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introduction
“Mergers and Acquisitions” (“M&A”)” has been considered to be one of the efficient tools of inorganic growth of a company and are common forms of restructuring that enable an efficient mechanism for synergy of business and economies of scale. The intent behind M&A by the Companies may vary from gaining competitive advantage, drawing synergies, enhancing capacities, tax benefits to the consolidation of operations.
Mergers & Acquisition are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tool of business strategy. They are widely used in a wide array of fields such as information technology, telecommunications and business process outsourcing as well as traditional business to gain strength, expand the customer base, cut competition or enter into new market or product segment.
Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity.
There are various regulatory institutions and government initiatives which play an important role in regulating M&A across jurisdictions. Further, the key provisions affecting the M&A space in India are as reproduced below:
The “Companies Act of 2013” is the main governing legislation regulating “companies” and “mergers”, and it is handled by the “Ministry of Corporate Affairs”.
The “Securities and Exchange Board of India” (“SEBI”) mandates and governs the securities markets, the “SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011” (“the Takeover Code”) govern acquisitions of shareholding and control in “listed companies”, while the “SEBI (Delisting of Equity Shares) Regulations 2009” regulates “delisting of shares” from stock exchanges.
“FEMA”, the guidelines issued by the central government along with the RBI master directions and circulars are administered by the “Reserve Bank of India” (“RBI”) and the government of India. Further, “RBI” also regulates capital inflows and outflows in accordance with the directions specified thereunder.
“Income Tax Act 1961”: managed and regulated by the “Income Tax Department”, “the Income Tax Act”, along with “double tax avoidance treaties” as executed by the Indian government with foreign countries, mandates the “tax treatment” for “M&A transactions”;
“Competition Act 2002”: “The Competition Commission of India”, regulates and governs the business combination provisions, directs and decides upon “antitrust matters and approvals”;
“Insolvency and Bankruptcy Code 2016” (“IBC”): the IBC, which is overseen by the “National Company Law Tribunals” (“NCLTs”), governs corporate insolvency matters and disposal of assets and liquidation proceeds distribution among stakeholders in “corporate insolvency resolution”.
ROLE OF MERGERS AND ACQUISITIONS (“M&A”), ITS PREREQUISITES, AND ITS IMPACT ON GROWTH
The “Companies Act of 2013” (“CA 2013”) and the “Income Tax Act of 1961” (“ITA”) do not define the term “merger”. The merger is a concept that refers to the merging entities into one, with the objective of collaborating the assets and liabilities of the separate entities and organizing them into one enterprise. “Mergers” can be utilized to achieve a variety of goals, including cost optimization, “technology acquisition”, and synergies by way of access to new markets and sectors. In most cases, the merging entities will cease to exist and merge into a single “resulting” entity.
Apart from the substantive provisions in “Sections 230-240”, the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 ('CAA Rules') provide procedural guidance.
“Mergers and acquisitions” ("M&A") are a popular way for companies to seek exponential rather than linear growth, and they continue to attract attention. The following points encompass the justification for an M&A transaction:
- Operational efficiency
- Fiscal Benefit
- Return on Equity
- Inorganic growth
- Promoter level consolidation
In the recent times Environmental, Social and Governance (ESG) Factors are increasingly influencing M&A decisions. Companies are now taking into account sustainability, social impact and ethical practices when evaluating potential targets. Investors and stakeholders are emphasizing responsible and sustainable business practices, leading to ESG becoming a critical aspect of due diligence and integration planning.
Further, the digital revolution has significantly changed the pattern in the M&A landscape, with technology driven deals becoming more prevalent, Companies are investing in technology focused M&A to enhance their digital capabilities.
“M&As” have been seen as a regular feature of the Indian economy and our current affairs. India is on an upscale, according to macroeconomic statistics, and the trends of “inorganic growth through M&As” are likely to continue.
Case study Analysis of Recent Mergers
Merger between Tata Group and Air India - Tata Group acquired Air India for a value of $2.4 billion or Indian Rupees 18,000 crore, wherein INR 2,700 crore was paid upfront and INR 15,300 of debt was taken up by Tata Sons. Further, Tata Group also announced a merger between Air India and Vistara, whereby Singapore Airlines (the owner of 49% of Vistara equity) will get ownership of 25.1% of the combined merged entity.
HDFC Limited – HDFC BANK Merger – HDFC Bank and HDFC Ltd merged to create a financial services conglomerate. The merger became effective by July 01, 2023. The merger ratio is 25 HDFC shares for 42 HDFC Bank shares. The merger created a banking behemoth with a market capitalisation of Rs 14 lakh crore.
Zomato – Blinkit merger – Zomato and Blinkit have reached an agreement for a merger. The all-stock deal values Blinkit between $700 million and $750 million. Blinkit, formerly known as Grofers, has recently revamped itself to focus on an instant grocery delivery portal.
The rationale and business objectives for an “M&A” activity can vary, but “inorganic growth” is nearly always the foremost. This is to increase the ease of doing business in India, which is plagued by many rules. As a result, “inorganic” development through M&A remains a viable option for every company. a) intention to reduce dependability and therefore either “backward or forward integration” by investing in other supply chain function, or b) Distressed sales, resulting in a business potentially being available 'cheap’.
“M&As” in India have evolved through a distinct phase of regulation, from discouragement to the formation of combinations to encouragement to various forms of M&As for reasons of optimal resource utilization, social benefits, and the growth and competitiveness of the Indian corporate sector, on the one hand.
Prior to liberalization, India's stringent laws and lack of business flexibility acted as a significant impediment to mergers and acquisitions. The government's post-reform economic policies of liberalization, privatization, and globalization provided the major drive for M&As in India.
Certain regulatory factors, such as an “antitrust regime”, are pressuring businesses to manage or lessen market share. Although “antitrust provisions” have long been a component of any “M&A transaction” in the United States, often affecting not only the timelines but also transaction modalities, they are still in their “infancy in India”, owing to the small transactions. The “global merger of Lafarge and Holcim”, however, hit a snag in India, wherein the “Competition Commission” eventually agreed to sell “Lafarge India” as a precondition of the worldwide deal concluding in India, clearing the way for numerous cement companies to enter India's cement industry.
Key considerations for a M&A transaction inter alia include –
Companies Act and Accounting
Scheme of arrangement and approvals
Compliances with documents, filings, etc.
Accounting implications w.r.t I-GAAP / Ind-AS
Stamp Duty and exchange control regulations –
Understanding state specific stamp duty laws
Adjudication proceedings etc.
FEMA – Funding options, pricing guidelines, sectoral caps etc.
Securities and Competition Law –
Compliance with SEBI Regulations/exchange approvals
Public shareholders perspective
Takeover code implications
Approval of CCI for Combinations
Tax -
Tax neutrality of restructuring
Continuity of fiscal benefits
Continuity of carry forward of losses
Indirect tax (GST, transfer of credits etc)
Key Challenges in a M&A transaction are –
Commercial rationale
Transaction cost (stamp duty / tax)
Regulatory approvals
Approval of stakeholders (shareholders/lenders etc)
Valuation
Time frame
ROLE OF THE NCLTS AND NCLAT IN INDIA
“National Company Law Tribunals” (“NCLT”) and the “National Company Law Appellate Tribunal” (“NCLAT”), were constituted in “June 2016” to deal with corporate disputes of a civil nature through Principal and other benches set up by the “Ministry of Corporate Affairs” (“MCA”).
While the NCLT has ordinary jurisdiction, the NCLAT has appellate jurisdiction. NCLTs have assumed jurisdiction of the High Courts for the sanctioning of M&A’s/Schemes as per the Companies Act, 2013. Pre-covid witnessed an era of physical hearings before the benches, however, the same got curtailed and happened by way of virtual hearings.
The NCLT and NCLAT are specialist organizations established to deal with corporate disputes and encourage the fast resolution of cases relating to company restructuring, rehabilitation, and revival. It's worth noting that in some situations, the NCLTs view “restructuring schemes” differently than the “High Courts” under the former “Companies Act 1956”, and that their judgments can be contradictory. As a result, clients who choose the NCLT method for transactions have experienced some transaction uncertainty as well as delays.
Conclusion
The M&A activity in the last financial year has played a critical role in shaping the global business landscape. The dynamic and resilient nature of M&A activity is highlighted by the trends we’ve seen this year. With the continual advancement in technology, ongoing economic recovery, and abundance of capital available for investments, it seems likely that M&A activity will continue to flourish in the foreseeable future. Corporations and investors should stay agile and attentive to the changing trends and opportunities within the M&A landscape. Rapid strategic change is a necessity for most companies in these days of globalization, hyper competition, and accelerated technological change.
By : Adarika Ghose, LLM, FCS, IIMA(Executive Education, Business Administration)
Corporate Counsel(Compliance Expert) Acquisory Consulting LLP
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