Share Swap: New Currency of Modern Mergers and Acquisitions

With a surge in restructuring in India share swap transactions are becoming very common.

It is making Mergers and Acquisitions (M&A) possible even when the company is facing cash crunches by eliminating the need for a cash transaction. Share swap transactions create synergies between the two entities.

Share Swap deals in India

• March 2017, Vodafone Mobile Services Limited and Idea Cellular Limited announced a swap based on a share-for-share structure where Vodafone acquired 50.3 percent and Aditya Birla group (which owned Idea) was to be allocated 26 percent of equity in the merger. 
• With the merger of HDFC with HDFC Bank it created the largest swap, generating a market capitalization of INR 14,000 billion which was the biggest in India’s corporate history and was higher than the total value of all deals — USD 52 Billion in 2021.
• Jindal Stainless Limited and Jindal Stainless (Hisar) Limited merged into Jindal Stainless Limited in a 100:195 share-swap ratio.

What is Share Swap?

A share swap transaction is one in which consideration is not in cash. Shares can be used as a currency to acquire shares of the target company. These transactions are settled through issuance of shares of acquiring entity to other party. For example, company X is acquiring company Y using share swap arrangement, X gives some of its shares to Y shareholders in exchange and entity Y and its shares cease to exist after such deal. An M&A deal can be carried out through 100% share swap transactions.

How does share swap work?

Share swap deal work through share swap ratio. A share swap ratio is a number that how many shares of acquiring company will be received by shareholders of target company. Share valuation is crucial in share swap. Valuation is done after accounting for various factors including the current market value of the acquiring and the target company along with their financials and earning per share. In order to retain credibility while guaranteeing fair values arrived independent valuers and auditors are essential. In the historic merger of HDFC Bank and HDFC Ltd. share exchange ratio as per the merger scheme, was HDFC Bank was to issue and allot to eligible shareholders 42 new equity shares of the face value of Re. 1/- each, credited as fully paid-up, for every 25 equity shares of the face value of Rs. 2/- each fully paid-up held by such shareholder in HDFC Ltd.

Regulatory Regime in India for share swap transaction.

An Indian company opting for a share swap transaction and issuing shares pursuant to that instead of a cash payout is subject to Section 42 (Preferential allotment), 62(1)(C) under Companies Act, 2013.

• Check Articles of Association for issuance of shares other than cash.
• Obtain a valuation report from an independent valuer as appointed by Board or Audit committee.
• Convene an Extra-ordinary General Meeting of the Shareholders to pass a special resolution to approve issuance of shares for consideration other than cash and make disclosure in the explanatory statement attached to give details about the details of share swap ratio.
• A listed company must follow all the additional compliances laid down in SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

Cross Border share swap

Prior to November 2015 the overseas deals were facing difficulty as Foreign Exchange Management Regulations (FEMA) required prior approval of the government to undertake the share swap. However, with the liberalization of FEMA and Overseas Direct Investment (ODI) cross border primary share swap (issuance of new shares by the acquiring company to the target company shareholders) is permitted to companies which fall under approval route. Secondary share swap (that is share swaps involving only transfers of existing shares between the acquirer and seller) still requires government approval.

Authored by:

Rajiv Sharma, Partner and Archita Chaturvedi, Associate at Singhania & Co.