Mergers And Acquisitions In India
Author: Anuj Goel, MAIMS, Delhi.
In merger the acquiring company takes over the assets and liabilities of a merged company. All the combining companies dissolves and only one large company is set for operations. Acquisition is a more general term, enveloping in itself in a range of acquisition transactions. It could be acquisition of control, leading to takeover of a company. It could be acquisition of tangible assets, intangible assets, rights and other kinds of obligations. This article gives a brief introduction about the mergers and acquisitions in India.
WHAT IS A MERGER?
A merger is a combination of two companies into one larger company. This action involves stock swap or cash payments to the target. In merger the acquiring company takes over the assets and liabilities of a merged company. All the combining companies dissolves and only one large company is set for operations. In general, when the firms are similar in size the term consolidation is applied. When two firms differs significantly in size the term merger is used. Merger commonly takes two forms. In the first form amalgamation, in second form absorption
In amalgamation two entities tends to combine and form a new entity, extinguishing both the existing entities. Hence,
A+B=C where C is an entirely new company (Amalgamation or Consolidation)
In absorption one company absorbs or take overs other company in their name. Hence,
A+B=A where B company is absorbed in A (Absorption)
Usually, merger occurs in consensual setting, where executives from the target company helps those from the purchaser in a due diligence process to ensure that the deal is beneficial to both the parties. In a merger, the board of directors of both the companies agrees to combine and seek stakeholder approval for the combination. In most cause, at least 50% of the stakeholder of binding and the target firm have to agree to the merger. The target firm ceases to exist and to be a part of the acquired firm.
Different types of Mergers:
A merger between the firms that are totally engaged in two different activities. There are two types of conglomerate pure and mixed. Pure conglomerate involves the firms that have nothing in common, while mixed conglomerate mergers includes the firms that are looking for product or market extension.
Example: A athletic shoes manufacturer merges with a soft drink firm. The resulting company faced with the same competition in each of its two markets after the merger as the individual firms were before the merger. One example of conglomerate merger is the merge of Walt Disney with American Broadcasting Company.
2. Horizontal Merger:
A merger occurring between the companies in the same industry. Horizontal merger is a business consolidation that occurs between the firms which operates in the same space, often as competitors offering the same goods and service. Horizontal mergers is common in the industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry.
Example: A merger between Coca-Cola and Pepsi beverage division, for example, would be horizontal in nature. The goal of a horizontal is to create a new larger organization with increased market share.
3. Market Extension Mergers:
A market extension merger takes place between the firms that deals with the same products but different markets. The main purpose of market extension merger is to make sure that firms can get access to bigger markets and to make big client base.
Example: A very good example of market extension merger is the acquisition of Eagle Bancshares Inc. By the RBC Centura Eagle Bancshare’s headquarter at Atlanta, Georgia and has 283 workers. It has almost 90000 accounts and holds assets worth US $1 billion
4. Product Extension Mergers:
Product extension takes place between the firms that deals in the same product and operate in the same market. The product extension merger allows the merging companies to come together so that they can get access to bigger set of customers. This ensures that they can earn great profits.
Example: The acquisition of Mobilink Telecom Inc.by Broadcom is a proper example of product extension merger. Broadcom deals in the manufacturing of Bluetooth personal area network hardware systems and chips for IEEE 802.11b wireless LAN
5. Vertical Merger
A merger between two companies producing different goods and services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by firms that would be more efficient operating as one.
What is an Acquisition?
Acquisition is a more general term, enveloping in itself in a range of acquisition transactions. It could be acquisition of control, leading to takeover of a company. It could be acquisition of tangible assets, intangible assets, rights and other kinds of obligations. It could also be independent assets that may not lead to any kind of takeovers or mergers.
Meaning: a corporate action in which a firm takes most of, if not all, of the target company’s ownership stake in order to take control over target company. Acquisitions are often considered as the part of company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations and niche compared to expanding it on its own. Acquisitions, are often paid in cash, the acquiring company’s stock or combination of both. An acquisition, also known as a takeover, is the buying of one company by another.
There are four types of acquisitions:
Both the companies approve of the acquisition under friendly terms. There is no forceful takeover and the entire process is cordial.
A private company takeover a public company.
Back flip Acquisitions:
A very rare case of acquisitions in which a purchasing company becomes subsidiary of purchased company.
Here, as the name suggests whole operation is done by one company. The smaller company is put in such a condition in which they do not have any other option despite to say yes, or simply the bigger company buys all the stakes of smaller company, hence establishing bigger share and forming acquisition.
Indian System of Mergers and Acquisitions:
In India Mergers and Acquisitions are governed by Indian Companies Act, 1956 under section 391 to 394. Although mergers and acquisitions take place through mutual consents of both the firms, the procedure remain chiefly court driven. The approval of High Court is highly desirable for the commencement of any such process and the proposal of any such merger or acquisition is sanctioned by 3/4th of the
shareholders or creditors present at the General Board Meeting of concerned firm.
Law permits utmost time period of 210 days to both the companies for going ahead with the process of mergers and acquisitions. The allotted time period is clearly different from the minimum obligatory stay period for claimants. According to the law, the obligatory time frame for claimants is 210 commencing of filing of notice or acknowledgement of the commission’s order.
The entry limits of companies:
The entry limits are allocated in context of asset worth in context or company’s annual income. The entry limits in India are higher than European Union and are twofold as compared to United Kingdoms. The Indian M&A laws also permits combination of any Indian firm with its International counterparts, providing cross- border firms having set up in India.
There have been recent modifications in Indian Competition Act, 2002. It has replaced a voluntary announcement system with the mandatory one. Out of 106 nations which have formulated competitive laws, only 9 are acclaimed with a voluntary announcement system. Voluntary announcement systems are often correlated with business ambiguities and if the companies are identified for practicing monopoly after merging, the law strictly order them opt for de-merging of the business identity.
Provisions under Mergers and Acquisitions law in India:
- Provisions for tax allowance for mergers or de-mergers between two business identities is allocated under the Indian Income Tax Act. To qualify the allocation, these mergers or de-mergers are required to full the requirements related to section 2(19AA) and section 2(1B) of Indian Income Tax Act as per the pertinent state of affairs.
- Under the Indian Income Tax Act, the firm either Indian or foreign, qualifies for certain tax exemptions from the capital profits during transfer of shares.
- In case of “foreign company mergers”, a situation where two foreign firms are merged and a new formed identity is owned by Indian firm, a different set of guidelines is allotted. Hence the share allocation in targeted foreign business identity would be acknowledged as a transfer and would be chargeable under Indian tax law.
As per the clauses under the section 5(1) of Indian Income Tax Act, the international earnings by an Indian firm would be considered under “scope of income” for the Indian firm.