1

Dr. Rajkumar S Adukia

Author of more than 200 Books

B. Com (Hons.), FCA, FCS, FCMA, LL.B, MBA, Dip IFRS (UK), DLL&LW, DIPR, Dip in

Criminology. Ph.D.

Mobile: 098200 61049

Email Id: rajkumarradukia@caaa.in

Corporate Governance and its relevance in Merger and Amalgamations

Corporate Governance became a buzz word now-a-days. We talk of the corporate governance all

the time. Do we all know in real sense, what is corporate governance? its essence and how it can

be applied in an organisation? and so on. This article will provide you the whole idea.

Corporate Governance is not a new concept. The principles of good governance are as old as good

behaviour, which needs no formal definition. The principles of Governance have been in existence

for centuries. Corporate Governance defined by Kautilya. He states the fourfold duty of a King as:

Raksha (Protection), Vriddhi (Enhancement), Palana (Maintenance). Yogakshema – Safeguard.

The concept of governance has over the years gained momentum and a wider meaning. Its essence

was felt by many corporate failures. Such spectacular corporate failures arose primarily out of

poorly managed business practices.

An organization is an entity comprising multiple people such as its employees, management,

shareholders, suppliers, customers, contractors and external collaborators. Having a common

governance framework can play an important role in helping boards gain a better understanding of

their oversight role. The practice of corporate governance defines the role of the boards and

officers of the corporation. Not only this, the role of corporate governance is extremely important

in assessing Merger and Acquisitions. Before going into detail, we need to know the basic terms

such as:

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Meaning of Corporate

The word corporate has been defined in the Cambridge English Dictionary as relating to a large

company or group.

The word ‘company’ is derived from the Latin word (Com means with or together; panis means

bread). So, it means "companion, one who eats bread with you".

Meaning of Corporate Governance

Governance is "the process of decision-making and the process by which decisions are

implemented (or not implemented)". The term governance can apply to corporate, international,

national, local governance or to the interactions between other sectors of society. It is a general

concept and is applicable to all types of entities. Corporate governance is a technique which

governs the company’s policies, rules, practices and processes.

Merger & Amalgamation

Merger is a combination of two companies into a single larger company. As per cambridge English

Dictionary, it is an occasion when two or more companies join together to make one larger

company. In amalgamation, two or more companies are fused into one by merger or by one taking

over the other.

Corporate governance defined by various Scholars/Authors:

As per OECD Principles: corporate governance is “A system by which business Corporations

are directed and controlled”.

As per Mervyn King (Chairman: King Report): Good corporate governance is about

'intellectual honesty' and not just sticking to rules and regulations, capital flowed towards

companies that practiced this type of good governance.”

The Kumar Mangalam Birla Committee report defines it as “…fundamental objective of

corporate governance is the ‘enhancement of the long-term shareholder value while at the same

time protecting the interests of other stakeholders.”

“Corporate Governance is the system by which companies are directed and managed. It influences

how the objectives of the company are set and achieved, how risk is monitored and assessed, and

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how performance is optimised. (ASX Principles of Good Corporate Governance and Best

Practices Recommendations, 2003)

Why Corporate Governance?

➢ It lays down the framework for creating long-term trust between companies and the

external providers of capital

➢ It improves strategic thinking at the top by inducting independent directors who bring a

wealth of experience, and a host of new ideas

➢ It rationalizes the management and monitoring of risk that a firm faces globally

➢ It limits the liability of top management and directors, by carefully articulating the

decision-making process

How corporate governance can be applied?

❖ Best management practices

❖ Complying with the laws

❖ Fair trade practices

❖ Adherence to ethical standards

❖ Practice of corporate citizenship

❖ Social responsibility

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Components of Corporate Governance

Corporate Governance: Worldwide Scenario and committee reports

US

Corporate Governance has come into existence in the very beginning when the Securities and

Exchange Commission was established in 1934 under the Securities Act of 1933. In 1979, US

Securities Exchange Commission prescribed mandatory reporting on internal financial controls.

Various committees were formed from time to time to recommend for the corporate governance.

The first committee was formed in 1985 i.e. Committee of Sponsoring Organizations of the

Treadway Commission. It mainly deals with 3 subjects: enterprise risk management (ERM),

internal control, and fraud deterrence.

In February 8, 1999, the New York Stock Exchange (NYSE), the National Association of

Securities Dealers (NASD) and the Blue-Ribbon Committee on Improving the Effectiveness of

Corporate Audit Committees released its report.

Transparency

Independence

Accountability

Responsibility

Fairness

Social responsibilit

y

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UK

In UK, The Financial Reporting Council (FRC) is responsible for promoting high quality corporate

governance and reporting to foster investment. The UK Corporate Governance Code sets out

standards of good practice for listed companies on board composition and development,

remuneration, shareholder relations, accountability and audit.

In UK, various developments have been made since the day. It continues to have a high profile in

the UK. The first and foremost step towards corporate governance was taken by the Cadbury

committee. It was formed in May 1991, which was chaired by Sir Adrian Cadbury. UK Corporate

Governance Code (the Code) was produced in 1992 by the Cadbury Committee. Since then,

several amendments have been made and the most recent UK Corporate Governance Code was

published in April 2016 and the most recent UK Stewardship Code was published in September

2012.

In 1994 the King Report on Corporate Governance (King I) was published by the King Committee

on Corporate Governance. Till now four King’s report has been. The Committee revised its report

in 2002 (king II), and then in 2009 (King III). The King Committee published its

latest King IV Report on Corporate Governance for South Africa 2016 (King IV) on 1 November

2016.

In January 1995, Greenbury Committee was formed and the report of the group was published on

17 July 1995 to identify good practice in determining directors' remuneration and to prepare a code

of practice for UK.

In November 1995, Hampel Committee was set up to review and revise the earlier

recommendations of the Cadbury and Greenbury Committees.

In 1999, the Turnbull Report was first published and set out best practice on internal control for

UK listed companies which was named as Internal Control: Guidance for Directors on the

Combined Code (1999). In October 2005, an updated version of the guidance was issued with the

title 'Internal Control: Guidance for Directors on the Combined Code'.

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January 2003, Higgs Report was published. It considers ‘Review of the role and effectiveness of

non-executive directors’.

Also, in July, 2003, the Smith Report was published which proposed best practice guidance

relating to audit committees.

India

Corporate Governance was not in agenda of Indian Companies until early 1990s and no one would

find much reference to this subject in book of law till then. In India, weakness in the system such

as undesirable stock market practices, boards of directors without adequate fiduciary

responsibilities, poor disclosure practices, lack of transparency and chronic capitalism were all

crying for reforms and improved governance. As a part of liberalization process, in 1999 the

Government amended the Companies Act, 1956. Further amendments have followed subsequently

in the year 2000, 2002 and 2003. A variety of measures have been adopted including the

strengthening of certain shareholder rights (e.g. postal balloting on key issues), the empowering of

SEBI (e.g. to prosecute the defaulting companies, increased sanctions for directors who do not

fulfil their responsibilities, limits on the number of directorships, changes in reporting and the

requirement that a ‘small shareholder’s nominee’ be appointed on the Board of companies with a

paid-up capital of Rs. 5 crore or more)

The Confederation of Indian Industry (CII) took special initiative and published its first

comprehensive code on corporate governance (Desirable Corporate Governance: A Code) in 1998.

This was followed by the recommendations of the Kumar Mangalam Birla Committee on

Corporate Governance under the chairmanship of Kumar Mangalam Birla in 1999 with the

objective of promoting and raising of standards of good corporate governance. The

recommendations were accepted by SEBI in December 1999, and are established in Clause 49 of

the Listing Agreement.

In May 2000, the Department of Corporate Affairs (DCA) formed a broad-based study group under

the chairmanship of Dr. P.L. Sanjeev Reddy, Secretary of DCA. In November 2000, the Task

Force on Corporate Excellence set up by the group produced a report containing a range of

recommendations for raising governance standards among all companies in India. SEBI also

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instituted a committee under the chairmanship of Mr. N. R. Narayana Murthy which recommended

enhancements in corporate governance. SEBI has incorporated the recommendations made by the

Narayana Murthy Committee on Corporate Governance in Clause 49 of the listing agreement.

The Government further took a fresh initiative and constituted a committee in December 2004

under the chairmanship of Dr. J.J. Irani with the task of advising the government on the proposed

revisions to the Companies Act 1956.

In the year 2003, the Ministry of Company Affairs has set up National Foundation for Corporate

Governance (NFCG) in association with Confederation of Indian Industry (CII), Institute of

Company Secretaries of India (ICSI) and Institute of Chartered Accountants of India (ICAI). The

Government of India notified the Companies Act, 2013 ("New Companies Act"), which replaces

the erstwhile Companies Act, 1956. The New Act has greater emphasis on corporate governance

through the board and board processes.

Corporate Governance Framework in India for different sectors:

I. The Companies Act, 2013

II. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

III. Corporate Governance Guidelines for Insurers in India, 2016

IV. The NBFCs– Corporate Governance (Reserve Bank) Directions, 2015

V. Guidelines on Corporate Governance For CPSEs, 2010

VI. Secretarial Standards Issued by ICSI

Corporate Governance under the Companies Act, 2013

The Companies Act, 2013 ("New Companies Act") has been recently notified by the Government

of India, which replaces the former Companies Act, 1956. It has greater emphasis on corporate

governance through the board and board processes.

Section 149 under Chapter XI of the Companies Act, 2013 deals with the Companies to have

Board of Directors.

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A. Board of Directors

Number of Directors

Section 149(1) prescribes that every public company shall have a minimum of three directors,

private company shall have two directors and one person company shall have one director.

The maximum permissible directors cannot exceed 15 in a company. If more directors have to be

appointed, it can be done only with approval of the shareholders after passing a Special

Resolution.

Women Director (Rule 3 of the Companies (Appointment and Qualification of Directors) Rules,

2014)

At least one Women director for the following class of companies:

a) every listed company;

b) every other public company having-

i) paid-up share capital of 100 crore rupees or more; or

ii) turnover of 300 crore rupees or more.

Resident Director

As per section 149(3), every company is required to appoint one director who has stayed in India

for at least 180 days in the previous calendar year.

Board Composition

Every listed public company shall have at-least one third of total number of directors as

independent directors and the Central Government may further prescribe minimum number of

independent directors in any class or classes of company. [Section 149(4)]

B. Independent Director

Section 149(6) of the Companies Act, 2013 provides that:

“An independent director in relation to a company, means a director other than a managing

director or a whole-time director or a nominee director, –

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(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and

experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate

company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate

company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or

associate company, or their promoters, or directors, during the two immediately preceding

financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its

holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or

more of its gross turnover or total income or Rs. 50 lakh or such higher amount as may be

prescribed, whichever is lower, during the two immediately preceding financial years or during

the current financial year;

(e) who, neither himself nor any of his relatives –

(i) holds or has held the position of a key managerial personnel or is or has been employee of the

company or its holding, subsidiary or associate company in any of the three financial years

immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years

immediately preceding the financial year in which he is proposed to be appointed, of –

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its

holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding,

subsidiary or associate company amounting to ten per cent. Or more of the gross turnover of such

firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the

company; or

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(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that

receives twenty-five percent. or more of its receipts from the company, any of its promoters,

directors or its holding, subsidiary or associate company or that holds two per cent. or more of

the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed”.

C. Related Party Transactions

As per Section 134(3)(h) the Board’s Report shall contain particulars of contracts or arrangements

with related party as referred in section 188 of the Companies Act, 2013 in Form AOC-2

prescribed under Rule 8 of Companies (Accounts) Rules, 2014.

D. Board Meetings

As per section 173(1) every company shall hold the first meeting of the Board of directors within

thirty days of the date of its incorporation.

Frequency of Board meetings

Board meetings should be held regularly, at least four times in a year, with a maximum interval

of 120 days between meetings.

In case of One Person Company (OPC), small company and dormant company, at least one

Board meeting should be conducted in each half of the calendar year and the gap between two

meetings should not be less than Ninety days.

E. Board Committees

1. Audit Committee

2. Nomination & Remuneration Committee

3. Stakeholders Relationship Committee

4. Corporate Social Responsibility (CSR) Committee

Ideal Framework for Corporate Governance

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The objective of corporate governance is to promote strong, viable competitive corporations

accountable to stakeholders. The corporate governance depends upon various factors such as:

➢ the nature of the business;

➢ the company’s size and stage of development;

➢ availability of resources;

➢ shareholder expectations; and

➢ legal and regulatory requirements.

The ideal corporate governance framework should be:

1. Board size

There should be an optimum combination of executive and non-executive directors.

2. Role and powers of Board

There should be clearly defined role and powers of Board. Clear identification of powers,

roles, responsibilities and accountability of the Board, CEO, and the Chairman of the Board is

necessary for developing good corporate governance framework in an organisation and also to

avoid conflicts of interests between the senior management, CEO, and the Chairman and the

Board.

3. Regulatory framework

All those regulatory frameworks applicable to the organisation should be very clear in order to

avoid non-compliance and to increase firm’s efficiency. The Board and other senior management

should know their duty and non-compliances of which attracts penal provisions.

4. Board skills

The Board must possess the necessary skills, knowledge and expertise in the field of their work.

5. Training of Board members

The Organisation must provide some training to its board and other senior members from time to

time in order to ensure good corporate governance and other related duties. Various professional

development programmes should be conducted.

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6. Board independence

There must be sufficient number of independent directors on the board of the company to give

independent decisions and also to avoid conflict of interests. The Board needs to be capable of

assessing the performance of managers with an independent judgement.

7. Board meetings

Directors must devote sufficient time to conduct and attend board meetings. The board should

meet on fixed intervals to ensure better decision making.

8. Code of conduct

Every Organisation should establish code of conduct and these should be communicated to the

all stakeholders. It should be adhered by each member of the

organization.

9. Vigil Mechanism

There should be adequate vigil mechanism provided to the employees. The vigil mechanism shall

provide for adequate safeguards against victimisation of employees and directors who avail of the

vigil mechanism.

10. Disclosures

There should be disclosure and transparency norms prescribed for the organisation. Various

disclosures in the annual report should be made.

11. Monitoring the Board performance

The performance of the board should be monitored periodically. The Board should establish an

appropriate mechanism for reporting the results of Board’s performance evaluation results.

12. Board committees

The committees such as audit committee, risk management committee, CSR committee should

be established to review the adequacy of internal control and compliance with significant policies.

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Merger and Amalgamations

Mergers and acquisitions (M&A) have become important tools to respond to the increasing global

competition, rapid expansion into foreign markets and the economic survival of firms. There are

various types of merger and amalgamation such as Horizontal, Vertical and Conglomerate.

The term merger and amalgamation has not been defined under the Companies Act, 2013. Section

230 to 240 under Chapter XV of the Companies Act, 2013 deals with the ‘Compromises,

Arrangements and Amalgamations. It covers compromise or arrangements, mergers and

amalgamations, Corporate Debt Restructuring, demergers, fast track mergers for small

companies/holding subsidiary companies, cross border mergers, takeovers, amalgamation of

companies in public interest.

The Companies Act 2013, envisages a paradigm shift in the process of compromise/arrangement.

It envisages that all the powers and functions of the Company Law Board, Company Court, BIFR

under the Sick Industrial Companies Act will henceforth be exercised by NCLT.

Section 232: deals with mergers and amalgamation including demergers.

Section 232(1) states that when an application is made to the Tribunal under section 230 for the

sanctioning of a compromise or an arrangement proposed between a company and any such

persons as are mentioned in that section, and it is shown to the Tribunal— (a) that the compromise

or arrangement has been proposed for the purposes of, or in connection with, a scheme for the

reconstruction of the company or companies involving merger or the amalgamation of any two

or more companies; and (b) that under the scheme, the whole or any part of the undertaking,

property or liabilities of any company (hereinafter referred to as the transferor company) is

required to be transferred to another company (hereinafter referred to as the transferee company),

or is proposed to be divided among and transferred to two or more companies, the Tribunal may

on such application, order a meeting of the creditors or class of creditors or the members or class

of members, as the case may be, to be called, held and conducted in such manner as the Tribunal

may direct and the provisions of sub-sections (3) to (6) of section 230 shall apply mutatis

mutandis.

Circulation of documents for members/creditors meeting

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Section 232(2) provides that when an order has been made by the Tribunal under sub-section (1),

merging companies or the companies in respect of which a division is proposed, shall also be

required to circulate the following for the meeting so ordered by the Tribunal, namely:—

(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors of the

merging company;

(b) confirmation that a copy of the draft scheme has been filed with the Registrar;

(c) a report adopted by the directors of the merging companies explaining effect of compromise

on each class of shareholders, key managerial personnel, promotors and non-promoter

shareholders laying out in particular the share exchange ratio, specifying any special valuation

difficulties;

(d) the report of the expert with regard to valuation, if any;

(e) a supplementary accounting statement if the last annual accounts of any of the merging

company relate to a financial year ending more than six months before the first meeting of the

company summoned for the purposes of approving the scheme.

Sanctioning of scheme by tribunal

Section 232(3) states that the Tribunal, after satisfying itself that the procedure specified in sub-

sections (1) and (2) has been complied with, may, by order, sanction the compromise or

arrangement or by a subsequent order, make provision for the following matters, namely:—

(a) the transfer to the transferee company of the whole or any part of the undertaking, property or

liabilities of the transferor company from a date to be determined by the parties unless the

Tribunal, for reasons to be recorded by it in writing, decides otherwise;

(b) the allotment or appropriation by the transferee company of any shares, debentures, policies

or other like instruments in the company which, under the compromise or arrangement, are to be

allotted or appropriated by that company to or for any person: No transferee company can hold

shares in its own name or under any trust A transferee company shall not, as a result of the

compromise or arrangement, hold any shares in its own name or in the name of any trust whether

on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall

be cancelled or extinguished;

(c) the continuation by or against the transferee company of any legal proceedings pending by or

against any transferor company on the date of transfer;

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(d) dissolution, without winding-up, of any transferor company;

(e) the provision to be made for any persons who, within such time and in such manner as the

Tribunal directs, dissent from the compromise or arrangement;

(f) where share capital is held by any non-resident shareholder under the foreign direct investment

norms or guidelines specified by the Central Government or in accordance with any law for the

time being in force, the allotment of shares of the transferee company to such shareholder shall

be in the manner specified in the order;

(g) the transfer of the employees of the transferor company to the transferee company;

(h) when the transferor company is a listed company and the transferee company is an unlisted

company,—

(A) the transferee company shall remain an unlisted company until it becomes a listed company;

(B) if shareholders of the transferor company decide to opt out of the transferee company,

provision shall be made for payment of the value of shares held by them and other benefits in

accordance with a pre-determined price formula or after a valuation is made, and the arrangements

under this provision may be made by the Tribunal:

The amount of payment or valuation under this clause for any share shall not be less than what

has been specified by the Securities and Exchange Board under any regulations framed by it;

(i) where the transferor company is dissolved, the fee, if any, paid by the transferor company on

its authorised capital shall be set-off against any fees payable by the transferee company on its

authorised capital subsequent to the amalgamation; and

(j) such incidental, consequential and supplemental matters as are deemed necessary to secure

that the merger or amalgamation is fully and effectively carried out.

Auditor’s certificate as to conformity with accounting standard

No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the

company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if

any, proposed in the scheme of compromise or arrangement is in conformity with the accounting

standards prescribed under section 133.

Transfer of property or liabilities

Sub-section (4) stares that an order under this section provides for the transfer of any property or

liabilities, then, by virtue of the order, that property shall be transferred to the transferee company

and the liabilities shall be transferred to and become the liabilities of the transferee company and

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any property may, if the order so directs, be freed from any charge which shall by virtue of the

compromise or arrangement, cease to have effect.

Certified copy of the order to be filed with the registrar

Section 232(5) states that every company in relation to which the order is made shall cause a

certified copy of the order to be filed with the Registrar for registration within thirty days of the

receipt of certified copy of the order.

Effective date of the scheme

Section 232(6) states that the scheme under this section shall clearly indicate an appointed date

from which it shall be effective and the scheme shall be deemed to be effective from such date

and not at a date subsequent to the appointed date.

Annual statement certified by CA/CS/CWA to be filed with registrar every year until the

completion of the scheme

Section 232 (7) states that every company in relation to which the order is made shall, until the

completion of the scheme, file a statement in such form and within such time as may be prescribed

with the Registrar every year duly certified by a chartered accountant or a cost accountant or a

company secretary in practice indicating whether the scheme is being complied with in

accordance with the orders of the Tribunal or not.

Penalty

Section 232(8) states that if a transferor company or a transferee company contravenes the

provisions of this section, the transferor company or the transferee company, as the case may be,

shall be punishable with fine which shall not be less than one lakh rupees but which may extend

to twenty-five lakh rupees and every officer of such transferor or transferee company who is in

default, shall be punishable with imprisonment for a term which may extend to one year or with

fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or

with both.

Section 233 deals with Merger and Amalgamation of Certain Companies - Fast Track

Mergers

As per the provisions of Section 233, a notice with regard to the proposed Scheme is to be placed

before the Registrar of Companies, the Central Government, and the Official Liquidator to invite

objections to the Scheme. The objections and suggestions received by the companies should be

considered in the respective general meetings and the Scheme must be approved by shareholders

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at the general meetings holding at least 90 percent in value and creditors representing nine-tenths

of debt in value.

In the event of there being no objection, the Scheme will be approved and each of the Companies

involved will be required to file a declaration of solvency with Registrar of Companies of the

place where the Registered office of the Company are situated

The Transferee Company shall file a copy of Scheme so approved with Registrar of Companies,

the Central Government and the Official Liquidator where the registered office of the Company

is situated

However, in the event of any objection being raised against the proposed Scheme, or in case of

the Central Government being of the view that the Scheme is not in public interest, the Central

Government may file an application before NCLT stating its objections and request NCLT to

consider the proposed Scheme under the normal M&A process. The exclusivity of fast-track

mergers is expected to reduce the time elapsed during court proceedings, and will result in faster

disposal of matters.

List of some of the mergers and acquisitions in India-

1. Ranbaxy- Sun Pharmaceuticals- Sun Pharmaceutical Industries Limited, a multinational

pharmaceutical company headquartered in Mumbai, Maharashtra which manufactures and sells

pharmaceutical formulations and active pharmaceutical ingredients (APIs) primarily in India and

the United States bought the Ranbaxy Laboratories. Sun Pharma completed the acquisition of

Ranbaxy Laboratories Limited, an integrated, research based, international pharmaceutical

company, on 25th March 2015.

2. Flipkart- Myntra- Flipkart, India's largest e-tailer, has acquired online fashion portal Myntra.

Corporate Governance Issues in Merger and Amalgamations

At the time of merger and amalgamation, corporate governance plays a crucial role. Internal

corporate governance includes board of directors’ characteristics, the characteristics of the CEO

of the acquirer company and the impact of ownership structure on the efficiency of the firm. In

the context of corporate governance board size in many cases plays the crucial role. Characteristic

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of board of directors includes board size and the number of independent members of the board of

directors.

In a lot of large companies, top management is the part of board of directors. This fact may

adversely affect the decision-making on payment of dividends, and as a result, can lead to agency

conflicts and negative consequences as a reduction of cost of the company.

coordination and communication between the board of directors and top management of the

company is mainly dependent on the size of the board and the concentration of ownership in the

top management. Therefore, the differences between the interests of the shareholders with a large

board of directors may reduce the effectiveness of decision-making process. In order to have

effective board size, and strong decision making process, the corporate governance is must.