Mergers and Acquisitions: M&A comes under the business restructuring processes.

Merger is a
transaction including the combination of 2 or more companies where dominated companies (less
important) lose their identity and merge with the dominating player.
Acquisition is a process of taking over shares in or control of a company by an individual or
business entity to gain management control. M&A activities are undertaken to maximize the
companys growth prospects enhancing customer base, technology, market share as well as
innovative technologies ( through consolidation of companies).
M&A activities in India are not significant in number compared to the overseas market. But due
to reforms of 1991, increasing competition as well as exposure to global market, amendments in
various acts governing trade, FDI as well as expanded market, India is witnessing considerable
number of such business transactions. Various amendments in acts increasing scope of M&A in
India are as follows:
1. Amendment in Indian Companies Act, 1965 in 1991, doing away with the need of
government approval for various M&A activities.
2. Liberal changes in FDI, increasing the cap of foreign investment as well as opening
various industries to it.
3. Introduction of Depository Act for De-mat accounts for trading of shares easing the
process as well as increasing transparency eliminating the errors of paperwork
4. Reduction in the number of industries requiring government license for companies to
operate, increasing the penetration of private players
Sectors witnessing significant M&A activities:
1. Consumer goods sector: Various companies are going through M&A for various reasons
like increasing market share, reducing costs, business synergy etc.
2. Banking and Financial Institutions are also consolidating to increase capital and customer
base as RBI gives stricter regulations regarding the capital requirements as well as
increased competition by the new entrants
3. Professional Services like law firms, consultancies etc., as companies in this sector are
looking forward to cater to clients spread across the globe. Hence consolidation and
mergers certainly increase their reach
4. Sectors which see a lot of fragmentation in terms of capacity e.g. Steel industry,
Telecommunication
5. Healthcare sector is also witnessing a trend in M&A due to increased competition, a need
to diversify portfolio, drugs going off-patent and lack of innovation
6. Real Estate is also consolidating and M&A activities have increased in this sector

Various types of Mergers:

1. Horizontal Merger: When companies which are in direct competition merge together or
One company acquires controlling stakes in another, it is called Horizontal merger.
Generally companies operating in consumer goods sector come under this type. This is
done to decrease competition and gain market share. E.g. Volkswagon and Rolls Royce
2. Vertical Merger: When companies which have supplier customer relationship merge
together, they are said to have merged vertically.
3. Conglomerate Merger: Generally companies which do not have any common business
merge together to diversify. Such mergers are called conglomerate mergers.
There are various regulations governing the M&A activities in India. Various acts such as Indian
Companies Act, Competition Act 2002, FEMA, ID&R and SICA have been laid down to govern
mergers and acquisitions. These are described as given below:
Indian Companies Act 1965: The Act sets following guidelines for Mergers and Acquisitions:
1. Permission for the Amalgamation: Companies can amalgamate only when it is
permissible in their respective Memorandum of Association. The acquiring company
should have inclusion in its object clause permission to carry out the business activities of
the acquired company. If these things are not available, it is imperative to seek approval
of shareholders, board of directors, creditors as well as Company Law Board.
2. Stock Exchange: If the companies in question are listed, they should provide adequate
information to the stock exchange prior to the amalgamation including any price sensitive
piece of information.
3. Approval of the BOD: Both the companies should get the approval of their respective
Board of Directors on the draft proposal of merger or acquisition.
4. Application to the High Court: Draft proposal should be submitted to High Court to get
approval and go-ahead on the process.
5. Shareholders Meeting: Individual companies in the process should hold shareholders as
well as creditors meeting to get their approval. It is mandatory to get approval of 75%
shareholders and creditors.
6. High Court Order: After the approval of shareholders as well as the BOD, High Court
gives the verdict on the sanctioning of the process. After the sanctioning order is
received, true copies of it are submitted to the registrars of the individual companies.
7. Transfer of assets and Payment: The assets, liabilities as well as the stocks of the
transferor company are transferred to the transferee company on the specified date and
payment will be done in the form of equity shares, debentures cash or combination of
these listing these securities on the stock exchange.
The Competition Act 2002: This act regulates through the Competition Commission of India.
It is voluntary for the companies entering arrangement to notify the Commission but
companies might be scrutinized when threshold limit of turnover or assets specified is
breached. Section 5 under the Act defines combination or amalgamation referring to assets or
turnover as:

1. Exclusively in India
2. In and outside India
The turnover regulations are a little biased against the Indian companies as an Indian
company having turnover more than 3000 crores cannot acquire another Indian company
without prior approval of Competition Commission of India whereas a foreign company can.
Section 6 states that no company should enter into an arrangement (Merger, Acquisition,
Takeover or Amalgamation) which would have substantial adverse impact on the related
market.
The commission would consider following factors while considering any amalgamation:
1.
2.
3.
4.
5.
6.
7.
8.

Extent of entry barriers in the market before and after arrangement

Level of amalgamation in the related market
Degree of nullifying power in the market
Possibility of price increase in the market due to combination
Availability of the substitutes
Nature of competition in the market
Degree of innovation
Vertical integration in the market

The act seeks to minimize the adverse impacts of the combinations.

FEMA Act- 1999 & FDI: Foreign Exchange Management Act, 1999 regulates the issuance of
shares of the Indian company to the foreign entity. Reserve Bank of India has issued general
guidelines regarding foreign investment in India. It is to promote trade and payments as well
as the orderly development of the foreign exchange market.
Under the current regulatory framework cross border merger of the companies is not
possible. However a foreign company can merge an Indian company by a) setting up an
Indian entity and merging through it; b) acquiring an Indian company and merging through it.
Acquisition of an Indian company by a foreign company needs receipt from Foreign
Investment Promoter Board of the Government of India on the application filed by the Indian
company to eliminate any possibility of hostile takeover. Afterwards the foreign entity will
submit an application to the Reserve Bank of India regarding the details of the share prices.
Foreign Direct Investment is usually preferred as they are non-debt creating, non-volatile and
their returns depend on the cash flows of the project financed by them.
Takeover Regulations and Listing Agreement: The listing agreement requires the companies
undergoing merger to make timely disclosure of price sensitive information regarding
merger.

Takeover Regulation applies to the acquisition of shares of the company listed in the stock
exchange. It does not apply to the following cases:
1. Allotment of shares in public issue
2. Preferential allotment passing a special resolution
3. Transfer of shares among the Indian promoters and foreign collaborators
Under this law, acquirer entity acquiring more than 5% shares needs to disclose the
information within 4 days to the acquired entity which further needs to inform stock
exchange. Likewise, holding of 15% of shares calls for disclosure of information within 21
days. Acquirer cannot hold more than 15% shares without making a public offer of minimum
20% acquisition of shares/voting rights.
Industry Development and Regulation Act: Under this act, central government holds the power to
take over the management of companies in certain industries mentioned in the schedule. This
might be done if any of the norms set by the schedule are breached by the companies or
undertaking is proceeding in a detrimental way to the market.
Sick Industrial Companies Act, 1985 (Special Provision): A Sick industrial company is the one in
control of various industrial undertakings, but having high losses compared to the net worth.
A financial institution or domestic bank interested in such company prepares revival schemes
for the company including merger. Such schemes do not need to follow the framework
designed by the Companies Act.
Depositories Act, 1996: With the introduction of this act, provisions have been made for the
shares trading in dematerialized form (electronic shares- demat). It brings transparency to the
process of mergers and acquisition reducing the possibility of hostile takeovers.
Indian Income Tax, 1961: ITA does not cover mergers specifically but it comes under the gambit
of amalgamation. It states that shares transferred from transferor to transferee are not
considered transferred and hence gains arising from the process are not taxable.