Mergers and Acquisitions in India - Mergers and

Acquisitions Across Indian Sectors

The process of mergers and acquisitions has gained substantial importance in today's
corporate world. This process is extensively used for restructuring the business
organizations. In India, the concept of mergers and acquisitions was initiated by the
government bodies. Some well known financial organizations also took the necessary
initiatives to restructure the corporate sector of India by adopting the mergers and
acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot
of challenges both in the domestic and international spheres. The increased competition
in the global market has prompted the Indian companies to go for mergers and
acquisitions as an important strategic choice. The trends of mergers and acquisitions in
India have changed over the years. The immediate effects of the mergers and
acquisitions have also been diverse across the various sectors of the Indian economy.

Mergers and Acquisitions Across Indian Sectors

Among the different Indian sectors that have resorted to mergers and acquisitions in
recent times, telecom, finance, FMCG, construction materials, automobile industry and
steel industry are worth mentioning. With the increasing number of Indian companies
opting for mergers and acquisitions, India is now one of the leading nations in the world
in terms of mergers and acquisitions.

The merger and acquisition business deals in India amounted to $40 billion during the
initial 2 months in the year 2007. The total estimated value of mergers and acquisitions
in India for 2007 was greater than $100 billion. It is twice the amount of mergers and
acquisitions in 2006.

Mergers and Acquisitions in India: the Latest Trends

Till recent past, the incidence of Indian entrepreneurs acquiring foreign enterprises was
not so common. The situation has undergone a sea change in the last couple of years.
Acquisition of foreign companies by the Indian businesses has been the latest trend in
the Indian corporate sector.

There are different factors that played their parts in facilitating the mergers and
acquisitions in India. Favorable government policies, buoyancy in economy, additional
liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are
the key factors behind the changing trends of mergers and acquisitions in India.

The Indian IT and ITES sectors have already proved their potential in the global market.
The other Indian sectors are also following the same trend. The increased participation
of the Indian companies in the global corporate sector has further facilitated the merger
and acquisition activities in India.

Major Mergers and Acquisitions in India

Recently the Indian companies have undertaken some important acquisitions. Some of
those are as follows:

Hindalco acquired Canada based Novelis. The deal involved transaction of $5,982
million. Tata Steel acquired Corus Group plc. The acquisition deal amounted to $12,000
million. Dr. Reddy's Labs acquired Betapharm through a deal worth of $597
million.Ranbaxy Labs acquired Terapia SA. The deal amounted to $324 million. Suzlon
Energy acquired Hansen Group through a deal of $565 million. The acquisition of
Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL
acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million. VSNL
acquired Teleglobe through a deal of $239 million.

When it comes to mergers and acquisitions deals in India , the total number was 287
from the month of January to May in 2007. It has involved monetary transaction of US
$47.37 billion. Out of these 287 merger and acquisition deals, there have been 102
cross country deals with a total valuation of US $28.19 billion.

The practice of mergers and acquisitions has attained considerable significance in the contemporary
corporate scenario which is broadly used for reorganizing the business entities. Indian industries were
exposed to plethora of challenges both nationally and internationally, since the introduction of Indian
economic reform in 1991. The cut-throat competition in international market compelled the Indian firms
to opt for mergers and acquisitions strategies, making it a vital premeditated option.

Why Mergers and Acquisitions in India?

The factors responsible for making the merger and acquisition deals favorable in India are:

 Dynamic government policies

 Corporate investments in industry
 Economic stability
 “ready to experiment” attitude of Indian industrialists

Sectors like pharmaceuticals, IT, ITES, telecommunications, steel, construction, etc, have proved their worth in the
international scenario and the rising participation of Indian firms in signing M&A deals has further triggered the
acquisition activities in India.

In spite of the massive downturn in 2009, the future of M&A deals in India looks promising. Indian telecom major
Bharti Airtel is all set to merge with its South African counterpart MTN, with a deal worth USD 23 billion. According to
the agreement Bharti Airtel would obtain 49% of stake in MTN and the South African telecom major would acquire
36% of stake in Bharti Airtel.

Ten biggest Mergers and Acquisitions deals in India

 Tata Steel acquired 100% stake in Corus Group on January 30, 2007. It was an all cash deal which
cumulatively amounted to $12.2 billion.

 Vodafone purchased administering interest of 67% owned by Hutch-Essar for a total worth of $11.1 billion
on February 11, 2007.
  India Aluminium and copper giant Hindalco Industries purchased Canada-based firm Novelis Inc in February
2007. The total worth of the deal was $6-billion.

 Indian pharma industry registered its first biggest in 2008 M&A deal through the acquisition of Japanese
pharmaceutical company Daiichi Sankyo by Indian major Ranbaxy for $4.5 billion.

 The Oil and Natural Gas Corp purchased Imperial Energy Plc in January 2009. The deal amounted to $2.8
billion and was considered as one of the biggest takeovers after 96.8% of London based companies'
shareholders acknowledged the buyout proposal.

 In November 2008 NTT DoCoMo, the Japan based telecom firm acquired 26% stake in Tata Teleservices
for USD 2.7 billion.

 India's financial industry saw the merging of two prominent banks - HDFC Bank and Centurion Bank of
Punjab. The deal took place in February 2008 for $2.4 billion.

 Tata Motors acquired Jaguar and Land Rover brands from Ford Motor in March 2008. The deal amounted to
$2.3 billion.

 2009 saw the acquisition Asarco LLC by Sterlite Industries Ltd's for $1.8 billion making it ninth biggest-ever
M&A agreement involving an Indian company.

 In May 2007, Suzlon Energy obtained the Germany-based wind turbine producer Repower. The 10th largest
in India, the M&A deal amounted to $1.7 billion.

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Introduction
The Indian economy has been growing with a rapid pace and has been emerging at the top, be it IT, R&D, pharmaceutical, infrastructure, energy,
consumer retail, telecom, financial services, media, and hospitality etc. It is second fastest growing economy in the world with GDP touching 9.3
% last year. This growth momentum was supported by the double digit growth of the services sector at 10.6% and industry at 9.7% in the first
quarter of 2006-07. Investors, big companies, industrial houses view Indian market in a growing and proliferating phase, whereby returns on
capital and the shareholder returns are high. Both the inbound and outbound mergers and acquisitions have increased dramatically. According to
Investment bankers, Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last year’s level and
quadruple of 2005.

In the first two months of 2007, corporate India witnessed deals worth close to $40 billion. One of the first overseas acquisitions by an Indian
company in 2007 was Mahindra & Mahindra’s takeover of 90 percent stake in Schoneweiss, a family-owned German company with over 140
years of experience in forging business. What hit the headlines early this year was Tata’s takeover of Corus for slightly over $10 billion. On the
heels of that deal, Hutchison Whampoa of Hong Kong sold their controlling stake in Hutchison-Essar to Vodafone for a whopping $11.1 billion.
Bangalore-based MTR’s packaged food division found a buyer in Orkala, a Norwegian company for $100 million. Service companies have also
joined the M&A game.

The taxation practice of Mumbai-based RSM Ambit was acquired by PricewaterhouseCoopers. There are many other bids in the pipeline. On an
average, in the last four years corporate earnings of companies in India have been increasing by 20-25 percent, contributing to enhanced
profitability and healthy balance sheets. For such companies, M&As are an effective strategy to expand their businesses and acquire global
footprint.

Mergers or amalgamation, result in the combination of two or more companies into one, wherein the merging entities lose their identities. No
fresh investment is made through this process. However, an exchange of shares takes place between the entities involved in such a process.
Generally, the company that survives is the buyer which retains its identity and the seller company is extinguished.

Definitions:
Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies
are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. Through mergers
and acquisitions, a company can (at least in theory) develop a competitive advantage and ultimately increase shareholder value. The said terms to
a layman may seem alike but in legal/ corporate terminology, they can be distinguished from each other:

# Merger: A full joining together of two previously separate corporations. A true merger in the legal sense occurs when both businesses dissolve
and fold their assets and liabilities into a newly created third entity. This entails the creation of a new corporation.

# Acquisition: Taking possession of another business. Also called a takeover or buyout. It may be share purchase (the buyer buys the shares of
the target company from the shareholders of the target company. The buyer will take on the company with all its assets and liabilities. ) or asset
purchase (buyer buys the assets of the target company from the target company)
In simple terms, A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made
by two "equals", whereas an acquisition or takeover on the other hand, is characterized the purchase of a smaller company by a much larger one.
This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A typical
merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a
company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old
company exchanged for an equal number of shares in the merged entity. In an acquisition, the acquiring firm usually offers a cash price per share
to the target firm’s shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio.
Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders

# Joint Venture: Two or more businesses joining together under a contractual agreement to conduct a specific business enterprise with both
parties sharing profits and losses. The venture is for one specific project only, rather than for a continuing business relationship as in a strategic
alliance.

# Strategic Alliance: A partnership with another business in which you combine efforts in a business effort involving anything from getting a
better price for goods by buying in bulk together to seeking business together with each of you providing part of the product. The basic idea
behind alliances is to minimize risk while maximizing your leverage.

# Partnership: A business in which two or more individuals who carry on a continuing business for profit as co-owners. Legally, a partnership is
regarded as a group of individuals rather than as a single entity, although each of the partners file their share of the profits on their individual tax
returns.

Many mergers are in truth acquisitions. One business actually buys another and incorporates it into its own business model. Because of this
misuse of the term merger, many statistics on mergers are presented for the combined mergers and acquisitions (M&A) that are occurring. This
gives a broader and more accurate view of the merger market .
Types of Mergers:

From the perception of business organizations, there is a whole host of different mergers. However, from an economist point of view i.e. based
on the relationship between the two merging companies, mergers are classified into following:

# Horizontal merger- Two companies that are in direct competition and share the same product lines and markets i.e. it results in the
consolidation of firms that are direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini

# Vertical merger- A customer and company or a supplier and company i.e. merger of firms that have actual or potential buyer-seller relationship
eg. Ford- Bendix, Time Warner-TBS.

# Conglomerate merger- generally a merger between companies which do not have any common business areas or no common relationship of
any kind. Consolidated firma may sell related products or share marketing and distribution channels or production processes. Such kind of
merger may be broadly classified into following:

# Product-extension merger - Conglomerate mergers which involves companies selling different but related products in the same market or sell
non-competing products and use same marketing channels of production process. E.g. Phillip Morris-Kraft, Pepsico- Pizza Hut, Proctor and
Gamble and Clorox

# Market-extension merger - Conglomerate mergers wherein companies that sell the same products in different markets/ geographic markets.
E.g. Morrison supermarkets and Safeway, Time Warner-TCI.

# Pure Conglomerate merger- two companies which merge have no obvious relationship of any kind. E.g. BankCorp of America- Hughes
Electronics.

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence reshape the market structure i.e. they have direct
impact on seller concentration whereas vertical and conglomerate mergers do not affect market structures e.g. the seller concentration directly.
They do not have anticompetitive consequences.

The circumstances and reasons for every merger are different and these circumstances impact the way the deal is dealt, approached, managed
and executed. .However, the success of mergers depends on how well the deal makers can integrate two companies while maintaining day-to-day
operations. Each deal has its own flips which are influenced by various extraneous factors such as human capital component and the leadership.
Much of it depends on the company’s leadership and the ability to retain people who are key to company’s on going success. It is important, that
both the parties should be clear in their mind as to the motive of such acquisition i.e. there should be census- ad- idiom. Profits, intellectual
property, costumer base are peripheral or central to the acquiring company, the motive will determine the risk profile of such M&A. Generally
before the onset of any deal, due diligence is conducted so as to gauze the risks involved, the quantum of assets and liabilities that are acquired
etc.

Legal Procedures for Merger, Amalgamations and Take-overs

The basis law related to mergers is codified in the Indian Companies Act, 1956 which works in tandem with various regulatory policies. The
general law relating to mergers, amalgamations and reconstruction is embodied in sections 391 to 396 of the Companies Act, 1956 which jointly
deal with the compromise and arrangement with creditors and members of a company needed for a merger. Section 391 gives the Tribunal the
power to sanction a compromise or arrangement between a company and its creditors/ members subject to certain conditions. Section 392 gives
the power to the Tribunal to enforce and/ or supervise such compromises or arrangements with creditors and members. Section 393 provides for
the availability of the information required by the creditors and members of the concerned company when acceding to such an arrangement.
Section 394 makes provisions for facilitating reconstruction and amalgamation of companies, by making an appropriate application to the
Tribunal. Section 395 gives power and duty to acquire the shares of shareholders dissenting from the scheme or contract approved by the
majority.

And Section 396 deals with the power of the central government to provide for an amalgamation of companies in the national interest. In any
scheme of amalgamation, both the amalgamating company or companies and the amalgamated company should comply with the requirements
specified in sections 391 to 394 and submit details of all the formalities for consideration of the Tribunal. It is not enough if one of the
companies alone fulfils the necessary formalities. Sections 394, 394A of the Companies Act deal with the procedures and the requirements to be
followed in order to effect amalgamations of companies coupled with the provisions relating to the powers of the Tribunal and the central
government in the matter of bringing about amalgamations of companies.

After the application is filed, the Tribunal would pass orders with regard to the fixation of the dates of the hearing, and the provision of a copy of
the application to the Registrar of Companies and the Regional Director of the Company Law Board in accordance with section 394A and to the
Official Liquidator for the report confirming that the affairs of the company have not been conducted in a manner prejudicial to the interest of
the shareholders or the public. Before sanctioning the scheme of amalgamation, the Tribunal has also to give notice of every application made to
it under section 391 to 394 to the central government and the Tribunal should take into consideration the representations, if any, made to it by the
government before passing any order granting or rejecting the scheme of amalgamation. Thus the central government is provided with an
opportunity to have a say in the matter of amalgamations of companies before the scheme of amalgamation is approved or rejected by the
Tribunal.
The powers and functions of the central government in this regard are exercised by the Company Law Board through its Regional Directors.
While hearing the petitions of the companies in connection with the scheme of amalgamation, the Tribunal would give the petitioner company an
opportunity to meet all the objections which may be raised by shareholders, creditors, the government and others. It is, therefore, necessary for
the company to keep itself ready to face the various arguments and challenges. Thus by the order of the Tribunal, the properties or liabilities of
the amalgamating company get transferred to the amalgamated company. Under section 394, the Tribunal has been specifically empowered to
make specific provisions in its order sanctioning an amalgamation for the transfer to the amalgamated company of the whole or any parts of the
properties, liabilities, etc. of the amalgamated company. The rights and liabilities of the employees of the amalgamating company would stand
transferred to the amalgamated company only in those cases where the Tribunal specifically directs so in its order.

The assets and liabilities of the amalgamating company automatically gets vested in the amalgamated company by virtue of the order of the
Tribunal granting a scheme of amalgamation. The Tribunal also make provisions for the means of payment to the shareholders of the transferor
companies, continuation by or against the transferee company of any legal proceedings pending by or against any transferor company, the
dissolution (without winding up) of any transferor company, the provision to be made for any person who dissents from the compromise or
arrangement, and any other incidental consequential and supplementary matters to secure the amalgamation process if it is necessary. The order
of the Tribunal granting sanction to the scheme of amalgamation must be submitted by every company to which the order applies (i.e., the
amalgamating company and the amalgamated company) to the Registrar of Companies for registration within thirty days.

Motives behind M & A

These motives are considered to add shareholder value:
# Economies of Scale: This generally refers to a method in which the average cost per unit is decreased through increased production, since fixed
costs are shared over an increased number of goods. In a layman’s language, more the products, more is the bargaining power. This is possible
only when the companies merge/ combine/ acquired, as the same can often obliterate duplicate departments or operation, thereby lowering the
cost of the company relative to theoretically the same revenue stream, thus increasing profit. It also provides varied pool of resources of both the
combining companies along with a larger share in the market, wherein the resources can be exercised.

# Increased revenue /Increased Market Share: This motive assumes that the company will be absorbing the major competitor and thus increase
its power (by capturing increased market share) to set prices.

# Cross selling: For example, a bank buying a stock broker could then sell its banking products to the stock brokers customers, while the broker
can sign up the bank’ customers for brokerage account. Or, a manufacturer can acquire and sell complimentary products.

# Corporate Synergy: Better use of complimentary resources. It may take the form of revenue enhancement (to generate more revenue than its
two predecessor standalone companies would be able to generate) and cost savings (to reduce or eliminate expenses associated with running a
business).

# Taxes : A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a sick company is bought by giants.

# Geographical or other diversification: this is designed to smooth the earning results of a company, which over the long term smoothens the
stock price of the company giving conservative investors more confidence in investing in the company. However, this does not always deliver
value to shareholders.

# Resource transfer: Resources are unevenly distributed across firms and interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining scarce resources. Eg: Laying of employees, reducing taxes etc.

# Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge
may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing
in the investment community: bigger firms often have an easier time raising capital than smaller ones.

Advantages of M&A’s:
The general advantage behind mergers and acquisition is that it provides a productive platform for the companies to grow, though much of it
depends on the way the deal is implemented. It is a way to increase market penetration in a particular area with the help of an established base.
As per Mr D.S Brar (former C.E.O of Ranbaxy pharmaceuticals), few reasons for M&A’s are:
# Accessing new markets
# maintaining growth momentum
# acquiring visibility and international brands
# buying cutting edge technology rather than importing it
# taking on global competition
# improving operating margins and efficiencies
# developing new product mixes

Conclusion
In real terms, the rationale behind mergers and acquisitions is that the two companies are more valuable, profitable than individual companies
and that the shareholder value is also over and above that of the sum of the two companies. Despite negative studies and resistance from the
economists, M&A’s continue to be an important tool behind growth of a company. Reason being, the expansion is not limited by internal
resources, no drain on working capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate industry - increase
firm's market power.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are heating up in India and are growing with an ever
increasing cadence. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and
variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by
bigger ones.

The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their
reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies
for purpose of expanding their operation and increasing their profits, which in façade depends on the kind of companies being merged. Indian
markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of
business by multinationals operating in India, increasing competition against imports and acquisition activities. Therefore, it is ripe time for
business houses and corporates to watch the Indian market, and grab the opportunity.

Laws Regulating Merger

Following are the laws that regulate the merger of the company:-
(I) The Companies Act , 1956
Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations, mergers
and the procedure to be followed for getting the arrangement, compromise or the scheme of
amalgamation approved. Though, section 391 deals with the issue of compromise or arrangement
which is different from the issue of amalgamation as deal with under section 394, as section 394
too refers to the procedure under section 391 etc., all the section are to be seen together while
understanding the procedure of getting the scheme of amalgamation approved. Again, it is true
that while the procedure to be followed in case of amalgamation of two companies is wider than
the scheme of compromise or arrangement though there exist substantial overlapping.

The procedure to be followed while getting the scheme of amalgamation and the important
points, are as follows:-
(1) Any company, creditors of the company, class of them, members or the class of members can
file an application under section 391 seeking sanction of any scheme of compromise or
arrangement. However, by its very nature it can be understood that the scheme of amalgamation
is normally presented by the company. While filing an application either under section 391 or
section 394, the applicant is supposed to disclose all material particulars in accordance with the
provisions of the Act.
(2) Upon satisfying that the scheme is prima facie workable and fair, the Tribunal order for the
meeting of the members, class of members, creditors or the class of creditors. Rather, passing an
order calling for meeting, if the requirements of holding meetings with class of shareholders or
the members, are specifically dealt with in the order calling meeting, then, there won’t be any
subsequent litigation. The scope of conduct of meeting with such class of members or the
shareholders is wider in case of amalgamation than where a scheme of compromise or
arrangement is sought for under section 391

(3) The scheme must get approved by the majority of the stake holders viz., the members, class
of members, creditors or such class of creditors. The scope of conduct of meeting with the
members, class of members, creditors or such class of creditors will be restrictive some what in
an application seeking compromise or arrangement.

(4) There should be due notice disclosing all material particulars and annexing the copy of the
scheme as the case may be while calling the meeting.

(5) In a case where amalgamation of two companies is sought for, before approving the scheme
of amalgamation, a report is to be received form the registrar of companies that the approval of
scheme will not prejudice the interests of the shareholders.

(6) The Central Government is also required to file its report in an application seeking approval
of compromise, arrangement or the amalgamation as the case may be under section 394A.

(7) After complying with all the requirements, if the scheme is approved, then, the certified copy
of the order is to be filed with the concerned authorities.

(II) The Competition Act ,2002

Following provisions of the Competition Act, 2002 deals with mergers of the company:-
(1) Section 5 of the Competition Act, 2002 deals with “Combinations” which defines
combination by reference to assets and turnover
(a) exclusively in India and
(b) in India and outside India.

For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian
company without prior notification and approval of the Competition Commission. On the other
hand, a foreign company with turnover outside India of more than USD 1.5 billion (or in excess
of Rs. 4500 crores) may acquire a company in India with sales just short of Rs. 1500 crores
without any notification to (or approval of) the Competition Commission being required.

(2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a
combination which causes or is likely to cause an appreciable adverse effect on competition
within the relevant market in India and such a combination shall be void.
All types of intra-group combinations, mergers, demergers, reorganizations and other similar
transactions should be specifically exempted from the notification procedure and appropriate
clauses should be incorporated in sub-regulation 5(2) of the Regulations. These transactions do
not have any competitive impact on the market for assessment under the Competition Act,
Section 6.

(III) Foreign Exchange Management Act,1999

The foreign exchange laws relating to issuance and allotment of shares to foreign entities are
contained in The Foreign Exchange Management (Transfer or Issue of Security by a person
residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May,
2000. These regulations provide general guidelines on issuance of shares or securities by an
Indian entity to a person residing outside India or recording in its books any transfer of security
from or to such person. RBI has issued detailed guidelines on foreign investment in India vide
“Foreign Direct Investment Scheme” contained in Schedule 1 of said regulation.

(IV) SEBI Take over Code 1994

SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to
55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target
company in any financial year. [Regulation 11(1) of the SEBI Takeover Regulations] However,
acquisition of shares or voting rights beyond 26% would apparently attract the notification
procedure under the Act. It should be clarified that notification to CCI will not be required for
consolidation of shares or voting rights permitted under the SEBI Takeover Regulations.
Similarly the acquirer who has already acquired control of a company (say a listed company),
after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be
exempted from the Act for further acquisition of shares or voting rights in the same company.

(V) The Indian Income Tax Act (ITA), 1961

Merger has not been defined under the ITA but has been covered under the term 'amalgamation'
as defined in section 2(1B) of the Act. To encourage restructuring, merger and demerger has
been given a special treatment in the Income-tax Act since the beginning. The Finance Act, 1999
clarified many issues relating to Business Reorganizations thereby facilitating and making
business restructuring tax neutral. As per Finance Minister this has been done to accelerate
internal liberalization. Certain provisions applicable to mergers/demergers are as under:
Definition of Amalgamation/Merger — Section 2(1B). Amalgamation means merger of either
one or more companies with another company or merger of two or more companies to form one
company in such a manner that:
(1) All the properties and liabilities of the transferor company/companies become the properties
and liabilities of Transferee Company.
(2) Shareholders holding not less than 75% of the value of shares in the transferor company
(other than shares which are held by, or by a nominee for, the transferee company or its
subsidiaries) become shareholders of the transferee company.

The following provisions would be applicable to merger only if the conditions laid down in
section 2(1B) relating to merger are fulfilled:
(1) Taxability in the hands of Transferee Company — Section 47(vi) & section 47
(a) The transfer of shares by the shareholders of the transferor company in lieu of shares of the
transferee company on merger is not regarded as transfer and hence gains arising from the same
are not chargeable to tax in the hands of the shareholders of the transferee company. [Section
47(vii)]
(b) In case of merger, cost of acquisition of shares of the transferee company, which were
acquired in pursuant to merger will be the cost incurred for acquiring the shares of the transferor
company. [Section 49(2)]

(VI) Mandatory permission by the courts

Any scheme for mergers has to be sanctioned by the courts of the country. The company act
provides that the high court of the respective states where the transferor and the transferee
companies have their respective registered offices have the necessary jurisdiction to direct the
winding up or regulate the merger of the companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the arrangements after
having sanctioned the scheme of mergers as per the section 392 of the Company Act. Thereafter
the courts would issue the necessary sanctions for the scheme of mergers after dealing with the
application for the merger if they are convinced that the impending merger is “fair and
reasonable”.

The courts also have a certain limit to their powers to exercise their jurisdiction which have
essentially evolved from their own rulings. For example, the courts will not allow the merger to
come through the intervention of the courts, if the same can be effected through some other
provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if
there was something that the parties themselves could not agree to; also, if the merger, if
allowed, would be in contravention of certain conditions laid down by the law, such a merger
also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of
writs to entertain an appeal over a matter that is otherwise “final, conclusive and binding” as per
the section 391 of the Company act.

(VII) Stamp duty

Stamp act varies from state to State. As per Bombay Stamp Act, conveyance includes an order in
respect of amalgamation; by which property is transferred to or vested in any other person. As
per this Act, rate of stamp duty is 10 per cent.

Intellectual Property Due Diligence In Mergers And Acquisitions

The increased profile, frequency, and value of intellectual property related transactions have
elevated the need for all legal and financial professionals and Intellectual Property (IP) owner to
have thorough understanding of the assessment and the valuation of these assets, and their role in
commercial transaction. A detailed assessment of intellectual property asset is becoming an
increasingly integrated part of commercial transaction. Due diligence is the process of
investigating a party’s ownership, right to use, and right to stop others from using the IP rights
involved in sale or merger ---the nature of transaction and the rights being acquired will
determine the extent and focus of the due diligence review. Due Diligence in IP for valuation
would help in building strategy, where in:-
(a) If Intellectual Property asset is underplayed the plans for maximization would be discussed.
(b) If the Trademark has been maximized to the point that it has lost its cachet in the market
place, reclaiming may be considered.
(c) If mark is undergoing generalization and is becoming generic, reclaiming the mark from
slipping to generic status would need to be considered.
(d) Certain events can devalue an Intellectual Property Asset, in the same way a fire can
suddenly destroy a piece of real property. These sudden events in respect of IP could be adverse
publicity or personal injury arising from a product. An essential part of the due diligence and
valuation process accounts for the impact of product and company-related events on assets –
management can use risk information revealed in the due diligence.
(e) Due diligence could highlight contingent risk which do not always arise from Intellectual
Property law itself but may be significantly affected by product liability and contract law and
other non Intellectual Property realms.
Therefore Intellectual Property due diligence and valuation can be correlated with the overall
legal due diligence to provide an accurate conclusion regarding the asset present and future value

Legal Procedure For Bringing About Merger Of Companies

(1) Examination of object clauses:
The MOA of both the companies should be examined to check the power to amalgamate is
available. Further, the object clause of the merging company should permit it to carry on the
business of the merged company. If such clauses do not exist, necessary approvals of the share
holders, board of directors, and company law board are required.
(2) Intimation to stock exchanges:
The stock exchanges where merging and merged companies are listed should be informed about
the merger proposal. From time to time, copies of all notices, resolutions, and orders should be
mailed to the concerned stock exchanges.
(3) Approval of the draft merger proposal by the respective boards:
The draft merger proposal should be approved by the respective BOD’s. The board of each
company should pass a resolution authorizing its directors/executives to pursue the matter
further.
(4) Application to high courts:
Once the drafts of merger proposal is approved by the respective boards, each company should
make an application to the high court of the state where its registered office is situated so that it
can convene the meetings of share holders and creditors for passing the merger proposal.
(5) Dispatch of notice to share holders and creditors:
In order to convene the meetings of share holders and creditors, a notice and an explanatory
statement of the meeting, as approved by the high court, should be dispatched by each company
to its shareholders and creditors so that they get 21 days advance intimation. The notice of the
meetings should also be published in two news papers.
(6) Holding of meetings of share holders and creditors:
A meeting of share holders should be held by each company for passing the scheme of mergers
at least 75% of shareholders who vote either in person or by proxy must approve the scheme of
merger. Same applies to creditors also.
(7) Petition to High Court for confirmation and passing of HC orders:
Once the mergers scheme is passed by the share holders and creditors, the companies involved in
the merger should present a petition to the HC for confirming the scheme of merger. A notice
about the same has to be published in 2 newspapers.
(8) Filing the order with the registrar:
Certified true copies of the high court order must be filed with the registrar of companies within
the time limit specified by the court.
(9) Transfer of assets and liabilities:
After the final orders have been passed by both the HC’s, all the assets and liabilities of the
merged company will have to be transferred to the merging company.
(10) Issue of shares and debentures:
The merging company, after fulfilling the provisions of the law, should issue shares and
debentures of the merging company. The new shares and debentures so issued will then be listed
on the stock exchange.

Waiting Period In Merger

International experience shows that 80-85% of mergers and acquisitions do not raise competitive
concerns and are generally approved between 30-60 days. The rest tend to take longer time and,
therefore, laws permit sufficient time for looking into complex cases. The International
Competition Network, an association of global competition authorities, had recommended that
the straight forward cases should be dealt with within six weeks and complex cases within six
months.
The Indian competition law prescribes a maximum of 210 days for determination of
combination, which includes mergers, amalgamations, acquisitions etc. This however should not
be read as the minimum period of compulsory wait for parties who will notify the Competition
Commission. In fact, the law clearly states that the compulsory wait period is either 210 days
from the filing of the notice or the order of the Commission, whichever is earlier. In the event the
Commission approves a proposed combination on the 30th day, it can take effect on the 31st day.
The internal time limits within the overall gap of 210 days are proposed to be built in the
regulations that the Commission will be drafting, so that the over whelming proportion of
mergers would receive approval within a much shorter period.
The time lines prescribed under the Act and the Regulations do not take cognizance of the
compliances to be observed under other statutory provisions like the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997 (‘SEBI Takeover Regulations’). SEBI
Takeover Regulations require the acquirer to complete all procedures relating to the public offer
including payment of consideration to the shareholders who have accepted the offer, within 90
days from the date of public announcement. Similarly, mergers and amalgamations get
completed generally in 3-4 months’ time. Failure to make payments to the shareholders in the
public offer within the time stipulated in the SEBI Takeover Regulations entails payment of
interest by the acquirer at a rate as may be specified by SEBI. [Regulation 22(12) of the SEBI
Takeover Regulations] It would therefore be essential that the maximum turnaround time for
CCI should be reduced from 210 days to 90 days.

Conclusion
With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are
heating up in India and are growing with an ever increasing cadence. They are no more limited to
one particular type of business. The list of past and anticipated mergers covers every size and
variety of business -- mergers are on the increase over the whole marketplace, providing
platforms for the small companies being acquired by bigger ones. The basic reason behind
mergers and acquisitions is that organizations merge and form a single entity to achieve
economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage.
In simple terminology, mergers are considered as an important tool by companies for purpose of
expanding their operation and increasing their profits, which in façade depends on the kind of
companies being merged. Indian markets have witnessed burgeoning trend in mergers which
may be due to business consolidation by large industrial houses, consolidation of business by
multinationals operating in India, increasing competition against imports and acquisition
activities. Therefore, it is ripe time for business houses and corporates to watch the Indian
market, and grab the opportunity.