This article on ‘Mergers and Acquisitions Laws in India: All You Need to Know’ was written by Ishita Bobal, an intern at Legal Upanishad.
This article will focus on what is a merger, why companies merge, the point of difference between a merger and acquisition, the types of mergers, laws which regulate the acquisitions and the mergers, and the conclusion.
What is Merger?
A merger is well a joint organisation created by combining the two separate entities. Illegal language is a new entity created when two companies are consolidated in such a way that the ownership and the management structure are reformed. The merger is to dilute each company in individual power and there is no requirement of cash to complete the mergers. Mergers are usually done to expand the existing ventures into the new market to reduce the cost of operation to increase the profit and revenue.
Mergers are voluntary it does involve the companies that have the same size, work of nature, scope, etc. The amalgamation of two companies is also defined.
Why do companies merge?
The companies merge to decrease the average cost per unit and boost the production which is called the economy of sale. The main aim of any venture is to increase the revenue or increase the market share hence mergers are done by the Ventures to attain the same aim.
The companies use dual profit by merging as they use the complementary resources which further helps in saving the cost of production and in the long term it enhances the revenue.
Point of difference between mergers and acquisitions
When the two separate Ventures combine forces it results in a new entity, or a joint organisation is called a merger. Whereas an acquisition is to take over the small entity by the larger entity.
A merger is a purchase on a friendly basis, but an acquisition tends to be hostile. In an acquisition the buyer’s power is absolute but, in a merger, a new organisation is made.
Types of mergers
- When the two companies are involved in direct competition with the same value of the share and product lines IT results in the consolidation of forms that are direct rivals. E.g.: the merger of FORD AND VOLVO. These types of mergers are called horizontal mergers. Horizontal mergers reshaped the market structure as they eliminate the sellers, and their impact is directly on the seller concentration.
- The vertical merger takes place when the amalgamation of a customer and a company or a supplier and the company takes place. Hence it is necessary for this type of merger to have an actual or potential buyer-seller relationship. The vertical merger does not affect the market structure since they concentrate more on the seller.
- When a Merger takes place between companies which do not have a common business area or any kind of common relationship that type of a merger is called a conglomerate merger, the consolidated form which is the product of such two types of different companies may sell some related products and the distribution channel or production process. This type of merger is based on the seller’s concentration directly.
Laws which regulate the acquisitions
1- According to the Companies Act 1956 sections 390 to 395 talks about the arrangements, amalgamations, mergers and the procedure to be followed, arrangements yet to be made and the scheme of amalgamation. NCLAT deals with all kinds of grievances that come under the company law.
In one of the landmark cases, Foss vs Hardbottle, the judgement said to prevail the bill of majority shareholders and the court would not be interfering in the internal management and decisions of the venture but keeping it in mind that minority shareholder’s good not be oppressed or they should not be neglected hence keeping in its mind that the shareholders having the hefty shares should exercise their power within the limits.
The minority shareholders were given legal recognition by the ministry of corporate affairs in 2016 under section 236 of the Companies Act hence the minority shareholders have the provision to sell the share to majority shareholders while leaving the company. Also, the minority shareholding should not exceed more than 25% and was defined in the minority shareholdings.
2- The MRTP Act of 1969 was replaced by The Competition Act 2002. The MRTP Act was to prohibit the unfit trade practices done by the companies but since it had many loopholes and was not self-sufficient and prevent the Monopoly trade practices by the Ventures and also getting the public trust again the Competition Act 2002 was passed.
The main issue which was solved by the enactment of the Competition Act was that it successfully dealt with all the challenges that came over the LPG scheme over which the Indian economy had new exposure to the outside world. The main objectives of this Act were to prevent the unhealthy practices done by the trading Ventures, misuse of the power, please, to protect the consumer and to maintain the checks and balance system in companies as promoting anti-competitive practices.
Hence, the Acts are designed in such a way that it regulates the activities of the amalgamation of the company’s mergers and acquisitions.
3- The Indian Income Tax Act, 1961 provides the meaning of the term amalgamation in Section 2 (1B) which is the merger of one or more companies into another company to form a new venture. The companies which are most are called amalgamating companies and into which the company is merged is called an amalgamated company. The assets and liabilities of the amalgamating and amalgamated company are shared.
The Income Tax Act states that any gain or profit a venture receives after the sale of the capital asset comes under income; hence, the venture is required to pay the income tax in the coming year. But further Section 47 of the same Act examines some transactions for example when acid is transferred by the amalgamated company towards the amalgamating company then the transaction will be exempted.
When the shareholder transfers the share. And when two foreign companies are amalgamated then no tax is levied but further Indian company and foreign company are amalgamated, and the resultant is an Indian company this would result in the capital gain for shareholders and hens it would also be exempted.
Due to the increased exposure of India to foreign direct investment, the mergers and acquisitions and alliances are at par. The mergers and acquisitions are increased in search of a number that captures the whole marketplace which also provides the small companies with a platform to get acquired by the bigger ones. If we find a reason behind the increase in the number of mergers and acquisitions, it is to achieve economies of scale, widen the reach of the public and gain a competitive advantage all by a single entity.
Hence mergers are an important tool while expanding the business. Any business giant would grab the opportunity to acquire and amalgamate to widen the range in Indian markets with a huge number of buyers and consumers.
- Beena, P. L. Mergers and acquisitions: India under globalisation. Routledge India, 2014. Retrieved from: < https://doi.org/10.4324/9781315744032 >
- Rani, Neelam, Surendra S. Yadav, and P. K. Jain. “Financial performance analysis of mergers and acquisitions: evidence from India.” International Journal of Commerce and Management (2015). Retrieved from: < https://www.emerald.com/insight/content/doi/10.1108/IJCoMA-11-2012-0075/full/html >