A PROJECT ASSIGNMENT ON

MERGERS AND ACQUISITIONS

ST XAVIER’S COLLEGE

BY HABIB SARKAR

B.COM (MORNING) 3RD YEAR

ROLL NO. – 565

UNDER THE GUIDANCE OF PROF. A. P. MONDAL

MERGERS AND ACQUISITIONS

CONTENTS:

CHAPTER 1
 INTRODUCTION
 OBJECTIVE OF STUDY
 METHODOLOGY
 LIMITATION OF STUDY
 MERGERS AND ACQUISITIONS ACROSS
INDIAN SECTORS
 MERGERS AND ACQUISITION IN INDIA: LATEST
TRENDS

CHAPTER 2
 MERGERS AND AMALGATION
 ACQUISITIONS AND TAKEOVER
 DISTINCTION BETWEEN MERGER AND
ACQUISITION
 BENEFITS OF MERGERS AND ACQUISITIONS
 REASONS FOR MERGER AND ACQUISITIONS
 REASONS FOR FAILURE OF MERGERS AND
ACQUISITIONS

CHAPTER 3
 MERGERS: KEY CORPORATE AND SECURITIES
LAWS CONSIDERATION

CHAPTER 4
 ACQUISITION: KEY CORPORATE AND SECURITIES
LAWS CONSIDERATION

CHAPTER 5
 COMPETITION LAW

CHAPTER 6
 CASE STUDY: RELIANCE INDUSTRIES LTD. (RIL)
AND RELIANCE PETROLEUM LTD. (RPL) MERGER
 CONCLUSION
 BIBLIOGRAPHY

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CHAPTER 1

Introduction:

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.

Objective of Study:

This project study aims to provide a basis for the conceptual framework of
Mergers and Acquisition. An attempt is made to highlight the following
aspects:
 Concept of Mergers and Acquisitions.
 Latest trends of Mergers and Acquisitions in India.
 Different types of Mergers and Acquisitions.
 Distinction between Mergers and Acquisitions.
 Benefits of Mergers and Acquisitions.
 Reasons for Mergers and Acquisitions.
 Reasons for failure of Mergers and Acquisitions.
 Key Corporate and Securities Law consideration of Mergers and
Acquisitions.
 Competition Law.

Research Methodology and Limitation of Study:

Research methodology is a way to systematically solve research problem. In

it we study the various steps that are generally adopted by researcher in
studying his research problem along with the logic behind them. It is
necessary for a researcher to know not only the research
methods/techniques but also the methodology. It may be noted, in the
context of planning & development, that the significance of research lies in

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its quality and not in quantity. Researchers should know how to apply
particular research techniques, but they also need to know which of these
methods or techniques, are relevant and which are not, and what would they
mean and indicate and why.

This project is the mixture of theoretical as well as practical knowledge. Also

it contains ideas and information imparted by the guide. The secondary data
required for the project was collected from various websites and books of
reputed authors.

The project started with sorting all the raw data and arranging them in
perfect order. The data was collected from various sites, books, journals, etc.
A detail study of the Companies Act and SEBI guidelines was done to
understand the legal aspect of mergers and acquisition.

However, I have faced various problems and challenges while collecting the
aforesaid information. The said problems have been listed below as its
limitation:
1 Time constraint - Due to time constraint, a deep research could not be
conducted which would have given more accurate result. However,
nevertheless the results and finding of the said study has given a brief
understanding and status of Mergers and Acquisition in India.
2 No access to relevant information – Another important limitation to be
noted is that some relevant information which would have been very
important for the accurate result was not accessible by the general public.
The said information was accessible only to certain authorized person.

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.
India welcomed 2010 with great aplomb as it announced five big Mergers &
Acquisition (M&A) deals in the first quarter. These five major deals accounted
for over 71 per cent of the total M&A deals, and are worth around $19 billion.
In fact the biggest of them all, the Airtel-Zain mega deal worth $10.7 billion
has surpassed the total M&A figures for 2009. It is also the first time that an
Indian telecom firm has acquired a global telecom major.

Mergers and Acquisitions in India: the Latest Trends:

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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.

CHAPTER 2

Mergers and Amalgamations:

The term ‘merger’ is not defined under the
Companies Act, 1956 (the ‘Companies Act’),
the Income Tax Act, 1961 (the ‘ITA’) or any
other Indian law. Simply put, a merger is a
combination of two or more distinct entities into
one; the desired effect being not just the
accumulation of assets and liabilities of the
distinct entities, but to achieve several other benefits such as, economies of
scale, acquisition of cutting edge technologies, obtaining access into sectors /
markets with established players etc. Generally, in a merger, the merging
entities would cease to be in existence and would merge into a single
surviving entity. Very often, the two expressions "merger" and
"amalgamation" are used synonymously. But there is, in fact, a difference.
Merger generally refers to a circumstance in which the assets and liabilities of
a company (merging company) are vested in another company (the merged
company). The merging entity loses its identity and its shareholders become
shareholders of the merged company. On the other hand, an amalgamation
is an arrangement, whereby the assets and liabilities of two or more
companies (amalgamating companies) become vested in another company
(the amalgamated company). The amalgamating companies all lose their
identity and emerge as the amalgamated company; though in certain
transaction structures the amalgamated company may or may not be one of
the original companies. The shareholders of the amalgamating companies
become shareholders of the amalgamated company.
While the Companies Act does not define a merger or amalgamation,
Sections 390 to 394 of the Companies Act deal with the analogous concept of
schemes of arrangement or compromise between a company, it shareholders
and/or its creditors. A merger of a company ‘A’ with another company ‘B’

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would involve two schemes of arrangements, one between A and its

shareholders and the other between B and its shareholders. The ITA defines
the analogous term ‘amalgamation’ as the merger of one or more companies
with another company, or the merger of two or more companies to form one
company. The ITA goes on to specify certain other conditions that must be
satisfied for the merger to be an ‘amalgamation’.
Mergers may be of several types, depending on the requirements of the
merging entities:
Horizontal Mergers: Also referred to as a ‘horizontal integration’, this kind
of merger takes place between entities engaged in competing businesses
which are at the same stage of the industrial process. A horizontal merger
takes a company a step closer towards monopoly by eliminating a competitor
and establishing a stronger presence in the market. The other benefits of this
form of merger are the advantages of economies of scale and economies of
scope.
Vertical Mergers: Vertical mergers refer to the combination of two entities
at different stages of the industrial or production process. For example, the
merger of a company engaged in the construction business with a company
engaged in production of brick or steel would lead to vertical integration.
Companies stand to gain on account of lower transaction costs and
synchronization of demand and supply. Moreover, vertical integration helps a
company move towards greater independence and self-sufficiency. The
downside of a vertical merger involves large investments in technology in
order to compete effectively.
Congeneric Mergers: These are mergers between entities engaged in the
same general industry and somewhat interrelated, but having no common
customer-supplier relationship. A company uses this type of merger in order
to use the resulting ability to use the same sales and distribution channels to
reach the customers of both businesses.
Conglomerate Mergers: A conglomerate merger is a merger between two
entities in unrelated industries. The principal reason for a conglomerate
merger is utilization of financial resources, enlargement of debt capacity, and
increase in the value of outstanding shares by increased leverage and
earnings per share, and by lowering the average cost of capital. A merger
with a diverse business also helps the company to foray into varied
businesses without having to incur large start-up costs normally associated
with a new business.
Cash Merger: In a typical merger, the merged entity combines the assets of
the two companies and grants the shareholders of each original company
shares in the new company based on the relative valuations of the two
original companies. However, in the case of a ‘cash merger’, also known as a
‘cash-out merger’, the shareholders of one entity receives cash in place of
shares in the merged entity. This is a common practice in cases where the
shareholders of one of the merging entities do not want to be a part of the
merged entity.
Triangular Merger: A triangular merger is often resorted to for regulatory
and tax reasons. As the name suggests, it is a tripartite arrangement in
which the target merges with a subsidiary of the acquirer. Based on which

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entity is the survivor after such merger, a triangular merger may be forward
(when the target merges into the subsidiary and the subsidiary survives), or
reverse (when the subsidiary merges into the target and the target survives).

Acquisition and Takeover:

An acquisition or takeover is the purchase by one company of controlling

interest in the share capital, or all or substantially all of the assets and/or
liabilities, of another company. A takeover may be friendly or hostile,
depending on the offeror company’s approach, and may be effected through
agreements between the offeror and the majority shareholders, purchase of
shares from the open market, or by making an offer for acquisition of the
offeree’s shares to the entire body of shareholders.
Friendly takeover: Also commonly referred to as ‘negotiated takeover’, a
friendly takeover involves an acquisition of the target company through
negotiations between the existing promoters and prospective investors. This
kind of takeover is resorted to further some common objectives of both the
parties.
Hostile Takeover: A hostile takeover can happen by way of any of the
following actions: if the board rejects the offer, but the bidder continues to
pursue it or the bidder makes the offer without informing the board
beforehand.
Leveraged Buyouts: These are a form of takeovers where the acquisition is
funded by borrowed money. Often the assets of the target company are used
as collateral for the loan. This is a common structure when acquirers wish to
make large acquisitions without having to commit too much capital, and hope
to make the acquired business service the debt so raised.
Bailout Takeovers: Another form of takeover is a ‘bail out takeover’ in
which a profit making company acquires a sick company. This kind of
takeover is usually pursuant to a scheme of reconstruction/rehabilitation with
the approval of lender banks/financial institutions. One of the primary
motives for a profit making company to acquire a sick/loss making company
would be to set off of the losses of the sick company against the profits of
the acquirer, thereby reducing the tax payable by the acquirer. This would be
true in the case of a merger between such companies as well. Acquisitions
may be by way of acquisition of shares of the target, or acquisition of assets
and liabilities of the target. In the latter case it is usual for the business of
the target to be acquired by the acquirer on a going concern basis, i.e.
without attributing specific values to each asset / liability, but by arriving at a
valuation for the business as a whole (in the context of the ITA, such an
acquisition is referred to as a ‘slump sale’). An acquirer may also acquire a
target by other contractual means without the acquisition of shares, such as
agreements providing the acquirer with voting rights or board rights. It is
also possible for an acquirer to acquire a greater degree of control in the
target than what would be associated with the acquirer’s stake in the target,
e.g., the acquirer may hold 26% of the shares of the target but may enjoy

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disproportionate voting rights, management rights or veto rights in the

target.

Distinction between Mergers and Acquisitions:

 The terms merger and acquisition mean slightly different things. When
one company takes over another and clearly established itself as the
new owner, the purchase is called an acquisition. From a legal point of
view, the target company ceases to exist, the buyer "swallows" the
business and the buyer's stock continues to be traded.
 In the pure sense of the term, a merger happens when two firms,
often of about the same size, agree to go forward as a single new
company rather than remain separately owned and operated. This kind
of action is more precisely referred to as a "merger of equals." Both
companies' stocks are surrendered and new company stock is issued in
its place.
 In practice actual mergers of equals don't happen very often. Usually,
one company will buy another and, as part of the deal's terms, simply
allow the acquired firm to proclaim that the action is a merger of
equals, even if it's technically an acquisition. Being bought out often
carries negative connotations, therefore, by describing the deal as a
merger, deal makers and top managers try to make the takeover more
palatable.
 A purchase deal will also be called a merger when both CEOs agree
that joining together is in the best interest of both of their companies.
But when the deal is unfriendly (i.e. when the target company does
not want to be purchased) it is always regarded as an acquisition.

 Whether a purchase is considered a merger or an acquisition really

depends on whether the purchase is friendly or hostile and how it is
announced. In other words, the real difference lies in how the
purchase is communicated to and received by the target company's
board of directors, employees and shareholders.

Benefits of Mergers and Acquisitions:

 Benefits of Mergers and Acquisitions are the main reasons for which
the companies enter into these deals. Mergers and Acquisitions may
generate tax gains, can increase revenue and can reduce the cost of
capital. The main benefits of Mergers and Acquisitions are the
following:

 Greater Value Generation: Mergers and acquisitions often lead to an

increased value generation for the company. It is expected that the
shareholder value of a firm after mergers or acquisitions would be
greater than the sum of the shareholder values of the parent

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companies. Mergers and acquisitions generally succeed in generating

cost efficiency through the implementation of economies of scale.
 Merger & Acquisition also leads to tax gains and can even lead to a
revenue enhancement through market share gain. Companies go for
Mergers and Acquisition from the idea that, the joint company will be
able to generate more value than the separate firms. When a company
buys out another, it expects that the newly generated shareholder
value will be higher than the value of the sum of the shares of the two
separate companies.
 Mergers and Acquisitions can prove to be really beneficial to the
companies when they are weathering through the tough times. If the
company which is suffering from various problems in the market and is
not able to overcome the difficulties, it can go for an acquisition deal.
If a company, which has a strong market presence, buys out the weak
firm, then a more competitive and cost efficient company can be
generated. Here, the target company benefits as it gets out of the
difficult situation and after being acquired by the large firm, the joint
company accumulates larger market share. This is because of these
benefits that the small and less powerful firms agree to be acquired by
the large firms.
 Gaining Cost Efficiency: When two companies come together by
merger or acquisition, the joint company benefits in terms of cost
efficiency. A merger or acquisition is able to create economies of
scale which in turn generates cost efficiency. As the two firms form a
new and bigger company, the production is done on a much larger
scale and when the output production increases, there are strong
chances that the cost of production per unit of output gets reduced. An
increase in cost efficiency is affected through the procedure of mergers
and acquisitions. This is because mergers and acquisitions lead to
economies of scale. This in turn promotes cost efficiency. As the
parent firms amalgamate to form a bigger new firm the scale of
operations of the new firm increases. As output production rises there
are chances that the cost per unit of production will come down.

 Mergers and Acquisitions are also beneficial:

 When a firm wants to enter a new market.
 When a firm wants to introduce new products through research
and development.
 When a forms wants achieve administrative benefits.
 To increased market share.
 To lower cost of operation and/or production.
 To gain higher competitiveness.
 For industry know how and positioning.
 For financial leveraging.
 To improve profitability and EPS.
An increase in market share is one of the plausible benefits of mergers and
acquisitions. In case a financially strong company acquires a relatively
distressed one, the resultant organization can experience a substantial

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increase in market share. The new firm is usually more cost-efficient and
competitive as compared to its financially weak parent organization.

Reasons for mergers and acquisitions:

 One of the most common arguments for mergers and acquisitions is
the belief that "synergies" exist, allowing the two companies to work
more efficiently together than either would separately. Such synergies
may result from the firms' combined ability to exploit economies of
scale, eliminate duplicated functions, share managerial expertise, and
raise larger amounts of capital.
 'Horizontal' mergers (between companies operating at the same level
of production in the same industry) may also be motivated by a desire
for greater market power.

 Businesses are always looking for ways to reduce their tax exposure. A
firm has large sums of money lying idle, using these sums to acquire
another business that would not only enhance its operations but would
also reduce its tax liability.

 Corporations may pursue mergers and acquisitions as part of a

deliberate strategy of diversification, allowing the company to exploit
new markets and spread its risks.

 A company may seek an acquisition because it believes its target to be

undervalued, and thus a "bargain" - a good investment capable of
generating a high return for the parent company's shareholders. Often,
such acquisitions are also motivated by the "empire-building desire" of
the parent company's managers.

 A firm may be targeted for acquisition because it has specific skills

within its staff or has a particular technology that would be useful to
another business.

Reasons for Failure of Mergers and Acquisitions:

 Sometimes, the failure of an acquisition to generate good returns for
the parent company may be explained by the simple fact that they
paid too much for it. Having bid over-enthusiastically, the buyer may
find that the premium they paid for the acquired company's shares
(the so-called "winner's curse") wipes out any gains made from the
acquisition.
 However, even a deal that is financially sound may ultimately prove to
be a disaster, if it is implemented in a way that does not deal
sensitively with the companies' people and their different corporate
cultures. There may be acute contrasts between the attitudes and
values of the two companies, especially if the new partnership crosses

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national boundaries (in which case there may also be language

barriers to contend with).

 A merger or acquisition is an extremely stressful process for those

involved: job losses, restructuring, and the imposition of a new
corporate culture and identity can create uncertainty, anxiety and
resentment among a company's employees. Research shows that a
firm's productivity can drop by between 25 and 50 percent while
undergoing such a large-scale change; demoralisation of the workforce
is a major reason for. Companies often pay undue attention to the
short-term legal and financial considerations involved in a merger or
acquisition, and neglect the implications for corporate identity and
communication, factors that may prove equally important in the long
run because of their impact on workers' morale and productivity.

 Managers, suddenly deprived of authority and promotion opportunities,

can be particularly bitter: one survey found that "nearly 50% of
executives in acquired firms seek other jobs within one year".
Sometimes there may be specific personality clashes between
executives in the two companies. This may prove a serious problem.

CHAPTER 3

Mergers and Amalgamations: Key

Corporate and Securities Laws
Considerations.
A. COMPANIES ACT, 1956:

Sections 390 to 394 (the “Merger Provisions”)

of the Companies Act govern a merger of two or
more companies under Indian law. The Merger
Provisions are in fact worded so widely, that
they would provide for and regulate all kinds of
corporate restructuring that a company may possibly undertake; such as
mergers, amalgamations, demergers, spin-off /hive off, and every other
compromise, settlement, agreement or arrangement between a company and
its members and/or its creditors.
Procedure under the Merger Provisions: Since a merger essentially involves
an arrangement between the merging companies and their respective
shareholders, each of the companies proposing to merge with the other(s)
must make an application to the Company Court 5 (the ‘Court’) having
jurisdiction over such company for calling meetings of its respective

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shareholders and/or creditors. The Court may then order a meeting of the
creditors/shareholders of the company. If the majority in number
representing 3/4th in value of the creditors/shareholders present and voting
at such meeting agree to the merger, then the merger, if sanctioned by the
Court, is binding on all creditors/shareholders of the company. The Court will
not approve a merger or any other corporate restructuring, unless it is
satisfied that all material facts have been disclosed by the company. The
order of the Court approving a merger does not take effect until a certified
copy of the same is filed by the company with the Registrar of Companies.
The Merger Provisions constitute a comprehensive code in them, and under
these provisions Courts have full power to sanction any alterations in the
corporate structure of a company that may be necessary to effect the
corporate restructuring that is proposed. For example, in ordinary
circumstances a company must seek the approval of the Court for effecting a
reduction of its share capital. However, if a reduction of share capital forms
part of the corporate restructuring proposed by the company under the
Merger Provisions, then the Court has the power to approve and sanction
such reduction in share capital and separate proceedings for reduction of
share capital would not be necessary.
Applicability of Merger Provisions to foreign companies: Section 394 vests the
Court with certain powers to facilitate the reconstruction or amalgamation of
companies, i.e. in cases where an application is made for sanctioning an
arrangement that is:
 for the reconstruction of any company or companies or the amalgamation
of any two or more companies; and
 Under the scheme the whole or part of the undertaking, property or
liabilities of any company concerned in the scheme (referred to as the
‘transferor company’) is to be transferred to another company (referred to
as the transferee company’).
Section 394 (4) (b) makes it clear that:
 a ‘transferor company’ would mean any body corporate 6, whether or
not a company registered under the Companies Act (i.e. an Indian
company), implying that a foreign company could also be a transferor,
and
 a ‘transferee company’ would only mean an Indian company.
Therefore, the Merger Provisions recognize and permit a
merger/reconstruction where a foreign company merges into an Indian
company. But the reverse is not permitted, and an Indian company
cannot merge into a foreign company.

B. SECURITIES AND EXCHANGE BOARD OF INDIA:

1. Takeover Code.

The Securities and Exchange Board of India (the ‘SEBI’) is the nodal
authority regulating entities that are listed on stock exchanges in India. The
Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997 (the ‘Takeover Code’) restricts and

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regulates the acquisition of shares / control in listed companies. Generally, if

an acquirer acquires 15% or more of the shares or voting rights of a listed
company, the acquirer would be required to make an offer to the public to
acquire at least 20% of the voting capital of the company. However,
Regulation 3 (1) (j) of the Takeover Code provides that Regulations 10, 11
and 12 would not apply to any transfer or acquisition of shares or voting
rights pursuant to a scheme of arrangement or reconstruction, including
amalgamation or merger or demerger, under any law or regulation, whether
Indian or foreign. Therefore if a merger is sanctioned by the Court under the
Merger Provisions, the above mentioned provisions of the Takeover Code
would not be applicable.
Disclosure requirements under the Takeover Code: It must be noted that
Regulations 7 and 8 of the Takeover
Code would continue to be applicable to a merger involving a listed company.
Disclosures on certain acquisitions: Regulation 7 requires an acquirer to
make disclosures of the aggregate of his shareholding if the acquirer acquires
more than 5%, 10%, 14%, 54% or 74% of the shares/voting rights of a
company. Such disclosures must be made at each stage of acquisition and
are to be made to the company and to the stock exchanges on which the
shares of the company are listed. Regulation 7 further provides that an
acquirer, who has acquired shares/voting rights under Regulation 11
(Consolidation of holdings), must disclose purchase or sale of 2% or more of
the share capital of the company, to the company and to the stock
exchanges on which the shares of the company are listed. The disclosures
mentioned above are to be made within 2 days of (i) the receipt of intimation
of allotment of shares or (ii) the acquisition of shares or voting rights, as the
case may be. The company whose shares are acquired must also disclose to
the stock exchanges, the total number of shares held by the acquirers
mentioned above.
Continual disclosures: Regulation 8 requires a person holding more than 15%
of the shares / voting rights of a company to make annual disclosures to the
company (within 21 days from the financial year ending March 31) in respect
of his holdings as on March 31.

2. Listing Agreement:

The listing agreement11 entered into by a company for the purpose of listing
its shares with a stock exchange requires the following in the case of a Court
approved merger12:
 The scheme of merger/amalgamation/reconstruction must be filed with
the stock exchange at least one month prior to filing with the Court.
 The scheme cannot violate or override the provisions of any securities
law/stock exchange requirements.
 The pre and post merger shareholding must be disclosed to the
shareholders.

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CHAPTER 4

Acquisitions: Key Corporate and

Securities Laws Considerations:

A. COMPANIES ACT, 1956:

The Companies Act does not make a reference to

the term ‘acquisition’ per se. However, the various
modes used for making an acquisition of a
company involve compliance with certain key
provisions of the Companies Act. The modes most commonly adopted are a
share acquisition or an asset purchase.
1. Acquisition of Shares. A share purchase may take place by an
acquisition of all existing shares of the target by the acquirer, or by way of
subscription to new shares in the target so as to acquire a controlling stake
in the target.
Transferability of shares: Broadly speaking, an Indian company may be set
up as a private company or a public company. Membership of a private
company is restricted to 50 members, and a private company is required by
the Companies Act to restrict the transferability of its shares. A restriction on
transferability of shares is consequently inherent to a private company, such
restrictions being contained in its articles of association (the by laws of the
company), and usually in the form of a pre-emptive right in favor of the
other shareholders. The articles of association may prescribe certain
procedures relating to transfer of shares that must be adhered to in order to
affect a transfer of shares. While acquiring shares of a private company, it is
therefore advisable for the acquirer to ensure that the non-selling
shareholders (if any) waive any rights they may have under the articles of
association, and the procedure for transfer under the articles of association is
followed, lest any shareholder of the company claim that the transfer is void
or claim a right to such shares.
Transfer of shares: The transferor and transferee are required to execute a
share transfer form, and lodge such form along with the share certificates,
with the company. The share transfer form is a prescribed form, which must
be stamped in accordance with law. On lodging the same with the company,
the company will affect the transfer in its records and endorse the share
certificates in favor of the acquirer. It is also necessary for the Board of the
company to pass a resolution approving the transfer of shares.
Squeeze out provisions: Section 395 of the Companies Act provides that if a
scheme or contract involving the transfer of shares or a class of shares in a
company (the ‘transferor company’) to another company (the ‘transferee
company’) is approved by the holders of at least 9/10ths in value of the
shares whose transfer is involved, the transferee company may give notice to
the dissenting shareholders that it desires to acquire such shares, and the

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MERGERS AND ACQUISITIONS

transferee company is then, not only entitled, but also bound to acquire such
shares. In computing 90% (in value) of the shareholders as mentioned
above, shares held by the acquirer, nominees of the acquirer and subsidiaries
of the acquirer must be excluded.
The scheme or contract referred to above should be approved by the
shareholders of the transferee company within 4 months from the date of the
offer. The dissenting shareholders have the right to make an application to
the Court within one month from the date of the notice, if they are aggrieved
by the terms of the offer. If no application is made, or the application is
dismissed within one month of issue of the notice, the transferee company is
entitled and bound to acquire the shares of the dissenting shareholders. If
the transferee already holds more than 10% (in value) of the shares (being
of the same class as those that are being acquired) of the transferor, then
the following conditions must also be met:
 The transferee offers the same terms to all holders of the shares of
that class whose transfer is involved; and
 The shareholders holding 90% (in value) who have approved the
scheme/contract should also be not less than 3/4ths in number of the
holders of those shares (not including the acquirer).
Therefore, if an acquirer already holds 50% of the shares of the target, it
would need the approval of 90% (in value) of the other shareholders of the
target to invoke the provisions of this Section, i.e. the approval of holders of
45% of the shares of the target. If this approval is received, the acquirer
would then be entitled to acquire the balance 5% of the shares of the target.
Since the acquirer in such a case holds more than 10% of the share capital,
then the shareholders holding 45% of the share capital must also constitute
at least 3/4ths (in number) of the shareholders holding the balance 50%.
Therefore, if one shareholder holds 45% and approves the transfer, and the
remaining 5% is held by 5 shareholders who do not approve the transfer,
then the acquirer would not be able to invoke the provisions of Section 395.
If the dissenting shareholders do not apply to the Court, or the Court does
not provide any relief to the dissenting shareholders on their application,
then the acquirer must send a copy of the notice (issued to the dissenting
shareholders) along with an instrument of transfer, executed on behalf of the
dissenting shareholder by any person appointed by the acquirer, to the target
along with the consideration payable. The instrument of transfer must also
be executed by the transferee on its own behalf.
The transferor would then be obliged to record and register the transfer in
favor of the transferee. The consideration received by the transferor must be
deposited in a separate bank account and held in trust for the dissenting
shareholders. This procedure is subject to the conditions and terms set forth
in the Companies Act. The merit of these provisions is that a complete
takeover or squeeze-out could be effected without resort to tedious court
procedures.
Some restrictions: Section 395 provides that the “transferor company” (i.e.
the target) can be any body corporate, whether or not incorporated under
Indian law. Therefore the target can also be a foreign company.

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However, a ‘transferee company’ (i.e. the acquirer), must be an Indian

company.
New share issuance: If the acquisition of a public company involves the issue
of new shares or securities to the acquirer, then it would be necessary for the
shareholders of the company to pass a special resolution under the
provisions of Section 81(1A) of the Companies Act. A special resolution is one
that is passed by at least 3/4ths of the shareholders present and voting at a
meeting of the shareholders. A private company is not required to pass a
special resolution for the issue of shares, and a simple resolution of the board
of directors should suffice.
The issue of shares by an unlisted public company to an acquirer must also
comply with the Unlisted Public Companies (Preferential Allotment) Rules,
2003. Some of the important features of these rules are as follows:
 Equity shares, fully convertible debentures, partly convertible
debentures or any other financial instruments convertible into equity
are governed by these rules.
 The issue of shares must be authorized by the articles of association of
the company and approved by a special resolution passed by
shareholders in a general meeting, authorizing the board of directors
of the company to issue the shares. The validity of the shareholders’
resolution is 12 months, implying that if shares are not issued within
12 months of the resolution, the resolution will lapse, and a fresh
resolution will be required for the issuance.
 The explanatory statement to the notice for the general meeting
should contain key disclosures pertaining to the object of the issue,
pricing of shares including the relevant date for calculation of the
price, shareholding pattern, change of control, if any, and whether the
promoters/directors/key management persons propose to acquire
shares as part of such issuance.
Limits on investment: Section 372A of the Companies Act provides for certain
limits on inter-corporate loans and investments. An acquirer may acquire by
way of subscription, purchase or otherwise, the securities of any other body
corporate up to 60% of the acquirers paid up share capital and free reserves,
or 100 % of its free reserves, whichever is more. However, the acquirer is
permitted to acquire shares beyond such limits, if it is authorized by its
shareholders vide a special resolution passed in a general meeting. It may be
noted that the restrictions under Section 372A are not applicable to private
companies. Further, Section 372A would not be applicable to an acquirer
which is a foreign company.

2. Asset Purchase: An asset purchase involves the sale of the whole or part
of the assets of the target to the acquirer. The board of directors of a public
company or a private company that is a subsidiary of a public company,
cannot sell, lease or dispose all, substantially all, or any undertaking of the
company without the approval of the shareholders in a shareholders meeting.
Therefore, it would be necessary for more than 50% of the shareholders of
the seller company to pass a resolution approving such a sale or disposal.
Further, a separate asset purchase agreement may sometimes be executed

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MERGERS AND ACQUISITIONS

to better capture the provisions relating to transfer of assets. Non – compete

provisions may also be linked to goodwill and contained in the asset purchase
agreement.

B. SECURITIES AND EXCHANGE BOARD OF INDIA:

1. Securities and Exchange Board of India (Issue of Capital and

Disclosure Requirements) Regulations, 2009

On August 26, 2009, Securities and Exchange Board of India (“SEBI”)

notified the Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009 (”ICDR Regulations”)
replacing the erstwhile Securities and Exchange Board of India (Disclosure
and Investor Protection) Guidelines, 2000.
As per the ICDR Regulations, if the acquisition of an Indian listed company
involves the issue of new equity shares or securities convertible into equity
shares (“Specified Securities”) by the target to the acquirer, the provisions
of Chapter VII (“Preferential Allotment Regulations”) contained in ICDR
Regulations will be applicable (in addition to the provisions of the Companies
Act mentioned above). We have highlighted below some of the relevant
provisions of the Preferential Allotment Regulations.
Pricing of the issue. Where the equity shares of the target have been listed
on a stock exchange for a period of 6 months or more prior to the relevant
date, the price of the equity shares issued on a preferential basis must be not
less than the price that is the higher of, (a) the average of the weekly high
and low of the closing prices of the related equity shares quoted on the stock
exchange during the six months preceding the relevant date, or (b) the
average of the weekly high and low of the closing prices of the related equity
shares quoted on a stock exchange during the two weeks preceding the
relevant date.
Lock-in: Specified Securities issued to the acquirer (who is not a promoter of
the target) are subject to a lock-in for a period of one year from the date of
allotment. Further, if the acquirer holds any equity shares of the target prior
to such preferential allotment, then such prior equity shareholding of the
acquirer shall be locked in for a period of 6 months from the date of the
preferential allotment. If the Specified Securities are allotted on a
preferential basis to promoters/promoter group as defined in Chapter I of the
ICDR Regulations, these shall be locked in for a period of 3 years from the
date of allotment subject to a permitted limit of 20% of the total capital of
the company. Such locked in Specified Securities may be transferred
amongst promoter/promoter group or any person in control of the company,
subject to the transferee being subject to the remaining period of the lock in.
Currency of the resolution: The preferential allotment of Specified Securities
pursuant to a resolution of the shareholders approving such issuance must
be completed within a period of 15 days from the date on which the
resolution is passed by the shareholders, failing which a fresh approval of the
shareholders shall be necessary.

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Exemption: The Preferential Allotment Regulations (other than the lock-in

provisions) do not apply in the case of a preferential allotment of shares
pursuant to merger / amalgamation approved by the Court under the Merger
Provisions discussed above.

2. Takeover Code.

If an acquisition is contemplated by way of issue of new shares, or the

acquisition of existing shares, of a listed company, to or by an acquirer, the
provisions of the Takeover Code may be applicable. Under the
Takeover Code, an acquirer, along with persons acting in concert:
 cannot acquire shares or voting rights which (taken together with
shares or voting rights, if any, held by him and by persons acting in
concert), entitle such acquirer to exercise 15% or more of the shares
or voting rights in the target
 who has acquired, 15% or more but less than 55% of the shares or
voting rights in the target, cannot acquire, either by himself or through
persons acting in concert, additional shares or voting rights entitling
him to exercise more than 5% of the voting rights the target, in any
financial year ending on 31st March,
 who holds 55% or more but less than 75% of the shares or voting
rights in the target, cannot acquire either by himself or through
persons acting in concert, any additional shares or voting rights
therein,
 Who holds 75% of the shares or voting rights in the target, cannot
acquire either by himself or through persons acting in concert, any
additional shares or voting rights therein, unless the acquirer makes a
public announcement to acquire the shares or voting rights of the
target in accordance with the provisions of the Takeover Code. The
term ‘acquisition’ would include both, direct acquisition in an Indian
listed company as well as indirect acquisition of an Indian listed
company by virtue of acquisition of companies, whether listed or
unlisted, whether in India or abroad. Further, the aforesaid limit of 5%
acquisition is calculated aggregating all purchases, without netting of
sales.
However, vide a recent amendment, any person holding 55% or more (but
less than 75%) shares is permitted to further increase his shareholding by
not more than 5% in the target without making a public announcement if the
acquisition is through open market purchase in normal segment on the stock
exchange but not through bulk deal /block deal/ negotiated deal/ preferential
allotment or the increase in the shareholding or voting rights of the acquirer
is pursuant to a buyback of shares by the target. Though there were certain
ambiguities as to the period during which the 5% limit can be exhausted,
SEBI has clarified that the 5% limit shall be applicable during the lifetime of
the target without any limitation as to financial year or otherwise. However,
just like the acquisition of 5% up to 55%, the acquisition is calculated
aggregating all purchases, without netting of sales.

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Where an acquirer who (together with persons acting in concert with him)
holds fifty five per cent (55%) or more but less than seventy five per cent
(75%) of the shares or voting rights in a target company, is desirous of
consolidating his holding while ensuring that the public shareholding in the
target company does not fall below the minimum level permitted by the
Listing Agreement, he may do so only by making a public announcement in
accordance with these regulations:
Provided that in a case where the target company had obtained listing of its
shares by making an offer of at least ten per cent. (10%) of issue size to the
public in terms of clause (b) of sub-rule (2) of rule 19 of the Securities
Contracts (Regulation) Rules, 1957, or in terms of any relaxation granted
from strict enforcement of the said rule, this sub-regulation shall apply as if
for the words and figures ‘seventy five per cent (75%)’, the words and
figures ‘ninety per cent. (90%)’ were substituted.
Till recently, under regulation 3(2) of the Takeover Code, acquisition of ADRs
/ GDRs were exempted from open offer requirement under Chapter III of the
Takeover Code until the time of conversion into the underlying equity shares.
It was generally understood that this position would remain unchanged even
when customary voting arrangements are entered into between depositories
and ADR / GDR holders. However, pursuant to the SEBI Press Release
No.300/2009 dated September 22, 2009, an amendment was brought in by
SEBI in the Takeover Code that such exemption from open offer would be
available only as long as ADR / GDR holders remain passive investors without
any kind of voting arrangement with the depository banks on the underlying
equity shares.
Regulation 12 of the Takeover Code further provides that irrespective of
whether or not there has been any acquisition of shares or voting rights in a
company, no acquirer shall acquire control 26 over the target company, unless
such person makes a public announcement to acquire shares and acquires
such shares in accordance with the Takeover Code. For the purpose of this
Regulation, the term ‘acquisition’ includes direct or indirect acquisition of
control of the target company by virtue of acquisition of companies, whether
listed or unlisted and whether in India or abroad. However the requirement
under Regulation 12 does not apply to a change in control that takes place
pursuant to a special resolution passed by the shareholders in a general
meeting.
Therefore, if 3/4ths of shareholders present and voting at a meeting approve
the change of control, then the requirement to make a public offer under
Regulation 12 would not be triggered. The principle objectives of the
Takeover Code are to provide the shareholders of a listed company with
adequate information about an impending change in control of the company,
and also to provide them with a limited exit option in case they do not wish
to retain their shareholding in the company post the change in control. It is
also possible for the acquirer to provide that the offer to acquire shares is
subject to minimum level of acceptance, which may be less than 20%.
However to do this, the acquirer would need to deposit at least 50% of the
consideration payable in an escrow account.

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Pricing of the offer: The merchant banker appointed by the acquirer will
determine the price for the offer on the basis of the parameters laid down in
the Takeover Code. Regulation 20 (4) provides that the offer price for shares
of a target company (whose shares are frequently traded) will be the highest
of:
 the negotiated price under the agreement for acquisition of shares or
voting rights entered into by the acquirer;
 price paid by the acquirer or PAC for acquisition, if any, including by
way of allotment in a public or rights or preferential issue during the
twenty six week period prior to the date of public announcement,
whichever is higher;
 average of the weekly high and low of the closing prices of the shares
of the target company as quoted on the stock exchange where the
shares of the company are most frequently traded during the twenty-
six weeks, or the average of the daily high and low of the prices of the
shares as quoted on the stock exchange where the shares of the
company are most frequently traded during the two weeks, preceding
the date of public announcement, whichever is higher.
In the case of a target company whose shares are infrequently traded 27, in
addition to the factors stated in (a) and (b) above (for frequently traded
shares), other parameters such as return on net worth, book value of the
shares of the target company, earning per share, price earning multiple vis-
à-vis the industry average, are also considered for determining the price. The
SEBI may also require valuation of such infrequently traded shares by an
independent valuer.
Mode of payment of offer price: The offer price may be paid in cash, by
issue, exchange or transfer of shares (Other than preference shares) of the
acquirer, if the acquirer is a listed entity, by issue, exchange or transfer of
secured instruments of the acquirer with a minimum ‘A’ grade rating from a
credit rating agency registered with the SEBI, or a combination of all of the
above.
Non-compete payments: Payments made to persons other than the target
company under any non-compete agreement exceeding 25% of the offer
price arrived at as per the requirements mentioned above, must be added to
the offer price.
Pricing for indirect acquisition or control: The offer price for indirect
acquisition or control shall be determined with reference to the date of the
public announcement for the parent company and the date of the public
announcement for acquisition of shares of the target company, whichever is
higher, in accordance with requirements set out above.
If the acquirer intends to dispose of / encumber the assets in the target
company, except in the ordinary course of business, then he must make such
a disclosure in the public announcement or in the letter of offer to the
shareholders, failing which, the acquirer cannot dispose of or encumber the
assets of the target company for a period of 2 years from the date of closure
of the public offer.

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Restrictions on the target company: After the acquirer makes the public
announcement, the target company is also subject to certain restrictions. The
target company cannot then
(a) Sell, transfer, encumber or otherwise dispose off or enter into an
agreement for sale, transfer, encumbrance or for disposal of assets, except
in the ordinary course of business of the target company and its subsidiaries,
(b) issue or allot any securities carrying voting rights during the offer period,
except for any subsisting obligations, and
(c) Enter into any material contracts.
Further the board of directors of the target company cannot (a) appoint as
additional director or fill in any casual vacancy on the board of directors, any
person(s) representing or having interest in the acquirer, until the acquire
fulfill his obligations under the Takeover Code, and (b) permit any existing
director of the target company who represents or has an interest in the
acquirer, to participate in any matter relating to the offer.
Competitive Bidding/ Revision of offer/bid: The Takeover Code also permits a
person other than the acquirer (the first bidder) to make a competitive bid,
by a public announcement, for the shares of the target company.
This bid must be made within 21 days from the date of the public
announcement of the first bidder. The competitive bid must be for at least
the number of shares held by the first bidder (along with PAC), plus the
number of shares that the first bidder has bid for. If the first bidder wishes to
revise his bid, then he must make another public announcement within 14
days from the date of the public announcement by the second bidder. The
first bidder (and any other bidder) is in fact, entitled to revise his bid
upwards (subject only to certain time limitations), irrespective of whether or
not a competitive bid is made.
Certain exemptions from the applicability of the Regulations 10, 11 and 12 of
the Takeover Code: The following acquisitions / transfers would be exempt
from the key provisions of the Takeover Code:
 acquisition pursuant to a public issue;
 acquisition by a shareholder pursuant to a rights issue to the extent of
his entitlement and subject to certain other restrictions;
 inter-se transfer of shares amongst:
 qualifying Indian promoters and foreign collaborators who are
shareholders,
 qualifying promoters, provided that the parties have been holding
shares in the target company for a period of at least three years prior
to the proposed acquisition,
 the acquirer and PAC, where the transfer of shares takes place three
years after the date of closure of the public offer made by them under
the Takeover Code and the transfer is at a price not exceeding 125%
of the price determined as per the Takeover Code (as mentioned
above);
 acquisition of shares in the ordinary course of business by (a) Banks
and public financial institutions as pledgees, (b) the International
Finance Corporation, Asian Development Bank, International Bank for

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Reconstruction and Development, Commonwealth Development

Corporation and such other international financial institutions;
 acquisition of shares by a person in exchange of shares received under
a public offer made under the Takeover Code;
 acquisition of shares by way of transmission on succession or
inheritance;
 transfer of shares from venture capital funds or foreign venture capital
investors registered with the SEBI to promoters of a venture capital
undertaking or to a venture capital undertaking, pursuant to an
agreement between such venture capital fund or foreign venture
capital investors, with such promoters or venture capital undertaking;
 change in control by takeover of management of the borrower target
company by the secured creditor or by restoration of management to
the said target company by the said secured creditor in terms of the
Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002;
 acquisition of shares in companies whose shares are not listed on any
stock exchange, unless it results in the acquisition shares/voting
rights/control of a company listed in India; and
 acquisition of shares in terms of guidelines or regulations regarding
delisting of securities framed by the SEBI.

3. Listing Agreement:

Clause 40A of the listing agreement 33 entered into by a company with the
stock exchange on which its shares are listed, requires the company to
maintain a public shareholding34 of at least 25% or 10%, as the case may be,
on a continuous basis. If the public shareholding falls below the minimum
level pursuant to:
 the issuance or transfer of shares (i) in compliance with directions of any
regulatory or statutory authority, or (ii) in compliance with the Takeover
Code, or
 reorganization of capital by a scheme of arrangement, the stock exchange
may provide additional time of 1 year (extendable up to 2 years) to the
company to comply with the minimum requirements. In order to comply
with the minimum public shareholding requirements, the company must
either, issue shares to the public or offer shares of the promoters to the
public. If a company fails to comply with the minimum requirements, its
shares may be delisted by the stock exchange, and penal action may also
be taken against the company.

4. Insider Trading Regulations:

Securities and Exchange Board of India (Insider Trading) Regulations, 1992

regulates insider trading and a person in violation of these regulations is
punishable under Section 24 and Section 15G of the SEBI Act, 1992. These
regulations were considerably amended in 2002 and renamed as Securities
and Exchange Board of India (Prohibition of Insider Trading) Regulations,

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MERGERS AND ACQUISITIONS

1992 (hereinafter referred to as the “SEBI Insider Regulations”). The SEBI

Insider Regulations are intended to prevent insider trading in securities of
Indian listed company. The SEBI Insider Regulations are basically punitive in
nature with respect to describing what constitutes insider trading and then
seeking to punish such an act in various ways. Securities and Exchange
Board of India (“SEBI”) is responsible for administering and enforcing SEBI
Insider Regulations. Regulation 3 of SEBI Insider Regulations prohibits an
Insider from communicating counseling or procuring directly or indirectly any
unpublished price sensitive information to any person. Thus, the above
provisions prohibit the insider from communicating unpublished price
sensitive information and also the person receiving such unpublished price
sensitive information from dealing in securities. As defined under the
Regulation 2(d), the words “dealing in securities” “shall mean the act of
subscribing, buying, selling, or agreeing to subscribe, buy or sell or deal in
any securities by any person, either as principal or as agent.
As per Regulation 2(ha) of SEBI Insider Regulations, price sensitive
information (“PSI”) means:
"any information which relates directly or indirectly to a company and which
if published are likely to materially affect the price of securities of company”.
Therefore, any information which can materially affect the price of securities
could be treated as PSI. The following shall be deemed to be PSI :
 Periodical financial results of the company;
 Intended declaration of dividends (both interim and final);
 Issue of securities or buy-back of securities;
 Any major expansion plans or execution of new projects;
 Amalgamation, mergers or takeovers;
 Disposal of the whole or substantial part of the undertaking; and
 Significant changes in policies, plans or operations of the company.
Information that is not publicly known or information that has not been
published officially is considered as non public information. The term
“unpublished” is defined under Regulation 2(k) of the SEBI Insider
Regulations as “information that is not published by the company or its
agents and is not specific in nature”.
Under the SEBI Insider Regulations an insider on his behalf or on behalf of
any other person is prohibited from dealing in securities of a company listed
on a stock exchange when he is in possession of any Unpublished PSI,
irrespective of whether or not such a trade was made for the purpose of
making a gain or reducing a loss. As such, the existence of profit motive is
not required while interpreting the violation of SEBI Insider Regulations.
However, in the case of Rakesh Agarwal v. SEBI, [2004] 49 SCL 351 (SAT-
Mumbai) it was held that if an insider based on the Unpublished PSI deals in
securities for no advantage to him, over others, it is not against the interest
of shareholders. Further it was held that it is true that the regulation does
not specifically bring in mens rea as an ingredient of insider trading. But that
does not mean that the motive need be ignored.
Regulation 3 of the SEBI Insider Regulations prohibits dealing,
communication or counseling on matters relating to insider trading. It states
that “No insider shall

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MERGERS AND ACQUISITIONS

i) “either on his own behalf or on behalf of any other person, deal in

securities of a company listed on any stock exchange when in possession of
any unpublished price sensitive information; or
ii) communicate counsel or procure directly or indirectly any unpublished
price sensitive information to any person who while in possession of such
unpublished price sensitive information shall not deal in securities:
Provided that nothing contained above shall be applicable to any
communication required in the ordinary course of business or profession or
employment or under any law.”
On the basis of this regulation it may be stated that the offence of insider
trading or dealing, constitutes of a set of necessary ingredients, which are:
 Involvement of Insiders / Connected persons;
 Possession of unpublished Price Sensitive Information; and
 Dealing in securities listed on any stock exchange.
Regulation 3A reads, “No Company shall deal in the securities of another
company or associate of that other company while in possession of any
unpublished price sensitive information”.
Disclosure Requirements: The SEBI Insider Regulations requires all directors,
officers and substantial shareholders in a listed company to make periodic
disclosures of their shareholding as specified in the SEBI Insider Regulations.

Initial Disclosures37: Any person holding more than 5% shares or voting

rights in any listed company is required to disclose to the company in Form
A38, the number of shares or voting rights held by such person on becoming
such holder, within two (2) working days of the receipt of intimation of
allotment of shares or the acquisition of shares or voting rights, as the case
may be. Any person, who is a director or officer of a listed company, shall
disclose to the company in Form B39, the number of shares or voting rights
held by such person and their dependents within two working days of
becoming a director or officer of the company.

Continual Disclosures:
 Any person holding more than 5% shares or voting rights in any listed
company is required to disclose to the company within two (2) working
days from receipt of intimation of allotment of shares; or acquisition or
sale of shares or voting rights in Form C40, the number of shares or
voting rights held and change in shareholding or voting rights, even if
such change results in shareholding falling below 5%, if there has been
any change in such holdings from the last disclosure made under
Regulation 13(1) of SEBI Insider Regulations or under this sub-
regulation and such change exceeds 2% of total shareholding or voting
rights in the company.
 Any person, who is a director or officer of a listed company, shall
disclose to the company in Form D41, the change in shareholding or
voting rights held by him and his dependents, if the change exceeds
INR 5 lacs in value or 25,000 shares or 1% to total shareholding or
voting rights, whichever is lower. The disclosure shall be made within

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two (2) working days from receipt of intimation of allotment of shares

or acquisition or sale of shares or voting rights.

CHAPTER 5

Competition Law:
In India, the Monopolies and Restrictive Trade
Practices Act, 1969 (‘MRTP’) was the first
enactment that came into effect on June 1,
1970 with the object of controlling
monopolies, prohibiting monopolistic and
restrictive trade practices and unfair trade
practices. The commission set up under the
MRTP was empowered to inquire into any
practice in relation to goods or services which
are monopolistic, restrictive or unfair in nature. The complaint may be
preferred by a consumer, trade or consumer association or even the Central
Government. The commission was armed with powers to pass orders for the
discontinuation of the practice. Where the inquiry by the commission reveals
that the trade practice inquired into operates or is likely to operate against
public interest, the Central Government may pass such orders as it thinks fit
to remedy or present any mischief resulting from such trade practice. Prior to
1991, the MRTP also contained provisions regulating mergers and
acquisitions. In 1991, the MRTP was amended, and the provisions regulating
mergers and acquisitions were deleted. With the changing nature of
competition laws, a need was felt for a change in focus, with emphasis on
promoting competition rather than curbing monopolies.
Thereafter, Government of India appointed a committee in October, 1999 to
examine the existing MRTP Act for shifting the focus of the law from curbing
monopolies to promoting competition and to suggest a modern competition
law.
The Government of India enacted the Competition Act, 2002 (‘Competition
Act’) to replace the existing MRTP. Vide a notification dated August 28,
2009; Section 66 of the Competition Act has been brought into force by
virtue of which the MRTP Act was repealed with effect from September 1,
2009. However, the jurisprudence of the MRTP regime while interpreting the
substantive provisions of MRTP Act may be of persuasive value while
interpreting the substantive provisions of the Competition Act.
The Competition Act takes a new look at competition altogether and contains
specific provisions on anticompetition agreements, abuse of dominance,
mergers, amalgamations and takeovers and competition advocacy. The
Competition Commission of India (‘CCI’) has been established to control
anti-competitive agreements, abuse of dominant position by an enterprise
and for regulating certain combinations. The substantive provisions of the
Competition Act relating to anti competitive agreements (Section 3) and

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abuse of dominance (Section 4) have been notified while the provisions

relating to combinations (Section 5 and 6) have not yet been notified.
Anti competitive agreements: The Competition Act essentially
contemplates two kinds of anti competitive agreements – horizontal
agreements or agreements between entities engaged in similar trade of
goods or provisions of services, and vertical agreements or agreements
between entities in different stages / levels of the chain of production, in
respect of production, supply, distribution, storage, sale or price of goods or
services. Anti competitive agreements that cause or are likely to cause an
appreciable adverse effect on competition within India are void under the
provisions of the Competition Act. A horizontal agreement that
(i) determines purchase / sale prices, or
(ii) limits or controls production supply, markets, technical
development, investment or provision of services, or
(iii) shares the market or source of production or provision of
services, by allocation of geographical areas/type of goods or
services or number of customers in the market, or
(iv) results in bid rigging / collusive bidding, are presumed to have
an appreciable adverse effect on competition.
On the other hand, vertical agreements, such as tie-in arrangements 42,
exclusive supply or distribution agreements, etc., are anti competitive only if
they cause or are likely to cause an appreciable adverse effect on
competition in India.
It may be noted that in the case of a vertical agreement, there is no
presumption that such agreement would have an appreciable adverse effect
on competition in India, and the CCI would have to prove such effect.
However, in the case of a horizontal agreement, the burden of proof would lie
with the entities that are party to the agreement, to prove that there is no
appreciable adverse effect on competition in India.
Abuse of Dominant Position: An entity is considered to be in a dominant
position if it is able to operate independently of competitive forces in India,
or is able to affect its competitors or consumers or the relevant market in
India in its favor. The Competition Act prohibits an entity from abusing its
dominant position. Abuse of dominance would include imposing unfair or
discriminatory conditions or prices in purchase/sale of goods or services and
predatory pricing, limiting or restricting production / provision of
goods/services, technical or scientific development, indulging in practices
resulting in denial of market access etc.
Regulation of Combinations:
Certain combinations defined under the Competition Act are considered to
affect competition in India and are regulated by the CCI, such as:
 An acquisition where the transferor and transferee jointly have, or a
merger or amalgamation where the resulting entity has,
(i) assets valued43 at more than Rs. 10 billion or turnover of more
than Rs. 30 billion, in India; or
(ii) assets valued at more than USD 500 million in India and
abroad, of which assets worth at least Rs 5 billion are in India,

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or, turnover more than USD 1500 million of which turnover in

India should be at least Rs 15 billion.
 An acquisition where the group to which the acquired entity would belong,
jointly has, or a merger or amalgamation where the group to which the
resulting entity belongs, has:
(i) assets valued at more that Rs. 40 billion or turnover of more
than Rs 120 billion, in India; or
(ii) assets valued at more than USD 2 billion in the aggregate in
India and abroad, of which assets worth at least Rs 5 billion
should be in India, or turnover of more than USD 6 billion,
including at least Rs 15 billion in India.
A share subscription, financing facility or any acquisition by a public financial
institution, FII, bank or venture capital fund pursuant to any loan or
investment agreement, would not qualify as a combination that will be
regulated by the CCI, and such transactions are therefore exempt under the
Competition Act. However, the public financial institution, FII, bank or
venture capital fund is required to notify the CCI of the details of the
acquisition within 7 day of completion of the acquisition.
Mandatory reporting: Where previously reporting of a combination was
optional, proposed amendments to the Competition Act make it mandatory
for persons undertaking combinations, to give prior notice to the CCI.
The information is to be provided to the CCI in the prescribed format within
30 days of the approval of the combination or the execution of any
agreement or other document for acquisition. The combination will become
effective only after the expiry of 210 days from the date on which notice is
given to the CCI, or after the CCI has passed an order approving the
combination or rejecting the same. The lengthy waiting period may impact
time lines in the closing of mergers and acquisitions, and the cost involved in
waiting out the period of 210 days. However, the wording of the proposed
clause seems to suggest that if the CCI delays an order longer than the
prescribed 210 days, the combination would be deemed to have been
approved by the CCI, therefore removing the uncertainty of waiting for the
completion of a potentially elongated regulatory process, as well as forcing
the regulators to act in an expeditious manner. In case of a failure to notify
the CCI, or contravention of its orders, the Competition Act inter alia
provides for certain penalties, civil liability and criminal liability, depending on
the nature of the failure/contravention.

CHAPTER 6

Case Study:

Reliance Industries Ltd (RIL) and Reliance

Petroleum Ltd. (RPL) merger:

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Historically every company that Reliance Industries Ltd has floated has been
folded into the mothership at some stage. This way, the promoters have
always been able to increase their stake in the mothership.
Reliance Industries Ltd (RIL) and Reliance Petroleum Ltd. (RPL) informed the
Bombay Stock Exchange (BSE) separately that a meeting of the respective
board of directors of the companies was held on today, inter alia, to consider
and recommend the amalgamation of RPL with RIL.
It was announced at the time when RPL was going to start its refinery in full
capacity. Also this news came when the option for Chevron to acquire
another 24% in RPL was going to get expired. Looking at the uncertain
economy and low crude price which can hit the earnings of RIL, the parent
company; it was a good move to merge RPL such that volatility in earnings of
RIL can be countered.
Such practices will shields RIL shareholders from the risk that any new
project faces till it reaches completion. In fact it will add more value to RIL
than RPL. RPL is currently a 71 per cent subsidiary of RIL; it was created in
2005 as a 100 per cent export oriented petroleum refinery and polypropylene
plant in the SEZ at Jamnagar in Gujarat. When fully functional it will be the
sixth largest refinery unit in the world.
In April 2006, RIL’s stake fell to 75 per cent following both the sale of a
5 per cent stake to US oil major Chevron for Rs. 1,320 crore and its jumbo
IPO which was subscribed more than 50 times for Rs 1,43,500 crore, a
record broken only in January 2008 by the Reliance Power IPO of the rival
Ambani group. RIL’s stake fell further to 71 per cent after the controversial
open market sale of its own shares worth 4.01 per cent equity stake in RPL in
late 2007.
The timing of the move to merge RPL into RIL is close to the expiry of the
option that Chevron has – to pick up an additional 24 per cent stake in RPL
or to exit from the company altogether. This deadline is July 2009.

Combined Market Cap

RIL 199093.56

RPL 34290.00

233383.56

This outscripts the No.2 Company in the sensex by market cap by over
Rs.80000 crore.

Total No. of shareholders

RIL 2222947
RPL 2147699

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Refining Capacity (Barrels/day)

RIL 660000
RPL 580000

Combined, the Reliance refineries would be the world’s largest at a singe site.

The major reasons for uniting are:-

(i) CHEVRON( US based company) was having 5% stake in RPL and
had the option to pick up an addition 24% stake in RPL or to exit
from the company altogether. The deadline was July 2009.
(ii) If the CHEVRON had increased its stake to 29% then RIL which
earlier had 71% stake would now have 47% stake in the company,
clearly a minority stake.
(iii) It would have cost CHEVRON $6 billion during 2007 for the 24%
stake, but now due to the current decline in RPL prices, the same
24% stake would have cost them merely $1.6 billion. So Mukesh
Ambani decided not to allow the 24% stake been taken by
CHEVRON and to do this they went for the merger.
(iv) THE COMBINED REFINING capacity will be 1.24 million barrels of
crude/day (6, 60,000 bpd from RIL and 5, 80,000 bpd from RPL). It
would make the Reliance, in the list of 50 most profitable
companies and the top five producer of polypropylene.
(v) Its script will have enhanced weightage in all the stock indices
(currently RIL is having weightage of 15% in BSE top 30
companies, which will increase to 20% after the merger).
(vi) The other important reason might be that, this merger will give
monopoly to RIL in negotiating the crude price. As we can notice
from the table below, after merging the companies their combined
capacity would be very high.

Higher Financial Strength & Flexibility:

• The deal is expected to enhance the position of RIL as an integrated global
energy major. Markets ascribe higher valuation for integrated energy
companies vis-a-vis standalone refiners due to better competitive position
and reduced earnings volatility.
• This merger of RPL is expected to transform RIL to be among world’s 50
most profitable companies; top ten non-states owned refining company
globally; top 15 independent upstream companies; and five largest producers
of poly propylene in the world.
• RIL will have enhanced weight ages in domestic indices; it will also gain
significantly from higher financial strength and flexibility. The merger is likely
to be earnings accretive for RIL from the first year itself.
• It will have operational synergies from combined business in areas such as
crude sourcing, product placement, process optimization and logistics,
besides consolidation of a world-class operating refinery asset.

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• The combined capacity of the two companies expected to be 1.24 million

barrels of oil a day. At present RIL produces 6.60 lakh barrels and RPL
produces 5.80 lakh barrels a day.
• The merger would help the combined entity save on income tax and
dividend distribution tax.
• It would also create a much bigger balance sheet that would help
Reliance Industries raise money for working capital and expansion.
• The merger of Reliance Industries and Reliance Petroleum is also a move
towards integration of group businesses and will create huge market value of
a whopping Rs 2, 33,000 cr.

Shareholders and the market is excited over the prospects of this merger so
think of the buzz and the market value that would be generated if the two
brothers decide to bury their differences!

Statement filed to BSE by RIL says:

• Merger is India’s largest ever.

• RPL shareholders to receive 1 (one) share of RIL for every 16 (sixteen)
shares of RPL. RIL will issue 6.92 crore new shares, thereby increasing its
equity capital to Rs. 1643 crore.
• RIL’s holding in RPL to be cancelled. No fresh treasury stock created.
• RIL to be a top 10 private sector refining company globally.
• RIL to become the world’s largest producer of Ultra Clean Fuels at single
location.
• Merger to unlock greater efficiency from scale and synergies.
• Merger to be EPS accretive.
• RIL to have 3.7 million shareholders.

Commenting on the merger, Mukesh Ambani, Chairman and Managing

Director, RIL said: “This merger follows Reliance Industries’ philosophy of
creating enduring value for all our stakeholders. It is a significant step in our
goal to be among the largest global corporations.”

Merger Benefits and Synergies:

Reliance Industries, which owns the world's biggest refinery complex, is

looking at additional cash flows, tax benefits, continuity of export status and
other synergies in its attempt to merge Reliance Petroleum with itself, after a
54 per cent decline in stock prices. The biggest benefit for RIL seems to be
using additional cash flows generated by RPL which can be used to step up
investment and expansion of its oil & gas exploration business.
"RPL will start generating cash. A smart thing is to merge RPL with RIL,
which can use the RPL cash flows to fund its expansion,'' an analyst with a
local brokerage said.

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RPL is expected to report a profit of about Rs 4,500 crore (Rs 45 billion) in

2009-10 while RIL expects to post a profit of more than Rs 19,000 crore (Rs
190 billion) in 2009-10.
Yet another factor motivating the merger may be the continuity of tax benefit
accruing from a special economic zone for another five years.
The RIL refinery enjoyed a ten-year tax holiday, sales tax deferment and
other tax rebates, all of which ended a couple of years back when it sought
an export-oriented unit. But the Jamnagar refinery is set to lose its EoU
status, entailing tax incentives, next month as the term expires.
Additionally RIL will save on transfer pricing on use of KG Basin gas and
other related products between the two companies. The company will also
save on taxes to be paid arising out of the transfer resulting in savings of
about $1-1.5 for every barrel of crude processed, analysts said. The savings
will occur at a time when refining margins are under pressure because of a
slump in oil prices.
As for RPL, with the completion of the refinery, the cash flow generated will
help Reliance Industries in enhancing its investment in exploration and
production business, analysts said.
"Overall it seems a good move from Reliance Industries' perspective,''
Deepak Pareek, an analyst with Angel Broking said.
On the basis of the market price of the two companies the swap ratio works
out to 17 shares of RPL for every one share of RIL, while if the company opts
to swap shares on the basis of book value the swap ratio will be 20:1.
Analysts believe that RIL may swap each of its share for every 18 shares of
RPL.
For investors of RPL, even though it may be seem to be a losing proposition,
in the current market situation, it would make sense for them to convert
their holding into a larger company which has a wide variety of businesses
rather than invest in a company with a single income stream.

The Merger will result in RIL:

• Operating two of the world’s largest, most complex refineries.

• Owning 1.24 million barrels per day (MBPD) of crude processing capacity,
the largest refining capacity at any single location in the world.
• Emerging as the world’s 5th largest producer of Polypropylene

Merger Details:

Under the terms of the proposed merger RPL shareholders will receive 1
share of RIL for every 16 RPL shares held by them.

The appointed date of merger of RPL with RIL is 1st April 2009.

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RIL will cancel its holding in RPL.

Based on the recommended merger ratio, RIL will issue 6.92 crore new
equity shares to the existing shareholders of RPL. This will result in a 4.4%
increase in equity base from Rs.1574 crore to Rs.1643 crore. Consequently,
the promoter holding in RIL will reduce from 49% to 47%.

Reliance Industries Limited:

RIL is India’s largest private sector company on all major financial

parameters with a turnover of Rs.139269 crore (US$ 34.7 billion), cash profit
of Rs.25205 crore (US$ 3.8 billion) and net worth of Rs.81449 crore (US$
20.3 billion) as of March 31, 2008.
RIL is the first private sector company from India to feature in the Fortune
Global 500 list of ‘World’s Largest Corporations’ and ranks 103 rd amongst the
world’s Top 200 companies in terms of profits. RIL is amongst the
30 fastest climbers ranked by Fortune. RIL features in the Forbes Global list
of the world’s 400 big companies and in the FT Global 500 list of the world’s
largest companies. RIL ranks amongst the ‘Worlds 25 Most Innovative
Companies’ as per a list compiled by the US financial publication – Business
Week in collaboration with the Boston Consulting Group.

Reliance Petroleum Limited:

RPL is a subsidiary of RIL. RPL is setting up Greenfield petroleum refinery and

polypropylene plant in a Special Economic Zone at Jamnagar in Gujarat. With
an annual crude processing capacity of 580000 barrels per stream day
(BPSD), RPL will be the sixth largest refinery in the world.

Conclusion:
There is little to stop Indian companies that desire to be global names for
playing the merger and acquisition game globally. With a plethora of
financing options, this aspiration has become a reality for many corporate
houses, who can now boast of having the best in the industry under their
wings. Indian companies have often surpassed their foreign counterparts in
corporate restructuring both within and beyond the national frontiers. At
present, an Indian company is not permitted to merge with a foreign entity;
this prohibition should be removed in order for companies to be able to
explore all possible restructuring options, and choose the most viable given
their commercial requirements. The competition law in India should also be
made less formalistic and speedy in order to facilitate the process.
Mergers and acquisitions are powerful indicators of a robust and growing
economy. The legal framework for such corporate restructuring must be easy
and facilitative and not restrictive and mired in bureaucratic and regulatory
hurdles. The biggest obstacle in the way of completing a merger or an
amalgamation remains the often long drawn out court procedure required for
the sanction of a scheme of arrangement. As George Bernard Shaw is

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reputed to have said “We are made wise not by the recollection of our past,
but by the responsibility for our future”, and the future of India is bright
indeed.

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