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The steel titan Tata Steel notified the exchanges of its board of directors’ decision after the recent historical event in which the board of directors authorized the amalgamation of seven firms into itself.[1] Six subsidiary businesses, including Tata Steel Long Product (TSPL), The Tinplate Firm of India, Tata Metaliks, TRF, Indian Steel, and Wired Products, Tata Steel Mining, and one associate company, S & T Mining Company, are among the organizations.” The proposed amalgamation by Tata Steel is to simplify the group holding structure, the primary reason for any of the Parent Companies to amalgamate its subsidiary company is to drive growth, strong parental growth, the amalgamation process helps to consolidate the down streaming operation thus helps in adding value growth added segments, cost reduction, additionally the corporate holding structure will bring enhanced agility to the business synergy and it will also unlock the opportunity for creating value shareholder value.[2]

The Company has proposed to opt for a Share Swap Arrangement and according to the exchange ratio, for TRF it is 17:10 (17 shares of tata steel for every 10 shares of TRF), for TSPL it is 67:10 (67 shares of tata steel for every 10 shares of TSPL), for Tinplate 33:10(33 shares of tata steel for every 10 shares of Tinplate), for Tata Metaliks it is 79:10 (79 shares of tata steel for every 10 shares of Tata Metaliks).[3] This arrangement calls our attention to the fundamentals of share swap agreements, how swap ratios are determined in merger and acquisition transactions, and judicial observations about share swap ratio determination.


In a share swap arrangement, shares are issued by the acquiring company to the target company’s shareholders as part of restructuring; this is essentially an exchange for shares as opposed to payments of cash consideration. In this case, we can say that shares are being used as money or currency to purchase the target company. Let’s say Company Z is the acquirer company that wants to buy Company Y; now Company Z will issue the target company’s shareholders with shares of its Company as part of the transaction.

Many companies are opting for share-swap arrangements as it gets difficult for a company to manage and get huge liquidity in one go. At a glance, Share- swap Arrangement might be looking like a cakewalk process, but it requires fair regulatory compliance in the procedure, Section 230-240 of the Indian Companies Act,2013 deals with the Merger & Acquisition part, approval of a minimum 75% of shareholders and class of creditors is required, approval of NCLAT also comes into the picture.[4]

If the business is not publicly traded, it must get a report from the registered valuer chosen by the board of directors or the audit firm, and the general meeting must be notified of the share exchange. Share-Swap Arrangement should also follow the guidelines as provided under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations[5] and subsequent amendments thereto SEBI(SAST)Regulations, regulations 3(1) and 4, 7, 9, 10a(iii) read with regulation 13 14 15(1) and other applicable regulations. If there is a cross-border merger under a share swap arrangement, then an overseas company has to face more regulations, will attract the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, it will also attract the Foreign Exchange Management (Transfer or issue of Security by a Person Resident outside India) Regulations.

Although share-swap agreements are typically taxed neutral, there are several circumstances in which the combined firm may be as well: Firstly, if a minimum of 50% of the shareholders of India become the shareholders of the newly amalgamated company, the second situation is when all the assets and liabilities of the target company are then transferred to the newly amalgamated company, the third situation is with the logic that there is no immediate return or profit in share-swap-merger, therefore, it is better to keep this merger tax-neutral and tax should be considered when there is cash-out by the shareholders.


The swap ratio basically measures the number of new shares the acquiring company has to give for each share of the target company’s shareholder in an M&A deal, it is a rate at which an acquiring company will exchange its share with the target company, for example of this is that company Z, the acquiring company is offering 5 shares for 1 share of a target company, then swap ratio will be 5:1, It is very important to determine swipe ratio as with the help of this the shareholders does not get impacted and they are on the same footing as they were in the target company and this all process is done by SEBI registered merchant banker. The merchant banker evaluates both the target company and the acquiring company in order to calculate the swap ratio. These evaluations include the target company’s financial health, the acquiring company’s debt level, and account metrics like book value, earnings per share, profit after tax, and dividend payments.

“The basic formula for swap ratio is [Swap Ratio= Number of acquirer’s new share issued/Number of target share bought] and the acquirer’s new shares issued is calculated as [Equity issued to do the deal/ Acquirer share price].” An apt example to understand the swap ratio is that an acquirer wants to acquire 10000 shares of the target company at Rupees 10 each, so here the deal value will be Rs.100000, they aim to finance this deal with 100% equity and so for this, the acquiring company is issuing 20000 shares, each share valuing at Rupees 5, so the swap ratio will be 2:1, dividing the equity issued by the acquirer’s share price (Rs.100000/ Rs.5) it gives us the information the number of shares issued by acquirer.


The court observed in the Mafatlal case[6] that it accepts certain methods in the determination of swap ratios, such as the Manageable Profit Method, Market value Method, and Net worth or Break-up Method, and additionally, these valuations should be made by a reputable firm, who are professional in their field. However, the court’s role in determining the swap ratio in share swap arrangements is very limited because it cannot delve into the issue of mathematical accuracy and business acumen.

In the case of Hindustan Lever Employees Union v. Hindustan Lever ltd.[7] and others, The Employees Union, who is the plaintiff in this case, said that the valuation of the arrangement might have been improved if the valuer had come up with another way. The Honourable Supreme Court dismissed the challenge and found that the valuer’s approach was legal, hence it affirmed the valuer’s calculated percentage. The swap ratio in this instance was in accordance with the arithmetical test, hence the court did not address the matter of mathematical correctness.

The Hon’ble Madras High Court in the Case of Kamala Sugar Mills Limited,[8] The court determined that because specialists in the fields of accounting and valuation can manage the difficult and technical process of valuing shares, it is preferable that the court refrains from evaluating and scrutinizing their calculations provided that it is calculated in line and regulation as stated by the regulating authority.

Further, The Calcutta High Court ruled in the case of Brooke Bond Lipton India Ltd.[9] Without alleging extortion, the court will accept a blend’s value and percentage of trade estimated by a reputable and qualified chartered accounting company. Simple allegations of extortion are inadequate since they fall well short of a true charge of fabricating all relevant facts. There was neither an allegation nor a setup in the particular instance.


Share swap arrangements are becoming common and accepted forms of M&A in today’s commercial and cashless transactions. They greatly aided businesses during the Covid crisis, when many of them were struggling with cash flow issues, and they represent a prime opportunity for businesses to leverage one another’s market values. However, the government and its different regulatory bodies should do more to regulate and promote share swap arrangements. When talking about the share-swap ratio, which is the mathematical and quantitative financial background of the company, it should follow all the Regulations as provided under SEBI and the apt method by which the interest of shareholders is protected, and investors remain unaffected by the M&A transaction.

Author(s) Name: Adnan Danish (National Law Institute University, Bhopal)


[1] The Hindu Bureau, Tata Steel board approves merger of seven entities into itself (The Hindu, 23 October 2022) <Tata Steel board approves merger of seven entities into itself – The Hindu> accessed 25 October 2022

[2] Mohit Agro Commodities v. Unknown Company Appeal (AT) No.59 of 2021

[3] Promita Shukla, Tata Steel Board Arrangement of its Subsidiaries (The Indian Express, 4 November 2022) <> accessed 25 October 2022

[4] The Companies Act, 2013, § 232, The Gazette of India, (August 30, 2013).

[5] SEBI (Substantial Acquisition of Shares and TakeoversRegulations2011 [last amended on March 6, 2017]

[6] Miheer H. Mafatlal v. Mafatlal Industries Ltd. AIR 1997 SC 506, (1997) 1 SCC 579

[7] Hindustan Lever Employee Union v. Hindustan Lever Ltd (1995) Supp. (1) SCC 499

[8] Kamala Sugar Mills Ltd.; In … vs Unknown on 14 March, 1980(1984 55 CompCas 308 Mad)

[9] Brooke Bond Lipton India v. Unknown on 09 September,1996(1999 98CompCas 496 Cal)