A much-needed clarification has been provided on two key issues pertaining to the date from which the merger/acquisition is effective. The uncertainty arose on account of different interpretations as regards the Company Law and the relevant Indian Accounting Standard 103.
Whether the date needs to be specific or can be linked to a future event
In order to mitigate the ambiguity surrounding the effective date of schemes of reconstruction under company law and accounting standards, the Ministry of Corporate Affairs (MCA) has issued a clarification with regards to ‘appointed date’ and ‘acquisition date’ under Companies Act, 2013 and Ind AS 103 (Business Combinations) respectively. Clarification has been provided on whether it is mandatory to indicate the ‘appointed date’ as a specific calendar date in the scheme of reconstruction. Section 232(6) of the Act states that the scheme shall clearly indicate an appointed date and the scheme shall be deemed to be effective from such date. The provision was very specific, leaving little room for companies, wherein the scheme of amalgamation / merger had to take effect on the occurrence of a future event. However, as a practice, companies were filing schemes with the National Company Law Tribunal either stating appointed date as a specific calendar date or a date based on a future event. With the circular issued on August 21, 2019, it is now possible for companies to opt for a calendar specific date or a date linked to future based event such as grant of licence by a competent authority or meeting the requirements of the agreement between the parties.
While providing the clarification, the circular draws upon the following court judgments
When is control deemed to have been transferred in case of acquisition
Clarification has also been provided on whether ‘acquisition date’ as per Ind AS 103 shall be the ‘appointed date’ as per section 232(6) of the Act. Ind AS 103 states that ‘acquisition date’ is the date on which the acquirer obtains the control of the acquiree which is generally the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree – closing date. However, the acquirer might obtain control on a date preceding or succeeding the closing date (for instance, if a written agreement expressly states so). Hence, proper judgment was to be exercised for the determination of the ‘acquisition date’. It is now clarified that the ‘appointed date’ shall be deemed to be the ‘acquisition date’ and accordingly the date of transfer of control is now aligned with the relevant accounting standard. Hence the judgment as regards date of acquiring control has been replaced by a specific provision / objective criteria.
Milan Mody is Partner at NA Shah Associates LLP. The views expressed in the article are personal.
First Published: IST