PROCEDURE OF MERGER

1.Observing Memorandum of Association of Transferee Company.

It has to be ensured that the objects of the MOA of the transferee company cover the objects of the
Transferor Company or companies. If not then it will be necessary to follow the procedure for
amendment of objects by passing a
special resolution at an EGM convened for this purpose.
It has been held by various decisions of the courts that there is no necessity to have special power in the
object clause of the MOA of a company for its amalgamation with another company. It has been laid
down that to amalgamate with another company is power of the company and not an object of the
company.

2. Convening a Board Meeting

Board Meeting is to be convened and held to consider and approve in principle amalgamation and appoint
an expert for valuation of shares to determine the share exchange ratio. Consequent upon finalization of
scheme of amalgamation
anther Board Meeting is to be held to approve the scheme.

3. Preparation of Valuation Report

Chartered Accountants are requested to prepare a Valuation Report & the swap ratio for consideration by
the Boards of both the companies and if necessary it may be prudent to obtain confirmation from
merchant bankers on the valuation to be made by the Chartered Accountants.

4. Preparation of scheme of amalgamation or merger

Auditors, legal advisors and Practicing Company Secretary of both the companies must interact with each
other and should report the result of their interaction to their respective BOD. The Boards of the involved
Companies should discuss and determine details of the proposed scheme of amalgamation and merger.
The draft of the scheme finally prepared by the Boards of both the companies should be exchanged and
discussed in their respective Board meetings.

After such meetings a final draft scheme will emerge.

Contents of Amalgamation scheme

1. Transfer date:
This is a cut off date from which all the movable and immovable properties including all rights, powers,
privileges of every kind, nature and description of the transferor company shall be transferred or deemed
to be transferred without any further act, deed or thing to the transferee company.

2. Effective date:
This is the date on which the transfer and vesting of the undertaking of the Transferor company shall
take effect i.e. all the requisite approvals would have been obtained.

The scheme should suitably provide for:

1. Brief details of transferor and transferee companies

2. Appointed date
3. Main terms of transfer of assets and liabilities from transferor to transferee.
4. Effective date of the scheme
5. Details of happenings and consequences of the scheme coming into effect on effective date
6. The terms of carrying on the business activities by transferor between ‗appointed date‘ and ‗effective
date‘
7. Details of Share capital of transferor and Transferee Company
8. Proposed share exchange ratio, conditions attached thereto fractional certificates to be issued to
Transferee Company, approvals and consent required etc.
9. Conditions about payment of dividend, ranking of equity shares, prorata dividend declaration and
distribution.
10. Status of employees of transferor companies and various schemes or funds created for their benefit
from the effective date
11. Agreement between transferor and transferee companies towards making applications/petitions under
sec.391 and 394 and other provisions to the respective High Courts
12. Impact of various provisions covering income tax dues, contingencies and other accounting entries
deserving attention.
13. Statement to bear costs, expenses etc. in connection with the scheme by Transferee Company
14. Qualifications attached to the scheme requiring various approvals and sanctions.
15. Enhancement of borrowing limit of the transferee company upon the scheme coming into effect
16. Surrender of shares by Shareholders of Transferor Company for exchange into new share certificates.

5. Approvals of scheme
Approvals of BOD, Stock Exchanges, Share holders, creditors, financial institutions, Land holders, high
courts and RBI are required.

6. Application to High Court seeking direction to hold meetings

Rule 67 of the Companies (court) Rules, 1959 lays down that an application under section 391(1) of the
Companies Act, 1956 for an order seeking direction for convening meetings of creditors and/or members
or any class of them shall be by way of judge‘s summons supported by an affidavit. A copy of the
proposed scheme should be annexed to the affidavit as an exhibit thereto. The summons should be moved
ex parte in Form no.33 of the Companies (court) Rules, 1959. The affidavit in support of the application
should be in Form No. 34.

7. Jurisdiction of High Court Joint application or separate applications should be moved to the High Court
having jurisdiction over the state in which registered offices of the companies are situated.

8. Obtaining order of the court for holding class meetings.

On receiving a petition the court may order meetings of the members/creditors to be called, held and
conducted in such manner as the court directs. Once the ordered meetings are duly convened, held and
conducted and the scheme is
approved by the prescribed majority in value of the members/creditors, the court is bound to sanction
scheme.
Notice of the meeting(s) should be in Form no.36 must be sent by the person authorized by the court at
their last known addresses at least 21 clear days before the day fixed for the meeting. The notice must be
accompanied by a copy of the scheme for the proposed compromise or arrangement.

9. Notice by advertisement
Where the court has directed that the notice of the meetings should also be given by newspaper,
advertisements,and such notices are required to be given in the prescribed Form no. 38 and published
once in an English newspaper and once in the regional language of the state in which the registered office
of the company is situated.

10. Convening of General Meeting

At the General meeting convened by the High Court resolution will be passed approving the scheme of
amalgamation with such modification as may be proposed and agreed to at the meeting.
The resolution relating to the approval of amalgamation has to be approved by a majority of members
representing 3/4th in value of the creditors or class of creditors or members or class of members as the
case may be present and voting either in person or by proxy.
The minutes of the meeting should be finalized in consultation with the Chairman of the meeting and
should be signed by him once it is finalized and approved. Copies of such minutes are required to be
furnished to the Stock Exchange in terms of the Listing Agreement.

11. Reporting of the results

The Chairman of the meeting will submit report of the meeting indicating the results to the concerned
High Court in Form no.39 within 7 days of the conclusion of the meeting. The Report must state:
a)The no. of creditors/members or class of creditors/members who were present at the meeting and who
voted.
b) Their individual values and the way they voted

12. Petition to court for confirmation of scheme When the scheme is agreed to, with or without
modification a petition must be made to the court for confirmation of the scheme on the Form no.40
The court also directs that notices of petition be sent to the concerned Regional Director, ROC and the
official liquidator.
On hearing the petition the court shall fix the date of hearing and it shall be published in the same
newspaper in which notice of the meetings was advertised or in such other papers, not less than 10 days
before the date of
hearing.

13. Obtaining order of the court sanctioning the scheme An order of the court on summons for directions
should be obtained which will be in obtained which will be in Form no.41.

14. Filing of copy of court‘s order with ROC A certified copy of the order passed by the court under both
the section 391(3) and 394(3) is required to be filed with concerned ROC in E-form no.21.
If default is made in complying with this sub-section the company and every officer of the company who
is in default, shall be punishable with fine which may extend to five hundred rupees. According to sub-
section (3) of section 391 the court order shall not have effect unless a certified copy of the order has been
filed with the Registrar.

15. Transfer of the Assets & Liabilities

Section-394(2) vests power in the High Court to order for the transfer of any property or liabilities from
Transferor Company to Transferee Company. In pursuance of and by virtue of such order such properties
and liabilities of the transferor shall automatically stand transferred to transferee company without any
further act or deed from the date the Court‘s Order is filed with ROC.

16. Allotment of Shares to Shareholders of Transferor Company

Pursuant to the sanctioned scheme of amalgamation, the share-holders of the Transferor company are
entitled to get shares in the transferee company in the Exchange ratio provided under the said scheme.
There are three different situations in which allotment could be given effect:-

i) Where Transferor Company is not a listed company, the formalities prescribed under listing agreement
do not exist and the allotment could take place without setting the record date or giving any advance
notice to shareholders except asking them to surrender their old share certificates for exchange by the new
ones;
ii) The second situation will emerge different where Transferor Company is a listed company. In this
case, the stock exchange is to be intimated of the record date by giving at least 42 days notice or such
notice as provided in the listing agreement ;

iii) The third situation is where allotment to Non-Resident Indians is involved and permission of Reserve
Bank of India is necessary. The allotment will take place only on receipt of RBI permission. In this
connection refer to Regulations- 7, 9 & 10B of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident outside India) Regulations, 2000 as and where applicable.

Having made the allotment, the transferee company is required to file with ROC with return of allotment
in Form No-2 appended to the Companies (Central Government‘s) General Rules and Forms within 30
days from the date of allotment in terms of Sec-75 of the Act.

Transferee Company shall having issued the new share certificates in lieu of and in exchange of old ones,
surrendered by transferor‘s shareholders should make necessary entries in the register of members and
index of members for the shares so allotted in terms of Sec-150 and 151 respectively of the Companies
Act,1

17. Listing of the Shares at Stock Exchange

After the amalgamation is effected, the company which takes over the assets and liabilities of the
transferor company should apply to the stock exchanges where its securities are listed, for listing the new
shares allotted to the shareholders of the transferor company.

18. Court order to be annexed to Memorandum of

Transferee Company
It is the mandatory requirement vide Sec-391(4) of the Companies Act, 1956 that after the certified copy
of the Court‘s Order sanctioning the scheme of amalgamation is filed with Registrar, it should be annexed
to every copy of the Memorandum issued by the transferee company. Failure to comply with requirement
renders the company and its officers liable to punishment.

19. Preservation of Books & Papers of Amalgamated Company

Sec-396A of the Act requires that the books and papers of the amalgamated Company should be
preserved and not be disposed of without prior permission of the Central Government.

20. The Post Merger Secretarial Obligations

There are various formalities to be complied with after amalgamation of the companies is given effect to
and allotment of shares to the shareholders of the transferor Company is over. These formalities include
filing of the returns with Registrar of Companies, transfer of investments of transferor company in; the
name of the transferee, intimating banks and financial institutions, creditors and debtors about the transfer
of the transferor company‘s assets and liabilities in the name of the transferee company, transfer of
employees, gratuity, PF and Pension funds etc.

21. Withdrawal of the Scheme not permissible

Once the scheme for merger has been approved by requisite majority of Shareholders and creditors, the
scheme cannot be with-drawn by subsequent meeting of shareholders by passing Resolution for
withdrawal of the petition submitted to the court U/s- 391 for sanctioning the scheme.

PROCEDURE OF DEMERGER

The procedure is as follows:

1. Incorporate the company which will be the Resulting Company.
2. Frame a scheme of Demerger
3. File a Judges Summons in the High Court praying for an Order convening separate meetings of the
Creditors, Share-holders, or any class of them. Each such Judges summons must be supported by an
Affidavit and a copy of the Scheme must be annexed to the Affidavit. If all the Creditors agree to the
Scheme, the meeting may be dispensed with. In the case of a Demerger, it would not be possible to
dispense with a meeting of the share-holders, since under Section 293 (1)(a) of the Companies Act, a
general meeting of the share-holders would be essential before any such Demerger can take place.

4. Notice of the meeting must be given to the Creditors and /or members and sent individually to each
Share-holder/Creditor. Each notice must be accompanied by a copy of the scheme, explanatory
statement as required by Section 393 of the Companies Act and a proxy form.

5. The notice of meeting must be advertised in such newspapers and in such manner as the judge may
direct. The Advertisement must take place at least 21 clear days before the date of the meeting,i.e. 21
days notice must be given excluding the date of advertising of the notice and the date of the meeting.

6. The Chairman of the meeting or other person directed to issue the Advertisement and notices must
file an Affidavit not less than 7 days before the date of the meeting showing that the directions reg:
issue of notices and advertisements have been duly complied with.

7. On the date of the meeting, the decisions of the meetings must be ascertained only be taking a poll.

8. The Chairman of each meeting must file a report in the Court within that time fixed by the Judge or
where no time has been fixed, within 7 days after the conclusion of the meeting. The report must state
accurately the number of creditors or class of creditors or number of members or class of members as
the case may be who were present and who voted at the meeting either in person or by proxy, their
individual values and the way they voted. The report shall be in Form 39 annexed to the Companies
(Court) Rules, 1959.

9. Where the proposed Demerger is approved by the various meetings with or without modification, the
company must present the petition to the Court, for confirmation of the Demerger within 7 days of the
filing of the Chairman's Report.

10. The Court shall fix a date for hearing of the Petition and direct advertising in the same newspapers in
which the notices of the meetings were advertised or in such other papers as the Court might direct. The
notice must be given not less than 10 days before the date of the hearing.

11.If the Court sanctions the Demerger, it may give such directions as it considers necessary for the
proper working of the Demerger. The certified copy of the Order must be filed within 14 days from the
date of the Order or such other time, as may be fixed by the Court.
12.Applications for Orders in connection with the Demerger or for any variation, etc. shall be made under
Section 394 by Judges Summons supported by an Affidavit for directions as to the proceedings to be
taken. Notice of the summons shall be given in such manner and to such person as the Court may direct.
On hearing the Summons, the Court may make such Order or Directions as may be necessary.

13.The Company or any Creditor or Member thereof may at any time after the passing of the Order
sanctioning Demerger, apply to the Court for determination of any question relating to the working of the
compromise or arrangement. Notices and Advertisements shall be as the Court may direct. The Court may
pass such Orders, give such Directions as it may think necessary
 Demerger or Hiving-Off:

Introduction:
There is a common misconception amongst the corporate world that demerger and hiving-off are similar as far as the
Indian corporate scenario is concerned, and hence, undertaking corporate restructuring using any one of the two
modes for investment purposes, for raising capital or for increasing profits through cost-reduction, does not make
any difference. This article takes this view as its starting point and dispels the notion by undertaking analysis of
"hiving off" and "demerger" concepts, both from the legal and taxation perspectives. The article further draws on the
various provisions of Indian company law, Indian tax law and judicial decisions to conclude that these two concepts
are significantly different on various points such as how the consideration is to be paid and proportioned, how the
assets would be valued, how the depreciation will be carried forward to the investing partner and what would be the
cost of assets in the hands of the investor, depending on whether the transaction is a demerger, or hiving-off. The
article recommends that corporations, both as sellers or as foreign direct investors, ought to be aware of the
implication of both strategies, as choosing one over the other may have considerable financial advantages as well as
undertaking the correct required procedural compliances.

Demerger
The expression ‗Demerger‘ is not expressly defined in the Companies Act, 1956. However, it is covered under the
expression arrangement, as defined in clause (b) of Section 390 of Companies Act.

Division of a company takes place when

1. Part of its undertaking is transferred to a newly formed company or an existing company and the remainder of
the first company‘s division/undertaking continues to be vested in it; and
2. Shares are allotted to certain of the first company‘s shareholders.

A demerger is a form of restructure in which owners of interests in the head entity (for example, shareholders or nit-
holders) gain direct ownership in an entity that they formerly owned indirectly (the ‗demerged entity‘). Underlying
ownership of the companies and/or trusts that formed part of the group does not change. The company or trust that
ceases to own the entity is known as the ‗demerging entity‘.

The entity that emerge have its own board of directors and, if listed on a stock exchange, have separate listings. The
purpose of demerger is to revive a company's flagging commercial fortunes, or simply to lift its share price.

Mode Of Demerger:
Under the scheme of arrangement with approval of the court U/s 391 of the Companies Act.

Procedure For Demerger:

1. Demerger forms part of the scheme of arrangement or compromise within the ambit of Section 390, 391, 392,
393, 394 besides Sec 394A

2. Demerger is most likely to attract the other provisions of the companies Act, envisaging reduction of Share capital
comprising Sec. 100 to 105

3. The company is required to pass a special resolution which is subject to the confirmation by the court by making
an application.

4. The notice to the shareholders convening the meeting for the approval will usually consist of the following detail:
(a) Full Details of the scheme
(b) Effect of the scheme on shareholders, creditors employee
(c) Details of the valuation Report
5. An application has to be made for approval of the High Court for the scheme of arrangement

6. It is necessary that the Articles of Association should have the provision of reduction of it‘s Share Capital in any
way, and its MOA should provide for demerger, Division or split of the Company in any way. Demerger thus,
resulting into reduction of Companies share capital would also require the Co. to amend its MOA.

Tax Aspect:

Definition of demerger U/s Section 2(19AA) of the Income Tax Act:

The definition of 'demerger' as given under Section 2(19AA) of the Income Tax Act is unduly restrictive, and
subject to various conditions. Some of the conditions mentioned are:

1. The first condition is that all the property of the undertaking should become the property of the resulting
company.
2. Conditions of Sec 391 to Sec.394 should be satisfied.
3. Similarly, all the liabilities relating to the undertaking immediately before the demerger should become the
liabilities of the resulting company.
4. Explanation 2 provides that not only identified liabilities should be transferred to the resulting company, but
also general borrowings in the ratio of the value of the assets transferred to the total value of the assets of the
demerged company.
5. Assets and liabilities have to be transferred at book value.

Compliance With SEBI Regulations

The SEBI (Disclosure and Investor Protection) Guidelines do provide certain disclosures needed for protecting the
investors. No specific guidelines are presently there. However, in SEBI Press Release 311-2003 dated December 17,
2003, it has been proposed by SEBI to enforce appropriate disclosures in case of demerger as in the case of
amalgamation.

Hiving Off The Business/Sale Of Undertaking

The term ‗Undertaking‘ as interpreted in the present context means a unit, a project or a business as a going concern.
It does not include individual assets and liabilities or any combination thereof not constituting a business activity.

Under a sale as a going concern, the rights, liabilities and obligations of all the affected parties (eg. debtors,
creditors, employees etc.) are protected. It provides for the continuation of the running of the undertaking without
any interruption.

Precautions to be taken by buyer: in a going concern principle the buyer inherits both benefits and liabilities from
the ongoing contracts that may arise at a later date even with respect to past transactions. There should be clear
provisions in the sale agreements fixing the responsibilities of the parties in this behalf

Legal Aspects Of Hiving Off:

Memorandum of Association:

Transferor Company: The MOA of the company shall contain a provision empowering the company ―to sell or
dispose off the whole or any part of the undertaking, or of any of the undertaking of the company‖. If there is no
provision in that regard, then the MOA can be amended under section 17 of the Companies Act by passing a special
resolution.
Transferee Company: The objects clause of the transferee company shall also contain such a provision for carrying
on the business that it seeks to acquire. However it is not necessary that the objects of the two companies should be
in unison.

Consent of the Creditors:

The company needs to take consent of high value creditors in writing, if the assets on which the loans were raised
are transferred (as a part of the industrial undertaking). Only then the loans can be transferred or the assets can be
released from the charge.

Mode of payment of consideration:

The consideration for the transfer of the business/undertaking can take any one of the following forms:
# Shares;
# Shares and Bonds;
# Cash.

Tax Implications

Capital Gains in the hands of transferor:

The provisions of Section 50B of the Income Tax Act, 1961 provide for the computation of Capital Gains in case of
slump sale.

If the undertaking or division has been held by the transferee for more than 36 months: Any profits or gains arising
from the slump sale effected in the previous year shall be chargeable as long term capital gains and shall be deemed
to be the income of the previous year in which the transfer took place.

If the undertaking has been owned and held by the transferor for not more than a period of 36 months, the capital
gain arising out of such a slump sale shall be treated as short term capital gains.

Accumulated loss/Depreciation:

In case of slump sale the unabsorbed depreciation or losses can be carried forward only in the hands of the transferor
and unlike in the hands of the transferee in case of demerger.

Depreciation post slump sale:

The purchaser can claim depreciation on the basis of fair apportionment of total consideration as described earlier.

Demerger Vs. Hiving – Off

1. Consideration:

In case of Hiving- off, the payment of a lump sum sale consideration is required in respect of transfer of an
undertaking by slump sale in demerger the resulting Co. issues, in consideration of the demerger, it shares to the
shareholder of the demerged Co. on a proportionate basis

2. Valuation Of Asset:
In Hiving- off values are not assigned to individual assets and liabilities of the undertaking, whereas in case of
demerger, the assets and liabilities of the demerged Co. are transferred at the value appearing at the books of
accounts immediately before the demerger to the resulting Co.
3. Carry Forward Of Depreciation:

In Hiving- off unabsorbed depreciation/loss can be carried forward only by a transferor Co, whereas in the case
of demerger, the resulting Co. avails the benefit of such depreciation/loss.

4. Cost of Assets in Hands of the Transferee:

In a slump sale, to determine the actual cost of assets transferred, the lump sum consideration received is
apportioned in fair and reasonable manner among the assets, whereas in the case of demerger the assets are
valued at the book value as appearing in the books of transferor
Mergers & Demergers
by Abhishek Tripathy on July 27, 2008

Today the economic dynamics of the world are changing at a mind boggling pace. In today‘s
economy, the path that majority of companies are preferring to take, so as to increase their profits
and streamline their functioning is mergers and demergers.

The Prime Minister‘s Council of Trade lists the process of merger and demerger as one of the
keys to reinvigorate the ailing PSUs and energize the economy of the nation. This has been a
conscious aim at this right from the time of the economic liberalization of our nation started way
back in the early 1990s.

Mergers And Demergers:

Integration decisions are often justified by the synergies they create. Synergies exist when assets
are worth more when used in conjunction with each other than separately. Synergies of some
form are essential for integration to be successful. Integration offers little or no benefit when
they do not exist.[ [Hitt et al (2001); 47]

——————–TN Hubbard

MERGER is one of the most common forms of non organic corporate restructure programmes
that is adopted by the corporate world forged so as to achieve growth for the company as a
whole. In the strict economic sense of the word it would mean the ―union of two or more
commercial interests, corporations, undertakings, bodies or any other entities. In the corporate
business means, fusion of two or more corporations by the transfer of all property to a single
corporation.‖

The corporation that merges the other with it continues to exist after having absorbed the other
entity. The concept of mergers or the definition of the same has not, however, been clearly given
in the Companies Act, 1956. It has instead been defined in the Income Tax Act, 1961; the
Companies Act mentions of mergers in the section 394 while dealing with the powers of the
National Company Law tribunal ,and there is also some mention of the same in the sections 396
and 396A that deal with the power of the central government to merge or amalgamate companies
in the public interest and the record maintenance by the merged entity.

The Halsbury‘s Laws of England, Vol. VII(2) para 1462 page 1103 defines mergers as :
neither ‘reconstruction’ nor ‘amalgamation’ has a precise legal meaning. Amalgamation is a
blending of two or more existing undertakings into one undertaking, the shareholders of each
blending company becoming substantially the shareholders in the company which is to carry on
the blended undertakings. There may be amalgamation either by the transfer of two or more
undertakings to a new company, or by the transfer of one or more undertakings to an existing
company. Strictly, amalgamation does not, it seems, cover the mere acquisition by a company of
the share capital of other companies which remain in existence and continue their undertakings,
but the context in which the term is used may show that is intended to include such an
acquisition.

The section 2(1B) of the Income Tax act defines amalgamation as the ―merger of one company
with another..‖. Further, as per the IT Act, the entire property and all the liabilities of the
amalgamating company or companies before the process of amalgamation becomes the property
of the merged entity after the process of amalgamation is complete.

The rationale behind the merger of corporate entities is basically to improve their profit earnings
by acquiring new markets and hitherto virgin commercial territories. Mergers are basically the
tools by which the companies achieve their economies of scale, whether in terms of production
or marketing and with the spread in the shareholder base, the companies are better positioned to
arrange resources for their further expansion and growth. Also, with an increase in the number of
shareholders of the company, the companies also have the need to increase the value of the
shareholders by accentuating the profits and cutting down on the costs.

Very often the government provides the healthy companies with the tax incentives to take over
and merge the sick industries with itself. There are various benefits that are guaranteed under the
IT Act, 1961 and at times, the accumulated losses of the sick company are used to offset the
profits of the healthy company, thereby helping it to profit in the process. The gestation period of
the new businesses drastically reduces. With the talent pool of the merging company at its
disposal, the new entity will have the expertise and the dexterity to maneuver through the new
markets and avenues that were till now not available to it. Also, the combined resources of the
two companies in terms of the production facilities, marketing outlets, liquidity etc. will be the
strengths of the new body which will strategically position it in the market giving it an edge over
the rivals.

This particular aspect of the company benefiting out of the assets of the merged company
assumes significance in the light globalization. In the fast integrating and globalizing world, the
size of the company is a key factor to ensure that the company remains ahead in the race
globally.

TYPES OF MERGERS:
There are different types of mergers that take place in the economy of a country. These are:

1. Horizontal mergers;

2. Vertical mergers; and

3. Conglomerate mergers

1. HORIZONTAL OR ANNEXING MERGERS:

When the merger of such two or more companies takes place which produce the similar kinds of
products and compete directly with each other. The merger of sick companies results ―in the
elimination of duplication of facilities and operations and broadening the product line, reduction
in the finance for working capital, widening the market area and reducing unhealthy
competition.‖ The recent merger of the banks in the private sector and the merger of Arcellor
with Mittal Steel are all instances of horizontal mergers.

2. VERTICAL OR STREAMING MERGERS:

The process of vertical mergers are essentially a method of backward integration where the
object is to ensure that the inputs of raw material are seamlessly available by merging the sources
of their production with the main company which improves the efficiency of the merged entity
besides also ensuring an outlet for the goods produced in the in the merged company. The
merger of the CORUS with TATA will ensure, besides other things, the strengthening of the raw
material source for its various other projects as car manufacturing by employing the
technological prowess of the former which supplies steel to automobile manufacturers as
VOLVO and FORD.

3. CONGLOMERATE OR DIAGONAL MERGERS:

When two or more companies carrying out different businesses merge with each other to
diversify the product profile and thus ensure that the earnings are greater with the availability of
resources and technology as well as staff that can ensure better productivity of the merged
company. Perhaps the most important aspect of diversification is the aim to make the company
simply too large to avert the threats of take over by other rival companies.

BESIDES, there is also something that is known as the process of reverse merger where unlike
the convention, a stronger company merges with a sick company as is the case when a parent
company merges with its subsidiary. In this case, the assets of the merging company are greater
than the existing company and the issuance of new equity to the shareholders results in the
―increase in the original issued capital of the surviving company.‖

DEMERGER is the exact opposite of the concept of merger.The definition of the term is
provided in the IT Act, 1961 and it refers to the sections 391 and 394 of the Companies Act,
1956. As per the section 2(19AA) of the IT Act, it is a compromise restructuring process by
which one or more undertakings of a company are transferred to another, usually the subsidiary
of the demerging company. All the property as well as the liability of the demerging company,
becomes the property of the resulting company and are transferred at values appearing in its
books of account just before the demerger. The shareholders who hold not less than three fourth
of the shares of the demerged company become the shareholders of the resulting company

LEGALITIES OF MERGERS AND DEMERGERS:

MERGERS AND THE JURISDICTION OF COURTS:

Any scheme for mergers has to be sanctioned by the courts of the country. The company act
provides that the high court of the respective states where the transferor and the transferee
companies have their respective registered offices have the necessary jurisdiction to direct the
winding up or regulate the merger of the companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the arrangements after
having sanctioned the scheme of mergers as per the section 392 of the Company ActThereafter
the courts would issue the necessary sanctions for the scheme of mergers after dealing with the
application for the merger if they are convinced that the impending merger is ―fair and
reasonable‖.

The courts also have a certain limit to their powers to exercise their jurisdiction which have
essentially evolved from their own rulings. For example, the courts will not allow the merger to
come through the intervention of the courts, if the same can be effected through some other
provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if
there was something that the parties themselves could not agree to; also, if the merger, if
allowed, would be in contravention of certain conditions laid down by the law, such a merger
also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of
writs to entertain an appeal over a matter that is otherwise ―final ,conclusive and binding‖ as per
the section 391 of the above act.

SCHEME OF MERGER AND AMALGAMATION:

The scheme of merger is the most important document which governs each and every aspect of
the merger by laying down the framework within which the entire transaction is to take place
including the method of valuation of the companies involved, share exchange ratio, legal rights
and obligations of the two or more corporates involved and the members, creditors and other
parties who are affected by the process of the merger

PROCEDURE FOR MERGER:

The legal procedure follows four stages for the merger process to take place:

A. The draft scheme of the merger has to be approved by the board of directors of the
merging entities;
B. Application to the company courts seeking directions for convening meetings of the
various shareholders, creditors and the debenture holders of the companies;
C. Convening class meetings as directed by the high court and the subsequent obtaining of
approval of the shareholders and the creditors;
D. Finally filing a petition for the sanction of the scheme before the high court as has been
duly approved by the shareholders and the creditors of the companies.

demergers and the jurisdiction of the court:

The courts have the power to order or sanction for the demerger of a company as per the section
394(1)(b)(i) of the Companies Act, 1956. The scheme of arrangements can bring before a court
the scheme of arrangements that can be termed as a demerger. The application of chapter V of
part VI of the Companies Act has all the advantages of a merger and the transferor company is
allowed to sell the property but without having to bear the brunt of stamp duty, capital gains etc.
Demergers are also dealt with under the sections 391 to 394 of the Companies Act.

SCHEME OF DEMERGER:

The demerger of a company follows almost the same rules as are applicable to the merger of a
company. A demerger is also an arrangement under the section 390 of the Act as it defines the
demerger of the company in terms of the division of the shares of the company.The framing of
the scheme for the demerger of the company derives from the sections 390 to 396A of the
Companies Act, 1956. The demerger must have the approval of the court apart from the approval
of all the people concerned with the company.
PROCEDURE OF DEMERGER:

As per the companies act, the sale of the whole or the part of a company follows a two pronged
process for the demerger of the said company the first step of which would entail the approval of
the entire process by the company‘s board of directors and then by obtaining the necessary
approval of the shareholders at a general meeting of the company by passing a special resolution
and the resulting company has to ensure that the objects it now has include the carrying on of the
business that it sought to prior to the demerger of the company. This process of the company‘s
demerger should confirm to the provisions of either the section 293(1)(a) or sections 391 to 393
of the Companies Act.

However, the procedure as per the above act cannot be considered as a demerger as per the
provisions of the IT Act in a holistic and definite manner. The section 2(19AA) applies to the
process of demerger as per which the it is a compromise restructuring process by which one or
more undertakings of a company are transferred to another, usually the subsidiary of the
demerging company. All the property as well as the liability of the demerging company,
becomes the property of the resulting company and are transferred at values appearing in the
former‘s books of account just before the demerger. The shareholders who hold not less than
three fourth of the shares of the demerged company become the shareholders of the resulting
company

ECONOMIC ASPECTS WITH SOME EXAMPLES:

MERGERS IN THE PUBLIC SECTOR:

Indian – Air India merger that was mulled by the government was with the view to consolidate
the position of the Indian state run aviation behemoths so that they compete in the highly
competitive global markets. The aim was ―one company, one culture.‖ The purpose behind the
merger was to create a monolith that would be better positioned to take on global competition;
besides, with Air India keen on joining a global aviation alliance, the merger was intended to
provide additional benefits to passengers including access to far-flung areas of the country
currently not served by any domestic airline or not properly connected by the airways. The
mechanism of this merger was to have a human face with a judicious decision taken on the front
of the employees of both the companies.

The wisdom of taking the merger route to bail out the weakly performing commercial banks of
the country has been at the back of the government‘s mind for over 5 years now. An analysis by
Fitch Ratings, Singapore, in between 2000 and 2001 points out that the majority of Indian banks
are under-capitalized, when international provisioning norms are taken into account. ―The state
of the financial sector in any country is closely linked with the overall health of the economy,
and the Indian economy is beset with problems,‖ says Fitch. ―The fact that one crisis has
followed the other in rather quick succession, has certainly raised fresh questions on the health of
major financial institutions in the country.‖

By global standards, even the biggest of Indian banks are dwarfs in a business where size means
clout and where geographical boundaries are blurring due to the ever increasing influence of
globalization. The M. S. Verma Committee on Restructuring of Weak Commercial Banks has
evolved a restructuring plan for such weak public sector banks — UCO Bank and United Bank
of India (as well as a third bank which was not performing as well) — which, inter alia,
envisaged infusion of fresh capital aggregating Rs 5,500 crore. Provisioning requirements for
bad and doubtful debts, improving capital adequacy and investment for technology upgradation
were included as part of the package.

The report had sparked a bitter debate, much of which centered on alternatives. The controversy
has intensified as a number of other public sector banks now run the risk of slipping into the
category of weak banks. It is clear that unless these banks are put through a careful and well-
conceived process of restructuring, they may succumb to intense competition from private and
foreign banks, which have become increasingly aggressive.

In the United States, after their merger, Citibank and Bank of America companies climbed in the
rankings to the second and third slots respectively in the Forbes Global Magazine‘s list of 100
most important and competitive businesses world wide when the merger between Citibank and
Travelers to form Citigroup, and Bank of America with Nations Bank, Citigroup and Bank of
America materialized. This development has generated considerable interest in India too, and has
revived the debate on mergers and acquisitions as an option for revamping weak banks. The
debate was further fuelled by tax proposals, which enable companies to adjust tax losses in the
merger of a profit-making company with a loss-making one, it is widely believed that Indian
companies — particularly weak banks and financial institutions — could substantially benefit
from mergers and amalgamations.

These apart, the government is seriously considering the merger and demerger route for the
rejuvenation of the ailing PSUs as well as for ensuring that the ones which are profit making,
continue to remain so and maintain their core competency in the era of globalization. The
decision to merge the oil PSUs has been premised on this logic of increasing the efficiency and
profit earnings of the companies but there has been a fair share of criticism from the quarters
which believes that the mergers of oil PSUs is unwise. Also, the move to merge Nilachal Ispat
Nigam Ltd. in Kalinga Nagar with SAIL is a move with a similar logic.

MERGERS IN THE PRIVATE SECTOR:

Private Banks are taking to the consolidation route in a big way. The recent development over
the takeover of the Maharashtra based Sangli Bank with the largest private sector bank of our
country-ICICI Bank is a crucial development for the banking sector of our country. This merger
will give a boost to the ambitions of the ICICI Bank to penetrate the rural sector in a substantial
manner along with amassing a human resource pool that is adept at handling the rural sector
banking transactions.

Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion Bank of
Punjab (CBP). RBI has approved merger of Centurion Bank and Bank of Punjab effective from
October 1, 2005. The merger is at a swap ratio 9:4 and the combined bank is called Centurion
Bank of Punjab with the merged entity having a presence of 240 branches and extension
counters, 386 ATMs, about 2.2 million customers.

DEMERGERS IN THE PRIVATE SECTOR:

The demerger of the Reliance group is by far the biggest corporate restructure story in the private
sector. The split in the group led to the formation of the two independent entities Reliance
Industries ltd. led by Mr. Mukesh Ambani and the Anil dhirubhai Ambani Group led by the
younger brother Mr. Anil Ambani.

RIL has proposed the demerger ―in order to enable distinct focus of investors to invest in some
of the key businesses and to lend greater focus to the operation of each of its diverse businesses‖.
The explanatory statement says that ―with a view to achieve greater management focus and
keeping in mind the paramount and overall interests of the shareholders‖ of RIL…, the board of
directors ―believe that Shri Anil D. Ambani… will provide such focused management attention
and leadership to the financial services, power and telecom businesses… and Shri Mukesh D.
Ambani… will continue to lead the other businesses including petrochemicals, oil and gas
exploration and production, refining and textiles and other businesses comprising the Remaining
undertaking…‖

In the past several body corporates have opted for the demerger route. Eveready Industries
separated its tea business into McLeod Russell; Auto ancillary company Rane Madras transferred
its investments into separate company and the investment company was also listed. The
demerger list also includes Vardhman Spinning and Morarjee Realities. GTL is demerging its IT
infrastructure business to GTL Infrastructure.

DEMERGERS IN THE PUBLIC SECTOR:

Though it is one of the fundamental pillars of the government‘s policy to streamline the entire
economy, this mode of corporate restructure has not however been exploited the way it ideally
should have been. It prominently features on the government‘s plans and visions for the
restructuring of the economy. Therefore, when fully exploited, the concept of demergers will
help reshape the PSUs by allowing them to shed their excess

staff strength and loss making assets.

Mergers and intellectual property rights:

In these days of the emergence of a knowledge economy world over, the companies stand to gain
substantially through the transfer of the intellectual property rights that comes to their chest of
prized possessions after the process of merger is over. The intellectual property rights (IPRs)
would essentially cover the areas of trade marks, design, patents and copyrights Though there is
no set criteria to evaluate the commercial value of the IPRs, the factors to be kept in mind are:

1. whether there exists the requisite market for the product and the scale of operation of the
technology is pertinent and optimum for the market;

2. whether the technology is market tested and fit for commercial exploitation or has become
redundant in the present scenario and hence requires further research and development; and,

3.whether the technology is suitable with respect to the existing infrastructure that is in place.

CONCLUSION:

With the rise of new regional economic powers in the world, there has been a rise in what has
been termed as economic patriotism. The recent controversy that erupted with the vehement
opposition to the Mittal Arcellor deal by the European powers is a case in point.

But, despite the challenges, mergers and demergers are the two tools that hold an answer to the
Indian corporate community‘s thirst and relentless enterprise for a global presence today. Today,
as the waves of globalization are lashing at the doors of an ever prospering Indian economy and
drowning it in an insatiable appetite to develop and become an economic superpower, mergers
and demergers could well be the magical talisman for IndiaInc. to achieve its dreams.