DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

SUBJECT: MERGER AND ACQUISITION

Session: 2019 - 2020

FINAL DRAFT

ON

“Laws regulating Mergers & Acquisition in India”

SUBMITTED TO: SUBMITTED BY:

Dr. Manish Singh Shubham Singh Rawat

Associate Professor (Law) B.A. LL.B. (Hons.)

RMLNLU Sec. B; Enroll. No. - 134

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 ACKNOWLEDGEMENT

I express my gratitude and deep regards to my teacher Dr. Manish Singh for giving me such a
challenging topic and also for his exemplary guidance, monitoring and constant encouragement
throughout the course of this project.

I also take this opportunity to express a deep sense of gratitude to my seniors in the college for
their cordial support, valuable information and guidance, which helped me in completing this task
through various stages.

I am obliged to the staff members of the Madhu Limaye Library, for the timely and valuable
information provided by them in their respective fields. I am grateful for their cooperation during
the period of my assignment.

Lastly, I thank almighty, my family and friends for their constant encouragement without which
this assignment would not have been possible.

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 TABLE OF INDEX

1) Introduction…………………………………………………………………..4

2) Mergers or Amalgamations……………………………………………….…5

3) Regulations governing Mergers and Acquisition in India:-

3.1. The Companies Act, 1956………………………………………………..……6

3.2. The Competition Act, 2002……………………………………………………7

3.3. The Foreign Exchange Management Act, 1999……………………………8

3.4. The Securities & Exchange Board of India Act, 1992…………………….8

3.5. The Income Tax Act, 1961…………………………………………………….9

4) Review of some Merger & Acquisition Cases…………………………...…11

5) Conclusion………………………………………………………………….13

6) Bibliography………………………………………………………………..14
INTRODUCTION

The concept of merger and acquisition in India was not popular until the year 1988. During that
period a very small percentage of businesses in the country used to come together, mostly into a
friendly acquisition with a negotiated deal. The key factor contributing to fewer companies
involved in the merger is the regulatory and prohibitory provisions of MRTP Act, 1969.
According to this Act, a company or a firm has to follow a pressurized and burdensome procedure
to get approval for merger and acquisitions.

The year 1988 witnessed one of the oldest business acquisitions or company mergers in India. It is
the well-known ineffective unfriendly takeover bid by Swaraj Paul to overpower DCM Ltd. and
Escorts Ltd. Further to that many other Non-Residents Indians had put in their efforts to take
control over various companies through their stock exchange portfolio.

Volume is tremendously increasing with an estimated deal of worth more than $ 100 billion in the
year 2007. This is known to be two times more than that of 2006 and four times more than that of
the deal in 2006. Further to that, the percentage is continuously increasing with high end success
in business operations.

As for now the scenario has completely changed with increasing competition and globalization of
business. It is believed that at present India has now emerged as one of the top countries entering
into merger and acquisitions.
There are various motives behind the mergers of a Company:-

(i) Economies of Scale: This generally refers to a method in which the average cost per
unit is decreased through increased production.

(ii) Increased revenue/ Increased Market Share: This motive assumes that the company
will be absorbing the major competitor and thus increases it to set prices.

(iii) Cross selling: For example, a bank buying a stock broker could then sell its banking
products to the stock broker’s customers, while the broker can sign up the bank’s
customers for brokerage account.

(iv) Corporate Synergy: Better use of complimentary resources. It may take the form of
revenue enhancement and cost savings.

(v) Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a
sick company is bought by giants.

(vi) Geographical or other diversification: This is designed to smooth the earning results of
a company, which over the long term smoothens the stock price of the company giving
conservative investors more confidence in investing in the company. However, this
does not always deliver value to shareholders.
Mergers or Amalgamations

A merger is a combination of two companies where one corporation is completely absorbed by

another corporation. The less important company loses its identity and becomes part of the more
important corporation, which retains its identity. It may involve absorption or consolidation. Laws
in India use the term 'amalgamation' for merger. The Income Tax Act, 1961 [Section 2(1B)]
defines amalgamation as “the merger of one or more companies with another or the merger of two
or more companies to form a new company, in such a way that all assets and liabilities of the
amalgamating companies become assets and liabilities of the amalgamated company and
shareholders not less than three-fourths in value of the shares in the amalgamating company or
companies become shareholders of the amalgamated company.”

Merger is also defined as amalgamation i.e. the fusion of two or more existing companies. All
assets, liabilities and the stock of one company stand transferred to Transferee Company in
consideration of payment in the form of:

(i) Equity shares in the transferee company,

(ii) Debentures in the transferee company,

(iii) Cash, or

(iv) A mix of the above mode.

Thus, mergers or amalgamations may take two forms:-

 Merger through Absorption
 Merger through Consolidation

Besides, there are three major types of mergers:-

 Horizontal merger
 Vertical merger
 Conglomerate merger

Acquisitions and Takeovers

An ‘acquisition’ is the purchase of one business or company by another company or other

business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership
equity of the acquired entity. Thus, in an acquisition two or more companies may remain
independent, separate legal entities, but there may be a change in control of the companies. The
strategy of acquiring control over the management of another company – either directly by
acquiring shares carrying voting rights or by participating in the management is generally
referred to as ‘takeover’. Takeovers may be broadly classified into hostile takeovers and
friendly takeovers. When an acquisition is 'forced' or 'unwilling', it is called a ‘hostile takeover’.
In an unwilling acquisition, the management of 'target' company would oppose a move of being
taken over. But, when managements of acquiring and target companies mutually and willingly
agree for the takeover, it is called ‘friendly takeover’.
Regulations governing Mergers and Acquisitions in India
Mergers and acquisitions are regulated under various laws in India. The objective of the laws
is to make these deals transparent and protect the interest of all shareholders. They are
regulated through the provisions of:-

 The Companies Act, 1956

The scheme of merger/amalgamation is governed by the provisions of Section 391-394 of

Companies Act 1956. The summary of legal procedures for mergers or acquisition laid down
in the Companies Act, 1956 is given here below:

• Permission for merger: - Two or more companies can amalgamate only when the
amalgamation is permitted under their memorandum of association. Also, the acquiring
company should have the permission in its object clause to carry on the business of the
acquired company. In the absence of these provisions in the memorandum of association, it is
necessary to seek the permission of the shareholders, board of directors and the Company
Law Board before affecting the merger.

• Information to the stock exchange: - The acquiring and the acquired companies should
inform the stock exchanges (where they are listed) about the merger.

• Approval of board of directors: - The board of directors of the individual companies

should approve the draft proposal for amalgamation and authorize the managements of the
companies to further pursue the proposal.

• Application in the High Court : - An application for approving the draft amalgamation
proposal duly approved by the board of directors of the individual companies should be made
to the High Court.

• Shareholders' and creditors' meetings: - The individual companies should hold separate
meetings of their shareholders and creditors for approving the amalgamation scheme. At
least, 75 per cent of shareholders and creditors in separate meeting, voting in person or by
proxy, must accord their approval to the scheme.

• Sanction by the High Court: - After the approval of the shareholders and creditors, on the
petitions of the companies, the High Court will pass an order, sanctioning the amalgamation
scheme after it is satisfied that the scheme is fair and reasonable. The date of the court's
hearing will be published in two newspapers, and also, the regional director of the Company
Law Board will be intimated.

• Filing of the Court order: - After the Court order, its certified true copies will be filed with
the Registrar of Companies.

• Transfer of assets and liabilities: - The assets and liabilities of the acquired company will
be transferred to the acquiring company in accordance with the approved scheme, with effect
from the specified date.
• Payment by cash or securities : - As per the proposal, the acquiring company will
exchange shares and debentures and/or cash for the shares and debentures of the acquired
company. These securities will be listed on the stock exchange.

 The Competition Act, 2002

The Act regulates the various forms of business combinations through Competition
Commission of India. Provisions relating to combinations include Section 5, 6, 20, 29, 30 and
31 of Competition Act, 2002. Section 5 of the Act defines combination by providing
threshold limits on assets and turnovers. At present, any acquisition, merger or amalgamation
falling within the ambit of the thresholds constitutes a combination. According to Section 6
of the Act ‘no person or enterprise shall enter into a combination, in the form of an
acquisition, merger or amalgamation, which causes or is likely to cause an appreciable
adverse effect on competition in the relevant market and such a combination shall be void’. A
‘combination’ is either a merger of two enterprises or the acquisition of the control, shares,
voting rights or assets of an enterprise or an enterprise that belongs to a group if it meets the
jurisdictional requirements. Although the Act does not expressly so state, the term
‘combination’ include horizontal, vertical and conglomerate mergers.

Further, CCI on May 11, 2011 issued the Competition Commission of India (Procedure in
regard to the transaction of business relating to combinations) Regulations, 2011
(“Combination Regulations”). These Combination Regulations will now govern the manner
in which the CCI will regulate combinations which have caused or are likely to cause
appreciable adverse effect on competition in India (“AAEC”).

Under the Act, Enterprises intending to enter into a combination have to give notice to the
Commission. But, all combinations do not call for scrutiny unless the resulting combination
exceeds the threshold limits in terms of assets or turnover as specified by the Competition
Commission of India. The Commission while regulating a 'combination' shall consider the
following factors:-

 Actual and potential competition through imports;

 Extent of entry barriers into the market;
 Level of combination in the market;
 Degree of countervailing power in the market;
 Possibility of the combination to significantly and substantially increase prices
or profits;
 Extent of effective competition likely to sustain in a market;
 Availability of substitutes before and after the combination;
 Market share of the parties to the combination individually and as a
combination;
 Possibility of the combination to remove the vigorous and effective competitor
or competition in the market;
 Nature and extent of vertical integration in the market;
  Nature and extent of innovation;
 Whether the benefits of the combinations outweigh the adverse impact of the
combination.

Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate
their harmful effects.

 The Foreign Exchange Management Act, 1999

FEMA is regulating the cross border mergers and acquisitions. The foreign exchange laws
relating to issuance and allotment of shares to foreign entities are contained in The Foreign
Exchange Management (Transfer or Issue of Security by a person residing outside India)
Regulation, 2000 issued by RBI vide Notification No. FEMA 20/2000-RB dated 3rd May,
2000. These regulations contained general provisions for inbound and outbound cross border
mergers and acquisitions in India. Under these provisions once the scheme of merger or
amalgamation of two or more Indian companies has been approved by a court in India, the
transferee company or new company is allowed to issue share to the shareholders of the
transferor company resident outside India subject to the condition that:

 The percentage of shareholding of person’s resident outside India in the transferee or

new company does not exceed the sectoral cap.
 The transferor company or the transferee or the new company is not engaged in
activities, which are prohibited in terms of FDI policy.

 The Securities and Exchange Board of India Act, 1992

The Securities and Exchange Board of India (the “SEBI”) is the nodal authority regulating
entities that are listed on stock exchanges in India. The Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has been repealed by the
Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 (the “Takeover Code”) with effect from October 23, 2011. The changes
introduced in the new regulations are based substantially on the recommendations of Achuthan
Committee that the SEBI had set up to review the working of the 1997 Regulations. The
Takeover Code restricts and regulates the acquisition of shares, voting rights and control in
listed companies. Acquisition of shares or voting rights of a listed company, entitling the
acquirer to exercise 25% or more of the voting rights in the target company, obligates the
acquirer to make an offer to the remaining shareholders of the target company to further acquire
at least 26% of the voting capital of the company. However, this obligation is subject to the
exemptions provided under the Takeover Code. Exemptions from open offer requirement under
the Takeover Code inter alia include acquisition pursuant to a scheme of arrangement:

(i) Involving the target company as a transferor company or as a transferee company, or

reconstruction of the target company, including amalgamation, merger or demerger,
pursuant to an order of a court or a competent authority under any law or regulation,
Indian or foreign; or
 (ii) arrangement not directly involving the target company as a transferor company or as a
transferee company, or reconstruction not involving the target company’s
undertaking, including amalgamation, merger or demerger, pursuant to an order of a
court or a competent authority under any law or regulation, Indian or foreign, subject
to (a) the component of cash and cash equivalents in the consideration paid being
less than twenty-five per cent of the consideration paid under the scheme; and (b)
where after implementation of the scheme of arrangement, persons directly or
indirectly holding at least thirty-three per cent of the voting rights in the combined
entity are the same as the persons who held the entire voting rights before the
implementation of the scheme.

Therefore if shares are acquired pursuant to a merger sanctioned by the Court under the Merger
Provisions, the above mentioned conditions are fulfilled then the acquirer need not make an
open offer for acquisition of additional shares under the Takeover Code.

The compliances under SEBI involve the following steps:

1) Acquirer must make a public announcement of the offer price, the number of shares to
be acquired from the public, identity of acquirer, purpose of acquisition, plans of
acquirer, change and control over the target company and period within which the
formalities would be completed.
2) The acquirer must make a public announcement through a merchant banker within 4
working days of entering into an agreement of acquiring shares or voting rights of the
target company.
3) Relevant documents should be filed with the SEBI which include a copy of the public
announcement in the newspaper, the draft, letter of offer and a due diligence
certificate.
4) Correct and adequate information must be disclosed and comments should be
incorporated by SEBI.
5) Letter of offers to shareholders of the target company must be sent within 45 days of
the public announcement. The offer remains open for 30 days for acceptance by the
shareholders.
6) The acquirer should determine the offer price after considering the relevant
parameters. Once an offer is made an acquirer cannot withdraw it except unless the
statutory approvals have been refused, the sole acquirer has died or if the SEBI merits
the withdrawal of the offer.

 The Income Tax Act, 1961

Amalgamation defined under Section 2(1B) of the Income Tax Act, 1961 means the merger of
one or more companies with another company or the merger of two or more companies to form
a new company in such a manner that the following conditions can be satisfied:-
 1) All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of the
amalgamation.
2) All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated companies by virtue of the
amalgamation.
3) Shareholders holding at least three-fourths in value of the shares in the amalgamating
company or companies (other than shares already held therein immediately before the
amalgamated company or its nominee) becomes the shareholders of the amalgamated
company by virtue of the amalgamation.

 Tax Concessions: The Income Tax Act, 1961

If any amalgamation takes place within the meaning of Section 2(1B) of the Act, the
following tax concession shall be available:

1) Tax concession to amalgamating company

2) Tax concession to shareholders of the amalgamating company
3) Tax concession to amalgamated company

1) Tax Concession to amalgamating company: Capital Gains tax not attracted: According
to Section 47(vi) where there is a transfer of any capital asset in the scheme of amalgamation,
by an amalgamating company to the amalgamated company, such transfer will not be
regarded as a transfer for the purpose of capital gain provided the amalgamated company, to
whom such assets have been transferred, is an Indian company.

2) Tax concessions to the shareholders of an amalgamating company [Section 47(vii)]:

Whereas shareholder of an amalgamating company transfers his shares, in a scheme or
amalgamation, such transaction will not be regards as a transfer for capital gain purposes, if
following conditions are satisfied:

 The transfer of shares is made in consideration of the allotment to him of any share or
shares in the amalgamated company, and
 The amalgamated company is an Indian company.

The cost of acquisition of such shares of the amalgamated company shall be the cost or
acquisition of the shares in the amalgamating company. Further, for computing the period of
holding of such shares, the period for which such shares were held in the amalgamating
company shall also be included.

3) Tax concessions to the amalgamated company: The amalgamated company shall be

eligible for tax concessions only if the following two conditions are satisfied:

 The amalgamation satisfies all the three conditions laid down in Section 2(1B), and
 The amalgamated company is an Indian company.
Review of some Mergers and Acquisitions Cases:
Daiichi - Ranbaxy Acquisition Deal

Ranbaxy was formed as joint venture with a European Pharmaceutical company in 1961. It was
bought over in 1966 by Bhai Mohan Singh. Till 90s the company mainly concentrated on
reverse-engineering for its growth. The success of the company as a major generic player in the
world market is reflective of the policies adopted post-1970 by the Indian government. With the
opening up of the Indian economy and changing patent law landscape, including other business
factors forced the company to have a re-look at its strategies. The company then started
aggressively looking out for tie-ups/ joint ventures with foreign pharmaceutical companies and
also to take over some good Indian companies in the same line of business. The company has
entered into licensing arrangements with international companies for marketing their patented
drugs in the country. Ranbaxy Laboratories is one of the top leading pharmaceutical companies
in the country. Almost half of its revenues come from antibiotics and antibacterial products.
However, of late, the company is slowly shifting its focus to cardio-vascular and anxiety-related
drugs (Life style drugs). The company has been focusing more on international markets, new
tie-up, new products and R&D activity. Ranbaxy has come under close scanner of the US FDA
which banned many of its products due to non - compliance of standards. However, similar
investigations in other countries found no such violations.

In November 2008, Daiichi Sankyo of Japan acquired Ranbaxy Laboratories at US$4.6 billion
for a controlling stake of 63.92% of Ranbaxy’s equity shares (position as of December, 2008).
Daiichi paid Rs. 737 ($15.42) per share. Pursuant to the change in the ownership of the
Company, the Board of Directors of the Company was re-constituted on December 19, 2008
(Annual Report 2009). As per the Company’s 2009 annual report “…the coming together of
Ranbaxy and Daiichi Sankyo is a path-breaking confluence that, in one sweep, catapults the
new, empowered entity to the status of the world's 15th largest pharmaceutical Company.
Individually, the two pharmaceutical giants are formidable-one, India's largest generics
Company and the other, among the largest innovator companies in Japan”. This possible motive
for the acquisition seems strategizing market position, combined with strengths of both generic
market networks and skills in innovation.

Many dubbed the deal as panic selling by Ranbaxy unable to visualize and strategize its position
in the changing market landscape. Others noted that the deal was not about creating synergies
but about creating the best out of the then prevailing share prices. However, this deal has raised
a lot of questions about future competitiveness of the Indian generic industry in the light of
possible change in generic pharma strategy by Daiichi. Some commentators have suggested that
Ranbaxy being a firm that immensely benefited out of national policies should not have been
allowed to be acquired by a foreign stakeholder (Kumar Nagesh, 2008). Citing regulations for
protecting domestic industries by other countries, it is argued that Ranbaxy being a national
industry, a law prohibiting such acquisitions is much needed. They remark that considering that
India’s fledgling technological capabilities are attracting global attention, blocking such deals
would be desirable. It is feared that Ranbaxy’s case may become a trendsetter for many such
future deals. On a broader industrial policy perspective, a couple of deals have the potential to
jeopardize the national capability in the industry.

Post-acquisition, it has been a rough ride for Ranbaxy. It posted a huge loss in 2009 and ended
its financial year with a loss of Rs. 915 crore, against a profit of Rs. 787 crore it posted last year.
Ranbaxy Laboratories will launch in India an anti-hypertensive drug, Olvance - the first product
from its parent Daiichi Sankyo’s portfolio to be introduced through it. It is noted that the launch
of Olvance marks the beginning of a “productive engagement” that will harness the respective
strengths of Daiichi Sankyo and Ranbaxy to establish a much stronger platform for Ranbaxy in
India (Mint. 2009).

Abbott - Piramal Acquisition Deal

At $3.72 billion, it’s the second largest pharma deal in India, after the $4.6 billion Daiichi-
Ranbaxy deal in 2008.

On May 21, 2010, Piramal Healthcare declared the execution of definitive agreements with
Abbott Lab for sale of its Formulation Business to AHPL (Abbott Healthcare Private Limited).
It was not an easy catch for Abbott Lab that had to outbid a number of prospective acquirers to
win this Formulation Business from the Piramal Healthcare.

Piramal is a leader in the branded generics market of India, and the buyout made Abbott the top
player in the Indian pharmaceutical market – one of the biggest areas of growth potential in the
world.

What it means for Abbott?

 Rights to 350 brands and trademarks of generics, including Phensedyl cough syrup
 Market share close to 7% in the Indian generic market
 Strong presence in India (growth rate 13-17%)
 Complete product portfolio
 Access to other emerging market

The Business Transfer is being undertaken for an all cash consideration of USD 3.72 billion.
Out of the said amount USD 2.12 billion would be payable by AHPL (Abbott Healthcare
Private Limited) to Piramal Healthcare on closing of the sale and a further USD 400 million is
payable upon each of the subsequent four anniversaries of the closing commencing in 2011. The
assets transferred include Piramal Healthcare’s manufacturing facilities at Baddi, Himachal
Pradesh and rights to approximately 350 brands and trademarks and the employees of the
Formulation Business.

The Piramal group has agreed that for eight years after the deal's closing, it will not enter the
business of generic pharmaceutical products in India, or make or market them in emerging
markets.
 CONCLUSION

In real terms, the rationale behind mergers and acquisitions is that the two companies are more
valuable, profitable than individual companies and that the shareholder value is also over and
above that of the sum of the two companies. Despite negative studies and resistance from the
economists, Merger and Acquisition’s continue to be an important tool behind growth of a
company. Reason being, the expansion is not limited by internal resources, no drain on working
capital - can use exchange of stocks, is attractive as tax benefit and above all can consolidate
industry - increase firm's market power.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are
heating up in India and are growing with an ever increasing cadence. They are no more limited to
one particular type of business. The list of past and anticipated mergers covers every size and
variety of business - mergers are on the increase over the whole marketplace, providing platforms
for the small companies being acquired by bigger ones.

The basic reason behind mergers and acquisitions is that organizations merge and form a single
entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain
competitive advantage. In simple terminology, mergers are considered as an important tool by
companies for purpose of expanding their operation and increasing their profits, which in façade
depends on the kind of companies being merged. Indian markets have witnessed burgeoning trend
in mergers which may be due to business consolidation by large industrial houses, consolidation of
business by multinationals operating in India, increasing competition against imports and
acquisition activities. Therefore, it is ripe time for business houses and corporates to watch the
Indian market, and grab the opportunity.
 BIBLIOGRAPHY

External Web-links:-

 https://www.moneycontrol.com/news/business/companies/top-7-ma-deals-in-india-who-
joined-hands-with-whom-and-for-how-much-2538437.html

 https://51197059-Laws-Regulating-Mergers-And-Acquisition-In-India.pdf

 http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-
In-India.html

 https://www.globallegalinsights.com/practice-areas/mergers-and-acquisitions-laws-and-
regulations/india

 http://www.legalserviceindia.com/articles/amer.htm