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What Is A Swap Ratio In An M&A Transaction And How Is It Arrived At?

In a Compromise, Arrangement & Amalgamation of a company with another company, there are various kinds of consideration that the parties in the transaction arrive upon. M&A transaction requires complex laws even for determining a share swap between the parties. In such a similar merger transaction the acquiring company and the acquired company may swap the number of shares either through Equity, Preference or debt in a proportion which they arrive from general meetings and discussion as upon the monetary health of each company in the transaction. To the effect, the Compromise, Arrangement & Amalgamation and its procedure by which the parties come into consideration for a Swap ratio has been dealt under Section 230 to 240 of the Companies Act, 2013 and in the Companies (Compromises, Arrangement, Amalgamations) Rules, 2016.

Swap Ratio in Compromise, Arrangement & Amalgamation.

In a transaction of amalgamation or merger, the companies come under the terms for the exchange of each other shares or liabilities, this exchange and the proportion of exchange compounds to swap ratio. Swap means where interexchange of a thing between the parties in a contract, whereas ratio means the amount of quantity each party may contribute in the exchange of transaction. For example, in amalgamation Company X is to acquire Company Y in exchange for Equity shares capital of each other, the swap ratio arrived upon is 1:3. Here, the acquired company will get 3 shares of the target company and the target company will receive 1 share of the Acquirer Company. The acquisition under this arrangement is done by a scheme of Compromise/Arrangement/Amalgamation as authorized by the Board of Directors of both companies and approved by NCLT.

Also Read: How a Company Board decision and actions are the cause of dishonesty?

Kinds of Swaps In An Acquisition.

There are two types of Swaps in an acquisition.

  • Stock Swaps

It is the most common method of acquisition and is an equity-based option of acquisition between the target company and the Acquirer Company which are exchanged in the transaction. Under the Stock swaps shareholding of a Target Company is exchanged with the Acquirer company. In this kind of swaps the shares of each company are accurately valued as per the Book value, the amount of debt and the net worth of each company. The share swap can be of Equity shares or Preference shares or both of the target company.

  • Debt/Equity Swaps

Similar to that of Shares Swaps it is Debt to Equity swaps. In this form of Swap, the Target company in an attempt to ease its debt burden makes a compromise in consideration of Equity of the Acquirer Company. The purpose of the Debt-Equity Swaps is to ease the Debt-Equity Ratio of the Target Company. In this transaction, the debt is written off in exchange for the shareholding of the Target Company. In a Debt-equity swap, it helps in debt restructuring in the company and the debt holders are provided with equity in place of the debts. This is generally done by the companies that have huge debt and to escape from the Bankruptcy proceedings.

In Debt-Equity Swap ratio, a swap ratio of 1:1 is generally considered a good deal where the target company has to offer equity shares in equal to its debt on its books. Whereas in a ratio of 1:2 the target company has to suffer financially because of high stakes it has to give to the Creditors. The only exception in debt/equity deal is when the Bond or debt raised by the company has a non-conversion agreement with the Creditor, becomes a block for the target company to convert this kind of Bond into a share or to ease up the debt in the company.

In short, the Debt/Equity is preferred to ease up the debt of the company, to improve the Debt-Equity Ratio of the Company and to avoid bankruptcy situation for the company. 

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How Parties Agree Upon A Swap Ratio?

To agree upon a swap ratio the parties in amalgamation has to comply with S.230 and S.240 of the Companies Act, 2013 and the Companies (Compromise, Arrangement & Amalgamation) Rules of 2016. The swap ratio between the parties can be arrived by several meetings and discussion between the parties which would take time and for this, the parties have to take several steps to reach a perfect deal. The process of discussions and meeting begins with an application under Sectoin.230 of the Companies Act, 2013 before the NCLT by any party to the proceeding in the compromise and arrangement.

What The Acquirer Has To Do?

The Acquirer after the application has to constitute a body of creditors or a class of creditors which will determine the proposal for the compromise and the arrangements in the meetings with the Transferor Company. The creditors shall submit the value of debt issued to the company and all details related to the debt in the meeting. The acquirer/transferee shall communicate the value of debts to the transferor company and in case of amalgamation the valuation report to the transferor company. The company shall also propose the scheme of the undertaking of property or liabilities as required to be transferred between the parties in compromise or arrangement. The acquirer/transferee shall prepare a draft on compromise or arrangement in the meeting of the creditors and shall also submit it to the NCLT.  

What the Target Company has to do?

The Target/transferor Company will state the Financial Health of the company, in general, and by producing the parameters related to Net Worth, Book value of the shares, Debts, the Earning per shares of the company for obtaining the proper value of the company (Board of Directors). Upon this report, a Registered Valuer shall produce the valuation report of the company.  The Target Company will appear before the meeting between the Acquirer/Transferee company and will produce the report related to findings in the valuation report. The company shall also produce all the compliances before SEBI, RBI and the Registrar of Companies in the meetings.

Also Read: Understand the difference between the Asset sale and Slump sale.


The parties in the transaction shall after meetings and discussion have to reach a common point in agreement of the swap ratio. The swap ratio will be determined as per the price fixed by the acquirer for the proper deal, which shall be examined as per the fare price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, the book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

Kinds Of Disputes In Determination Of Swap Ratio

The Supreme Court, the arriving of a swap ratio has been questioned on the basis of the legal procedure followed by the parties which are discussed below :

In Reliance Industries Ltd. v/s Unkown[1] the supreme court has pronounced that in deciding the consideration of compromise or arrangement between the parties if the dissenting voters in the class of creditors have been overcome by the majority decision of the creditors, the valuation report and the statutory compliances then, the court has no jurisdiction in question the procedure in determination of Swap Ratio.

Similarly, in the case of Parke Davis (India)Ltd. v/s Unkown [2][2005 124 CompCas 531 Bom], it is clear from the above observation that if any objection is raised before the company court to the swap ratio of shares, the enquiry that the court has to make is whether it is contrary to any law, whether it is contrary to any law, whether the valuation is carried out by an independent body and to find out whether it can be said that the ratio is unfair. The court has to see how the members who are the best judges of their own interest house voted on the resolutions. So far the present, it is nobody’s case that the swap ratio is contrary to any law. It is also nobody case that the experts who submitted the valuation report were not independent so far as the question of fairness is concerned.

Also in, Bank of Madura Shareholders v/s Governor of Reserve Bank of India[3], the learned Justice adjudicated that, it is ultimately for the shareholders to determine whether the scheme of amalgamation proposed by the banking company concerned should be granted their approval or not, with the ultimate control vested with RBI. The Court expressed no to opine nor desirable to view to express any opinion on the valuation of shares adopted for the determination of the swap ratio of shares. 

The High Court of Punjab & Haryana in the case of Sukh Realters Pvt. Ltd. v/s Ma Ganga Builders Pvt. Ltd. &others[4] had a question on accuracy and authenticity of the document the report of the properties from an Independent Approved Valuer for the purpose of Amalgamation. The court pointed out that in the proper fair valuation approach to arrive at the swap ratio by using the combination of 3 methods namely; Asset Value Approach, Market Value Approach, Income Approach to be applied following the directions of the Supreme Court in the decision of Hindustan Lever Employees Union v/s Hindustan Lever Ltd. & others [(1995)83 Company Case 30]. The said valuation report should have been placed in the Board Meeting of the Companies as well as in the General Meeting for the approval of the members along with Scheme of Amalgamation. Therefore, in the said case upon the circumstances and facts of the Scheme of Amalgamation the purchase consideration or the swap ratio was set aside and termed as insufficient and incorrect.


In a transaction of arrangement or amalgamation, the swap ratio determines the mathematical function of exchange between the transacting parties. The swap ratio denotes the quantitative approach of the companies and the financial background of the company in a transaction in determining the extent of acquisition by the companies. Either by Share swap or by Debt-Equity Swap the companies have their benefit in transferring of capital and performance of the business by the future Acquirer or management of the company.

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[1] https://indiankanoon.org/docfragment/184677221/?formInput=determination%20of%20swap%20ratio

[2] https://indiankanoon.org/doc/155916/

[3] https://indiankanoon.org/docfragment/1601006/?formInput=determination%20of%20swap%20ratio

[4] https://indiankanoon.org/doc/19591109/

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  1. Pingback: Understanding The Difference In Asset Sale and Slump Sale | Legal Shashtra

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