MERGERS AND ACQUISITIONS IN INDIAN TELECOM SECTOR

Prepared by:Abhinandana Kain Advocate

What is Merger
The term merger literally means merging of two organizations into one larger company where one survives and other lose their corporate existence. The surviving company retains its identity and acquires all the assets, liabilities and the stock of one company stand transferred to transferee Company.

The Companies Act, 1956 does not define the term Merger or Amalgamation. It deals with schemes of merger/ acquisition which are given in s.390-394 A, 395,396 and 396 A.

WAYS OF MERGER
A merger can take place in following four ways:
By purchase of assets.
The asset of company Y may be sold to company X. once This is done company Y is then Legally terminated and company X survives.

By purchase of common

share.

The common share of company Y may be purchased by company X. When company X holds all the shares of company Y it is dissolved.

Cont
By exchange of share for assets.
Company X may give its share to Stakeholders of company Y for its net assets.Then company Y is Terminated by its shareholders Who now holds shares of Company X.

Exchange of shares for shares

Company X gives its shares to The share holders of company Y and then company Y is terminated.

TYPES OF MERGER
Horizontal Combination A merger occurring between companies producing similar goods or offering similar services. This type of merger occurs frequently as a result of larger companies attempting to create more efficient economies of scale.

COMPANY A

COMPANY B

COMPANY AB

Vertical Merger
A merger between two companies producing different goods or services for one specific finished product. The merger of firms that have actual or potential buyer-seller relationships. Example: The merger of Reliance Petrochemicals Ltd with Reliance Industries Ltd- down stream merger, where a manufacturer merged with a supplier. Car manufacturer purchasing a tire company.

Conglomerate Merger
A merger between firms that are involved in totally unrelated business activities. Example:- Pepsi co- pizza hut.

ACQUISITION
One company takes over another and establishes itself as the new owner of the business. The buyer companies swallow the business of the target company, which ceases to exist. An acquisition is the purchase by one company of a controlling interest in the share capital of another existing company.

COMPARISON B/W MERGER AND ACQUISITION

MERGER
Combining of two business entities under common Ownership. The stocks of both the companies are surrendered while new stocks are issued afresh.

ACQUISITION
Buying one organization by another.

The buyer company swallowsthe business of the target company, which ceases to exist.

Merger is expensive than Acquisition (higher legal cost)

Acquisition is less expensive than merger.

EVOLUTION IN INDIAN TELECOM INDUSTRY-IMPORTANT MILESTONES.

HISTORY OF INDIAN TELECOMMUNICATIONS
1851: History of Indian Telecommunication started and first operational land lines were laid by the government near Calcutta. 1883: telephone services introduced in India. 1854 :A regular, separate department was opened, when telegraph facilities were thrown open to the public. 1923: Formation of Indian Radio Telegraph Company (IRT). 1932 : Merger of ETC and IRT into the Indian Radio and Cable Communication Company (IRCC).

 1985: Department of Telecommunications (DOT) established, an exclusive provider of domestic and long-distance service that would be its own regulator. 1986: Two wholly government-owned companies were created; Mahanagar Telephone Nigam Limited(MTNL), to serve Delhi and Bombay, and Videsh Sanchar Nigam Limited( VSNL), to operate international telecom services. 1994: In 1994, the government announced the National Telecom Policy which defined certain important objectives including availability of telephone on demand, provision of world class services at reasonable prices, improving Indias competitiveness in global markets. 1997 : Telecom Regulatory Authority of India (TRAI) was formed.

 1999: The most important milestone and instrument of telecom reforms is The New Telecom Policy, 1999 (NTP 99). It laid down a clear roadmap for future reforms, contemplating the opening up of all the segments of the telecom sector for private sector participation. 2003: The government then came up with Unified Access Service Licensing (UASL) in 2003, which It marked the end of licensing regime in the Indian Telecom industry. It eliminated the need for different licenses for different services. Players were now allowed to offer both mobile and fixed-line services under a single license after paying an additional entry fee. It helped in aligning convergent technologies and services.

TELECOM REGULATORY BODIES IN INDIA

Department of Telecommunication The DoT comes under the purview of Ministry of Communications and Information Technology. The Department is responsible granting licenses for various telecom services like Unified Access Service Internet and VSAT services, managing radio frequency in close coordination with the international bodies and enforcing wireless regulatory measures by monitoring wireless transmission of all users in the country. Telecom Commission The Telecom Commission was set up by the Government of India in 1989. The Telecom Commission is responsible for policy formulation, licensing, wireless spectrum management, research and development and standardization.

Telecom Regulatory Authority of India (TRAI) TRAI was formed in 1997 to provide an effective regulatory framework and adequate safeguards to ensure fair competition and protection of consumer interests. ROLE OF TRAI

Section 13 of the TRAI Act gives adequate powers to TRAI to issue directions to service providers.
Under Section 14 of the Act, the TRAI has full adjudicatory powers to resolve disputes between service providers. The TRAI act was amended by an ordinance, effective from 24TH January, 2000 establishing a Telecommunications Dispute Settlement and Appellate Tribunal (TDSAT) to take over the adjudicatory and disputes functions from TRAI.

Telecom Disputes settlement & Appellate Tribunal (TDSAT)

TDSAT was set up in May 2000 by the government of India. To protect the interest of the consumers and service providers of the telecommunication sector and also to encourage and ensure the growth of the telecommunication sector. The chairperson of TDSAT is appointed from the ranks of chief justice of a High Court or a Supreme Court judge and holds office for a period of 3 years. Section 14 N Transfer of Appeals-All appeals pending before the High Court immediately before the commencement of the TRAI (Amendment) Act, 2000 shall stand transferred to the Appellate Tribunal. Section 15-No Civil Court shall have jurisdiction to entertain any suit or proceedings in respect of any matter which the Appellate Tribunal is empowered by or under this Act.

Section 18 -An appeal shall lie against any order, not being an interlocutory order, of the Appellate Tribunal to the Supreme Court. Every appeal under this section shall be preferred within a period of ninety days from the date of the decision or order appealed against.

REGULATORY FRAMEWORK
FEMA Companies Act, 1956 DOT

M&A in Telecom Sector In India Competition Commission Of India

SEBI

DoT GUIDELINES
Based on recommendations of TRAI, DoT issued guidelines on merger of license in February 2004. Prior approval of the Department of Telecommunications will be necessary for merger of the license. The findings of the Department of Telecommunications would normally be given in a period of about four weeks from the date of submission of application. Merger of licenses shall be restricted to the same service area. There should be minimum 3 operators in a service area for that service, consequent upon such merger. Any merger, acquisition or restructuring, leading to a monopoly market situation in the given service area, shall not be permitted. Monopoly market situation is defined as market share of 67% or above of total subscriber base within a given service area, as on the last day of previous month.

COMPETITION ISSUES IN MERGER AND ACQUISITIONS

Section 6 of the Competition Act, 2002 deals with the regulation of 'combination', which includes mergers, amalgamation, and acquisitions, beyond a specified threshold limit. Most competition laws in the world require mandatory prior notification of every merger to the competition authority but under Indian law it is voluntary. CCI can also take suo motu cognizance of a merger perceived as potentially anti competitive and it can also enquire until one year after the merger has taken place. Once CCI has been notified, it must decide within 90 days of publication of details of the merger or else it is deemed approved.

SEBI TAKEOVER GUIDELINES

SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997. Regulation 11(2) - No acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company shall acquire by himself or through persons acting in concert unless he makes a public announcement as per the regulations. Further, if a target company was unlisted, but has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%. Regulation 11 (2A) - If an acquirer who together with persons acting in concert with him, who holds 55% or more but less than 75% of the shares or voting rights of the target company is desirous of consolidating his holding while ensuring that Public Holding in the target company does not fall below the permitted level of listing agreement he may do so only by making a public announcement as per the regulation.

Further, if a target company was unlisted, but has obtained listing of 10% of issue size, then the limit of 75% will be increased to 90%.

FEMA GUIDELINES
As per the Foreign Exchange Management Regulation, 2000 schedule 1 issued by RBI, investment in telecom sector by foreign investors is permitted under the automatic route within the overall sectoral cap of 74% without RBI approval. In case, investment by foreign investors in an Indian telco is likely to exceed sectoral cap of 74%, then they should seek approval of (FIPB) Foreign Investment Proposal Board. FDI scheme prohibits investments by citizen or entities of Pakistan and Bangladesh (regulation 5) primarily on security concerns. In the recent past, DoT has also delayed its approval to an Egyptian companys investment in Hutch India on similar grounds.

COMPANIES ACT,
Companies Act, 1956 does not define the term Merger or Amalgamation. It deals with schemes of merger/ acquisition which are given in s.390-394 A, 395,396 and 396 A. Legal Procedure For Bringing About Merger Of Companies
Examination of object clauses: The MOA of both the companies should be examined to check the power to amalgamate is available. Further, the object clause of the merging company should permit it to carry on the business of the merged company. If such clauses do not exist, necessary approvals of the share holders, board of directors, and company law board are required.

 Intimation to stock exchanges: The stock exchanges where merging and merged companies are listed should be informed about the merger proposal. From time to time, copies of all notices, resolutions, and orders should be mailed to the concerned stock exchanges. Approval of the draft merger proposal by the respective boards. Application to high courts: Once the drafts of merger proposal is approved by the respective boards, each company should make an application to the high court of the state where its registered office is situated so that it can convene the meetings of share holders and creditors for passing the merger proposal.

Dispatch of notice to share holders and creditors: In order to convene the meetings of share holders and creditors, a notice and an explanatory statement of the meeting, as approved by the high court, should be dispatched by each company to its shareholders and creditors so that they get 21 days advance intimation. The notice of the meetings should also be published in two news papers.

Benefits of M&A in Telecom Industry

Building of infrastructure in a more convenient way Licensing options for mergers and acquisitions are often found to be easier Mergers and acquisitions offer extensive networking advantages Brand value Bigger client base Wide array of products and services

1998 - 2005

Recent Merger and Acquisition

The first merger and acquisition deal in the Indian telecom industry occurred in 1998 between Max Group of Delhi and Hutchison Group of Hong Kong. 41% of stakes of Orange services in Mumbai was acquired by Hutchison from Max for 560 million US Dollars. The takeover of Mobilink Telecom by Broadcom. This can also be described as a suitable example of product extension merger. The taking over of Hutchison Essar by the Vodafone Group. Now it has become Vodafone Essar Limited. Reliance Communication which merged its telecom tower business with GTL infrastructure Ltd for USD 11 billion. Bharti Airtel acquired Kuwait based Zain telecoms African business for USD 10.7 billion. Reliance Industries acquired Infotel broadband for USD 1 Billion.

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