Mergers in India
Merger is a process whereby two or more enterprises may come together sharing their liabilities, responsibilities, assets and trade objectives.
Some of the reasons requiring the need of merging of entities are listed below:
i. Synergy of operational capabilities;
ii. Efficient allocation of managerial capabilities & infrastructure;
iii. Expansion and diversion in extended domestic and global markets;
iv. Revival and rehabilitation of a sick unit by adjusting its losses against profits of a healthy company;
v. Acquisition of raw materials and access to scientific research and technological advancement;
vi. Capital restructuring by appropriate to reduce the cost of servicing and improve return on capital employed;
vii. Improve corporate performance.
Types of Mergers
- Horizontal mergers
- Vertical Mergers
- Congeneric Mergers
- Conglomeration Mergers
- Consolidation Mergers
Difference between Merger and Acquisition in India
Merger happens when different entities join hands to become one single new entity. Whereas in Acquisition happens when one entity completely buys another entity.
In general sense of business or economics, mergers and acquisitions are a combination of two companies into one larger company.This commonly used term also cites to the fascet of corporate strategy and management generally dealing with the combining of different companies. This aims to aid and finance while also helps in rapidly growing the company in a given industry without having to create yet another business entity.
Acquisitions in India
Acquisition, also known as a takeover or a buyout, is the buying of one company (the ‘target’) by another.It usually refers to a purchase of a smaller firm by a larger one.
An acquisition may be classified into following types:-
i. Friendly and Hostile takeover:- A friendly takeover occurs when one corporation acquires another with the approval of both boards of directors for the transaction. Whereas hostile takeover occurs when the acquiring corporation, attempts to take over the target corporation, without the agreement of the it’s board of directors.
ii. Reverse takeover:- This is the case when a smaller firm acquires management control of a larger or longer established company and keeps it’s name for the combined entity.
iii. Reverse merger- It is when a private company that has strong prospects and is eager to raise financing buys a publicly listed shell company, usually one with no business and limited assets.
Laws Guiding Mergers & Acquisitions
The Competition Act, 2002 regulates combinations and governs the M&A transactions likely to cause an appreciable adverse effect on competition in India.
• The tax treatment of M&A transactions in India is governed by the Income Tax Act, 1961.
• Companies Act, 2013: Governs all companies in India. All corporate transactions, be it mergers, acquisitions or private equity funding, have to be implemented in accordance with the provisions of the.
• The SEBI (Substantial Acquisition of Shares andTakeovers) Regulations, 2011,governs M&A transactions which involve the acquisition of a substantial stake in a publicly listed company.
• Insolvency and Bankruptcy Code, 2016 (BC): regulates the dealing of distressed assets under the corporate insolvency resolution process.
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Meaning of Hostile Takeovers
A “Takeover” of a company is no different from an “Acquisition” of a company, which as per the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, means – “directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control over, a target company”. A normal takeover (friendly/ peaceful takeover) is different from a “hostile takeover” because in a “hostile takeover,” the current management or the owners (shareholders) resists the entry of the acquirer and the exercise of his control over the company.
There is a complicated web of laws that govern the takeover of companies and the procedure itself requires the framing of complex strategies and the negotiation and execution of multiple agreements between parties which are many a times resilient to indulge in such activities. Little has been accomplished by forging of legal mechanisms such as the SEBI Takeover code, SEBI (Disclosure & Investor Protection) Guidelines 2000, the FDI policy and the FEMA regulations to prevent unfair practices in the takeover of companies. The number of attempts of hostile takeover in India have been on a constant rise in the past decade especially after the LPG phase of 1991.
In the past few years, though some companies have managed to fend off against their acquirers and even shield themselves against unwanted media exposure, others have not been so fortunate. The hostile takeover of Raasi Cements Ltd. by India Cements Ltd. in 1998 is an appropriate example that elaborates how even the founders of a company can lose control over their company if they do not have proper mechanisms in place.
Defense strategies adopted against Hostile Takeover in India
Some of the defense strategies adopted by big companies to prevent and counter attempts of hostile takeovers are as follows:
- Poison Pills
- Shark Repellants
- Attack the Logic of the bid
- Corporate Restructuring
- Crown Jewel Defense
- Management Buyout
- Positive Public Information
- Share Repurchase
- Scorched Earth
- White Knight / White Square
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To know more about Commercial Contracts & Agreements in India, read below: