Companies (Compromises, Arrangements and Amalgamations) Rules 2020

As per the notification from the Ministry of Corporate Affairs on 3rd February 2020, few rules of the Companies Rules 2016 of Compromises, Arrangements and Amalgamations has been amended under the Companies (Compromises, Arrangements and Amalgamations) Rules 2020. These rules will be enforced very soon as soon as it is published in the Gazette of India.

Modifications to the existing Companies Rules 2016

The following are the changes made:

Insertion of new sub-rules:

In Rule 3, after sub-rule (4), two new sub-rules have been added - sub-rule (5) and sub-rule (6).

Details of Sub Rule (5)

Takeover offer:

As per terms of takeover described in Sub-section (11) of Section 230, a company member (optionally along with another company member) can apply for a takeover of the company only when the sum of number of shares held by the interested members is equal to or greater than three-fourths of the total company shares. They need to apply in order to own some or the whole of the rest of the company shares.

Definition of Shares:

By shares of the company what is implied is the equity shares that carry the right to vote. The definition is extended to include securities like depository receipts that empower the shareholder to have the right to vote.

Condition explained:

This sub-rule is only applicable to the takeover offer. It is not applicable to any statutory or regulatory necessity. In other words, this sub-rule is not applicable to transfer or transmission of shares based on a contract, or shares transfer or transmission of shares for any regulatory or statutory requisite.

Details of Sub Rule (6)

The new sub-rule (6) gives more information on what the application of takeover offer should contain.

Registered Valuer Report:

The application should contain a report made by a registered valuer. This report will have details of how the share valuation of shares to be taken over, has been done. In other words, if a member of a company wants to take over 10% of remaining shares of the company, then the report must give details of how the share valuation for this 10% of remaining shares has been arrived at. Importantly, this valuation needs to be done by considering two factors namely:

Highest Price for Shares: In a time period of last one year (twelve months to be precise), what has been the highest price for the shares paid either by a single person or a group of persons.
Fair Price of Share: The registered valuer should calculate the fair price of share after considering several valuation parameters. These parameters should include:
- Return of Net Worth
- Book Value of Shares
- Earnings per Share
- Price Earning Multiple compared to the Industry Average amongst other parameters that are usually used for such companies.

Bank Account Details:

A separate bank account has to be opened by the company member who is making the takeover offer. At least 50% or more of the total takeover offer (calculated in the report) has to be deposited in this bank account. The details of this bank account have to be included in the takeover offer.

Substitution in the existing Companies Rules 2016

In the Schedule of Fees for Serial No.1, in Subsection (1) of Section 230, the application for compromise arrangement and amalgamation fee is set to Rs.5000.

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Frequently Asked Questions

Common questions about Companies (Compromises, Arrangements, Amalgamations) Rules 2020.

The Companies (Compromises, Arrangements and Amalgamations) Rules 2020 are amendments to the existing Companies Rules 2016, specifically related to compromises, arrangements, and amalgamations of companies. These new rules introduce changes such as the addition of sub-rules (5) and (6) under Rule 3, which provide guidelines for takeover offers and the required contents of such applications.

Sub-rule (5) introduces a new provision for company members (optionally along with another member) to apply for a takeover of the company, provided their combined shareholding is equal to or greater than three-fourths of the total company shares. This sub-rule defines the term "shares" to include equity shares with voting rights and securities like depository receipts that grant voting rights.

As per sub-rule (6), a takeover offer application must include a registered valuer's report detailing the valuation of shares to be taken over, considering the highest price paid for shares in the last year and the fair price calculated based on factors like net worth, book value, earnings per share, and price-earning multiples. Additionally, the application must provide details of a separate bank account with at least 50% of the total takeover offer amount deposited.

The notification has substituted the fee for applications related to compromises, arrangements, and amalgamations under Section 230, subsection (1) of the Companies Rules 2016. The amended fee for such applications is now set at Rs. 5,000.

The Companies (Compromises, Arrangements and Amalgamations) Rules 2020 aim to provide a more structured framework and guidelines for takeover offers, valuations, and applications related to compromises, arrangements, and amalgamations of companies. These rules introduce specific requirements and procedures to ensure transparency and fairness in such corporate actions.

The Companies (Compromises, Arrangements and Amalgamations) Rules 2020 will come into effect soon after their publication in the Gazette of India, as mentioned in the notification from the Ministry of Corporate Affairs dated 3rd February 2020.

The registered valuer's report is a crucial component of a takeover offer application under sub-rule (6). It serves to provide a fair and comprehensive valuation of the shares to be taken over, considering factors like the highest price paid for shares in the past year and the fair price calculated based on various valuation parameters specific to the company and industry.

No, sub-rule (5) is specifically applicable to takeover offers made under sub-section (11) of Section 230. It does not apply to share transfers or transmissions arising from contracts, regulatory requirements, or statutory necessities.

The requirement to open a separate bank account and deposit at least 50% of the total takeover offer amount ensures that the company member making the offer has sufficient financial resources and commitment to follow through with the proposed takeover. This measure helps protect the interests of other shareholders and maintains transparency in the process.

The Companies (Compromises, Arrangements and Amalgamations) Rules 2020 are applicable to all companies governed by the Companies Act, 2013, and the Companies Rules, 2016. These rules provide a framework for compromises, arrangements, and amalgamations involving such companies, subject to the conditions and procedures outlined in the rules.