:44:28what to buy and how to buy so ins yeah
1:44:31more than what to buy it becomes very
1:44:33important from a legal perspective is
1:44:35how you buy and this is where we as
1:44:38lawyers
1:44:39come to the picture as well because
1:44:41obviously there are commercial
1:44:42considerations but sometimes the client
1:44:44says that listen i am open to everything
1:44:47i can buy this company out i can buy the
1:44:49assets i can go business transfer
1:44:52but you're my lawyer
1:44:53tell me which is the most legally sound
1:44:55method for me to go about this company
1:44:58and that is when the lawyers will
1:45:00actually tell them that okay listen that
1:45:02under law these are the 10 ways in which
1:45:04you can buy this company these are the
1:45:06advantages and disadvantages of
1:45:07everything and then you help them make
1:45:10the informed decision
1:45:12these will again depend on the scale of
1:45:14the company the size of the company and
1:45:16the other things which are there in the
1:45:18company and you have to take a very well
1:45:20informed call at that time but obviously
1:45:23like i said
1:45:24mostly all of this is commercially
1:45:26driven because there are commercial
1:45:28incentives behind it but
1:45:30that is not to say that the lawyers have
1:45:32no part to play in it because obviously
1:45:35the fact of whether or not the company
1:45:37has historical liabilities
1:45:39is something which comes from your due
1:45:41diligence from what you are finding as
1:45:44part of that company
1:45:46so what we've discussed right now is
1:45:48what are mergers and acquisitions in
1:45:49india what are the different types of
1:45:52merges which are there
1:45:54how are the different ways in which you
1:45:55acquire a company
1:45:58now what we're going to do after this
1:46:00which is in the next session now
1:46:02is that we will discuss the laws which
1:46:05are there
1:46:06now it's very good that you know a lot
1:46:08of these things are there that you will
1:46:10be running but what are the laws so
1:46:13differently just to give you a flavor of
1:46:14it there is a company's act which is
1:46:16there now anything when you're relating
1:46:19and dealing with the company buying or
1:46:21selling of a company buying the shares
1:46:22of a company
1:46:24board meetings of a company anything
1:46:25relating to the company it is your
1:46:27company's act which plays the most
1:46:29important role
1:46:31obviously if you're a listed company in
1:46:33addition to the companies act you have
1:46:35to look at the specific regulations with
1:46:37sebi
1:46:38which is this uh securities exchange
1:46:40board of india
1:46:42sebi has a lot of using regulations
1:46:43which in relation to listed companies so
1:46:46obviously if you're a public listed
1:46:47company you need to look at all those
1:46:49regulations as well
1:46:51then
1:46:52given the size of the company and the
1:46:53scale of the company you also need to
1:46:55look at the competition act to see
1:46:58whether or not that particular
1:46:59transaction
1:47:00is notifiable under the
1:47:03competition act the cci
1:47:06then obviously when shares a company or
1:47:08anything of the business of the company
1:47:09is related you also need to look at the
1:47:12fema the foreign exchange rules the fdi
1:47:16policy of the country to make sure that
1:47:17whether a foreign company can buy the
1:47:19shares or not or even the assets of a
1:47:21company so in the indian uh law if you
1:47:24buying a company then that company can
1:47:25own a property but a foreign company
1:47:28cannot directly buy property
1:47:31in india so there are restrictions to
1:47:33that as well so for a company if they
1:47:35buy a company which owns the the asset
1:47:38is in the name of the indian company
1:47:39that is fine but for them to directly
1:47:41buy that company it becomes a problem so
1:47:44a lot of times by structuring the asset
1:47:46purchase agreements and business
1:47:47transfer agreements those are also
1:47:48things which are taken into account
1:47:50right
1:47:51then what the other thing is the income
1:47:53tax aspects to fit what are the income
1:47:55tax aspects and how are those income tax
1:47:57aspects done
1:47:59except for example those we need to look
1:48:00at
1:48:02so just yeah so i think that is what
1:48:03we'll broadly discuss we will go through
1:48:06each and every law to see what all is
1:48:08that you require to know from a
1:48:11practical perspective in all those laws
1:48:13and what are the prominent sections that
1:48:14you need to look at
1:48:16so we will reconvene after this first
1:48:19session number two
1:48:21uh frat 130
1:48:23but before that again if there are any
1:48:24questions which you have
1:48:27yes
1:48:29and more helps
1:48:33uh my question is like when we
1:48:35talk as a lawyer so one of the main
1:48:38aspect is identify the liabilities of
1:48:40the company correct
1:48:42and that is basically where uh i think
1:48:46we comes more into picture but that is
1:48:48also one of the most difficult aspect
1:48:50correct because there can be some past
1:48:52liabilities and there might be some
1:48:54future liabilities which might be coming
1:48:56correct so what is the because we cannot
1:48:58depend on the disclosure of the company
1:49:00because they might be hiding so what is
1:49:02the best way to uh implement it and
1:49:05execute to identify all the past and the
1:49:07future liabilities
1:49:10yeah perfect so that is where we do that
1:49:13is why we do a due diligence now how we
1:49:15do a due diligence is that as we will
1:49:17firstly send you a few the company we
1:49:20will send you a checklist
1:49:22that checklist will in which i'll be
1:49:23asking you a bunch of questions in
1:49:25relation to a lot of these compliances
1:49:27which you do under law now you can tell
1:49:29me that listen i've been paying my dues
1:49:32under the labor act
1:49:34properly for the past five years there
1:49:36is no non-compliance
1:49:38now i can obviously not take your word
1:49:40for it obviously you're a very reputed
1:49:42man but i would still like to do my own
1:49:44due diligence
1:49:45so then what will happen is that we'll
1:49:46say very good can you give us evidence
1:49:49of payment of these uh labor under these
1:49:52labor laws for the past three years or
1:49:54past four years just for us to just to
1:49:56see
1:49:57then when you give them my new details
1:50:00of these are the payments that you made
1:50:02i will see that you your company today
1:50:05has 100 employees
1:50:06and your company has had these hundred
1:50:08employees for the past three years
1:50:10but you've only been paying your labor
1:50:12law fees and your
1:50:14all these legislations the money you
1:50:16only been paying for 70 employees
1:50:19so then it's a non-compliance because
1:50:20you're not paying for those 30 employees
1:50:23or i ask you that listen what all are
1:50:25the labor laws that you are following
1:50:28and you give me a list of these 10 laws
1:50:30which you say that these 10 laws i am
1:50:31following a to z everything
1:50:34but
1:50:35when i look at
1:50:36your company the nature of the business
1:50:38that you have you have more than 100
1:50:40employees and most of them are workmen
1:50:42etc etc and you have factories also so i
1:50:46would see that in addition to what
1:50:47you're doing you also need to follow the
1:50:50industrial dispute act and you also need
1:50:52to follow these other five label or
1:50:54legislations or you are in a state where
1:50:56there are also required to make any of a
1:51:00labor welfare fund contributions are
1:51:01required to be made so there is other
1:51:03five other legislation which are there
1:51:06which according to you you don't even
1:51:07follow because you did not know about
1:51:09them only because i asked you what is
1:51:11there and you did not tell me so the two
1:51:12ways so firstly i ask you whatever
1:51:14you're following if you tell me ten
1:51:16things and i'm compliant with all of
1:51:18them then i ask you to give me evidence
1:51:20that you've been paying things or you've
1:51:21been following these or you have
1:51:23registrations under all of these
1:51:24licenses
1:51:25secondly is that i've used that to
1:51:27figure out that maybe these are these
1:51:29five things that you don't follow at all
1:51:30because you don't you don't know about
1:51:32them as well so those are
1:51:33non-compliances up front
1:51:35then what i do is that i try and look at
1:51:38the minutes of your boat so your board
1:51:39has meetings your board has meetings
1:51:42your shareholder has meetings
1:51:43i will look at the board and shareholder
1:51:45meetings to see if there is any matter
1:51:47which was discussed in those minutes
1:51:49which is something you know of concern
1:51:51which i would want to delve into more
1:51:54what happens is that every company
1:51:56private or public is required to file
1:51:59its audited financial statements
1:52:01with the government so the mca every
1:52:03year so it's around this time every year
1:52:06that every company is required to file
1:52:08its audited financial statements in
1:52:09which there is specific auditor a
1:52:11chartered accountant who comes and
1:52:12audits your finances and makes a
1:52:14financial report
1:52:16i will look at that report to see if
1:52:18everything it has the auditor made any
1:52:20comment
1:52:21on any non-compliances in the company or
1:52:23any contingent liability for any you
1:52:25know labor litigation with litigation
1:52:27which is there against you
1:52:29right so i will look at into that then i
1:52:31will ask further questions based on that
1:52:34i will then what i'll do is that we will
1:52:36do a litigation check you know because
1:52:38mostly everything is online you can do a
1:52:40party check and everything
1:52:42online just to make sure to figure out
1:52:44whether or not there is any i am going
1:52:45litigation against your company
1:52:48so different different ways in different
1:52:50different aspects of law which you are
1:52:52required to follow if your company is in
1:52:54a particular line of business now
1:52:56obviously we as lawyers know that if
1:52:57you're running a particular type of
1:52:59business there is a laundry list of 15
1:53:02licenses and 15 permissions which you
1:53:04require in order to run that business
1:53:07now i will ask you copies of those
1:53:09registrations and licenses it's not
1:53:11enough for you to tell me that listen i
1:53:13have everything you don't need anything
1:53:15we will ask you copies of those licenses
1:53:17and registrations and we will see if
1:53:18these are valid and subsisting
1:53:21obviously in all of this they will have
1:53:23to rely a certain amount on the
1:53:25information which is being provided but
1:53:26provided by the company
1:53:28if somebody is not doing that then that
1:53:30is fraud if they are manufacturing
1:53:32things and this sending me you know
1:53:34false documents then that is fraud and
1:53:37then for fraud there is no bar i can
1:53:38actually sue you if it's something
1:53:40you're trying to you know a fraud
1:53:42it's pulling a fraud or
1:53:43misrepresentation you can rescind it
1:53:46but ideally yes so as our part as
1:53:48lawyers we dig into it that we know that
1:53:50what are the compliances the company is
1:53:52required to make and then we not only
1:53:54take the word of the opposite party on
1:53:56that we actually ask them to provide
1:53:58evidence that they've complied with
1:53:59everything that they've made those
1:54:00payments that they've been complying and
1:54:03they've been making those filings on an
1:54:04annual basis because see under a lot of
1:54:06laws you would require to make annual
1:54:08file you have to kind of make annual
1:54:10filings you're required to make
1:54:11quarterly filings for a lot of things so
1:54:13whether or not you've done that or not
1:54:15and those are easy to figure out
1:54:18right so that's how you will actually
1:54:20dig into doing the historic liabilities
1:54:25so we have three questions in the chat
1:54:27box if you could have a look otherwise i
1:54:28could uh speak out them for
1:54:31first is
1:54:32shava's health my question is related to
1:54:34the typography discussed does hostile
1:54:36takeover fall under any category you
1:54:37discuss or terms like hostile takeover
1:54:39informally used in the market
1:54:41so hostile takeover what happens is
1:54:43mostly that happens in the u.s market in
1:54:45the u.s this term you would have heard a
1:54:47lot that a hostile decor is taking place
1:54:49in india like i said a hot takeover will
1:54:52happen and it's mostly in relation to a
1:54:54listed company in india what will happen
1:54:56is that you will have that takeover code
1:54:58which we'll discuss in detail once we
1:55:00are discussing the laws which are
1:55:02required in a public m a and that will
1:55:04tell you what are the safeguards which
1:55:05are there under indian law which prevent
1:55:07a hostile decoder so under indian law
1:55:10what will happen is that you have to
1:55:11make an open offer and everybody has to
1:55:13accept that open offer you cannot just
1:55:16go you know randomly and buy out the
1:55:18entire shares of a company if you are
1:55:20buying you the moment you are reaching
1:55:21more than 10 of the shares of the
1:55:23company you have to make an open offer
1:55:25to all the other shareholders so we have
1:55:26a lot of safeguards in india when it
1:55:28comes to that under the takeover code so
1:55:30it's not something which can easily
1:55:32happen so the u.s market is a different
1:55:34law the securities law and that's where
1:55:35these questions uh
1:55:37things come up mostly
1:55:39mohammed
1:55:40has said uh
1:55:47see and then in mind three see in use
1:55:49for hostile it was a hostile takeover in
1:55:52india it's not that easy to do that
1:55:55definitely it's because i'll tell you
1:55:56when we'll discuss the laws in detail
1:55:58right now
1:56:00so would you mind writing inside what is
1:56:02the difference between
1:56:03compromise and arrangement as mentioned
1:56:05in section 138 comparing mna
1:56:08in section 130
1:56:09see these are terms so i'll tell you in
1:56:11like i said in under this indian company
1:56:13that know when they made it so they've
1:56:15made it a very fluid term
1:56:16compromise arrangements is something
1:56:19what if you read the act i think 230
1:56:21says that your companies along with the
1:56:23shareholders and creditors can enter
1:56:25into any type of compromise or any type
1:56:27of arrangement with each other so that
1:56:29arrangement can also be if i'm say
1:56:31reduction of share capital
1:56:33that compromiser arrangement with the
1:56:35creditors can be that i'm converting all
1:56:37their money which this code to those
1:56:39creditors and converting into equity or
1:56:42what i'm doing is then i am actually
1:56:44reducing the share capital of the
1:56:45company so that something can happen
1:56:47again between the shareholders so there
1:56:49is a lot of scope for the shareholders
1:56:51and creditors to come up with a lot of
1:56:53these compromises and arrangements
1:56:54amongst each other to meet the
1:56:56commercial objective
1:56:58obviously all of these compromises and
1:57:00arrangements which are there which are
1:57:01not falling under section 62 or section
1:57:0442 of the act
1:57:05those will have to go through a code
1:57:07approved process and the code approved
1:57:09process will require you to take
1:57:10permission from all the shareholders and
1:57:12creditors because all of these
1:57:14arrangements that you enter into are
1:57:16these creative ideas that you have as
1:57:18parties they will require you to affect
1:57:21the rights of the current shareholders
1:57:23so tomorrow if you want to do a
1:57:24reduction of capital that today
1:57:27everybody their 100 shareholders
1:57:29all of whom have one month share each
1:57:32but you want to buy back 50 percent of
1:57:34the shares and reduce the capital only
1:57:36to 50 but extinguish the shares of the
1:57:37remaining 50 people you will obviously
1:57:39require their consent so anything other
1:57:43than an amalgamation which is there any
1:57:45type of compromise that you have any
1:57:46reduction of capital or any other
1:57:48changes in your share capital that you
1:57:50want to do if you want to change
1:57:51dramatically change the rights of all
1:57:53the shareholders which are there in your
1:57:55company you know and a lot of these
1:57:57other things and these other
1:57:58arrangements which you want to come up
1:57:59with you go through a code
1:58:01process
1:58:03with it and it's not something that you
1:58:04can just directly do so anything which
1:58:06is there in section 62 of the act or
1:58:08section 42 of the act
1:58:10fair enough you go ahead and you do that
1:58:11but if it's not there in relation to the
1:58:13shares then you'll have to go through a
1:58:14court approved project uh
1:58:16process and for which it's a broad term
1:58:18which you have about compromise and
1:58:20arrangement these are not defined terms
1:58:22if you see under the companies act the
1:58:24company that does not define these terms
1:58:29do we have any more questions that need
1:58:30to be asked otherwise you'll proceed for
1:58:32the break
1:58:38so okay so we have suresh asking us a
1:58:40question so in the chat one entity gets
1:58:4218 stake out of this merger and has 30
1:58:44percent employees of the total measure
1:58:46then how can they manage in recent
1:58:47modules of public banks again psus our
1:58:50government government comes up with a
1:58:52separate act for those psu mergers and
1:58:54those are not you know court approved
1:58:56psu okay you will see that when the psus
1:58:59are coming budget may they announce that
1:59:00we are planning to merge these three
1:59:02psus and then everybody else comes on
1:59:04board so those are different processes
1:59:06insurance companies is not uh done
1:59:09through your company that mostly mostly
1:59:11insurance companies got the entire
1:59:13module process and all firstly you need
1:59:14ird approval irda has a separate set
1:59:18because it's a regulated industry so ird
1:59:20is a separate set of regulations which
1:59:22are required to be followed every person
1:59:24who's buying that company has to be a
1:59:25fit and proper person you have to meet
1:59:27capitalization requirements which are
1:59:29there which the irda has you have to
1:59:31have a certain outflow of money and you
1:59:33have to have certain budgetary
1:59:34requirements for you to in order to be
1:59:36able to merge those entities so it's a
1:59:38very different process than a normal
1:59:41company merger that you're having
1:59:43so if right now it's not as direct so
1:59:46what we are discussing right now is your
1:59:47plain and simple public company private
1:59:49company m a's which are there
1:59:51each and every sector if you start
1:59:52dwelling in there are many other laws
1:59:54which will come into the picture mostly
1:59:55these regulated sectors which are there
2:00:01right so any other questions we still
2:00:04have three minutes technically but i
2:00:06suppose if the questions are
2:00:08done with we can take a break
2:00:10and i request everyone to reassemble at
2:00:121 30 strictly we will start on time and
2:00:15we can take on the further sessions then
2:00:18thank you so much for joining in the
2:00:19session once so we'll meet you back here
2:00:21at 1 30 1 30. thank you everybody

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