Owing to the dynamic nature and demand of the business, the entities require to constantly modify their business model. Corporate restructuring is an instrument to effectively implement the strategies devised by changing the business model, management team or financial structure of the corporations. Growth of these corporations is either through organic means (through internal means like financial restructuring) or inorganic means in order to obtain accelerated growth (through external sources like mergers, acquisition).
Need for Merger
The various needs for undertaking a Merger exercise are as follows:
- Synergy of operational capabilities and efficient allocation of managerial capabilities & infrastructure.
- Expansion and diversion in extended domestic and global markets.
- Revival and rehabilitation of a sick unit by adjusting its losses against profits of a healthy company.
- Acquisition of raw materials and access to scientific research and technological advancement.
- Capital restructuring by appropriate to reduce the cost of servicing and improve return on capital employed.
- Improve corporate performance.
Considerations for Merger
The restructuring process requires the following aspects to be considered before, during and after the restructuring process:
- Valuation & Funding
- Legal and procedural issues
- Taxation and Stamp duty aspects
- Accounting aspects
- Competition aspects etc.
- Human and Cultural synergies
Types of Mergers
Mergers may be classified into the following categories:
- Horizontal Merger: It is a merger of two or more companies that compete for identical/similar goods/ services which thus are at the same stage of production in the same industry.
- Vertical Merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages / levels of production
- Co-generic Merger: It is the type of merger, where the companies in the same or related industries do not offer the same products, but may share similar distribution channels.
- Conglomerate Merger: Mergers of firms involved in unrelated type of activities for utilization of financial resources or enlarged debt capacity
Merger covered under law
Under the legislative ambit, merger falls under the following laws:
- The Companies Act, 2013: Under the provisions of Section 232 a merger may be sanctioned where the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies; and that under the scheme, the whole or any part of the undertaking, property or liabilities of any company is required to be transferred to another company or is proposed to be divided among and transferred to two or more companies.
- The Competition Act, 2012: As per the provisions of Section 3, merger agreements which cause or are likely to cause an appreciable adverse effect on competition within India in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services are prohibited. Such agreements are void and may be classified as:
- Horizontal Agreements which directly/ indirectly determines purchase or sale prices or limits or controls production, supply, markets, technical development, investment or provision of services; or directly or indirectly results in bid rigging or collusive bidding.
- Vertical Agreements including tie-in arrangement, exclusive supply agreement, exclusive distribution agreement, refusal to deal, resale price maintenance
RComm – SSTL Merger
Being on the rocky road, the debt laden Reliance Communication (RComm) also adopted recourse to corporate restructuring in the form of its merger with Sistema Shyam Teleservices (SSTL) which is a joint venture between Russia’s Sistema and India’s Shyam Group, post approval from Indian regulators and Courts.
According to the terms of the merger, RCom has taken over the business of SSTL inclusive of license, spectrum and 4 billion customers. It will acquire 30 MHz of SSTL’s 800/850 MHz band spectrum best suited for 4G LTE services. RCom has assumed spectrum liabilities of SSTL worth INR 3,900,000,000. SSTL was issued shares to the extent of 10% of the equity shareholding.
The said merger has accorded an opportunity to RCom, which was facing troubled waters combination, to stand and exist in the market. Such mergers aid the financially weak entity to continue to compete in the relevant market and thus allow the growth of competition. The law essentially keeps a check on the mergers to ensure that these combinations do not have adverse effect on competition in India.