The process of merger and acquisition in India in terms of corporate laws.

Introduction 

According to Economics survey 2021-2022, India has over 61,400 start-ups which are recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and 14,000 new startups were recognized during the fiscal year of 2022. After the abrupt staleness of the situation during the pandemic, numerous companies went bankrupt or went for IPO. 
 

Considering these situations, the number of M&A transactions got to increase. Each year’s transactions get doubled of its last year’s record, in the latest years and if compared the present with the 2000s’ deals, the number has almost quadrupled.

One of the misunderstandings of layman’s is that company law is actually the corporate laws, which is partially wrong, because company law occupies a small portion of the vast corporate law. These two terms not only mean the stipulated meaning by law but also sometimes these meanings are used interchangeably despite having different legal meanings.

The details of the strategy and approach of Byju’s has been explained by Money control.com which will be discussed later in this very article. In India, mergers and acquisitions remains court oriented even in the case of mutual agreements between firms. Section 396 handles the power of the central government to provide for the amalgamations of companies by maintaining the national interest. 

Mergers and acquisition are governed by Indian Companies Act, 1956 under section 391 and 394. Some of the biggest merger and acquisition cases of companies that took place in India that impacted upon various aspects of the laws. Some of them are Arcelor-Mittal, Zee Entertainment – Sony India Merger, In the year of 2021, the top transactions that took place are Adani Green Energy Limited (AGEL) taking acquisition of SB Energy India (Acquisition), Tata Digital taking acquisition of Big Basket.

The different aspects and legal procedure of Mergers and Acquisition in India

In many cases the mergers actually turn out to be acquisitionwhen a company buys another and incorporates its business model. The word merger is misused and so it is the very reason, the word “merger and acquisition” is used altogether.There are not only the processes of merger and acquisition present when it comes to formation of new corporations. Joint venture, strategic alliance, partnership are the other ways to initiate big corporations like Vistara (Tata sons & Singapore Airlines) 

1) Mergers is defined as the collaboration of two or more companies to form a new company in an extended form. Amalgation has the same process as merger but in merger the respective companies lose their identities. No new investments take place during this process. Share ‘s exchange take place. Actually, in the case of merging, the buyer identity remains intact but the seller loses its identity.

2) Acquisition is defined as the action of taking the possessions of other business by another business or company. It can be called as “takeover” or “buyout”. The company taking the acquisition or the share of another company with the liabilities and assets or the company buys the assets and liabilities of the target company. 

3) Joint venture is when two or more companies join to run a business or company together under a contractual agreement and both of them sharing the profits and losses of the business enterprise. Joint venture does not promote business relationship in strategic alliance as such but they venture for a single project. 

Strategic Alliance is a partnership with another business to minimize risks and maximize leverage 

4) Partnership is business in which two or more individualsor business owners who carry on a continuing business for profit as co-owners. It is regarded as a group of anindividual entities rather than a single entity. Each partner shares the profits on their individual tax returns.

Mergers are also divided into various types that is based on the different relationship of two or more merger companies. 

There are different types of mergers 

1) Horizontal merger: Two companies which participate in direct competition which shares same market. 

2) Vertical merger: Merger of companies that have current or potential buyer-seller relationship. 

3) Conglomerate merger: A merge between companies which do not have any common areas in business. This kind of merger can be classified in to three types; product-extension merger, market-extension merger, pure conglomerate merger.  

i) Product-extension merger: Conglomerate companies that sell different but relatable products by using same marketing same channels 

ii) Market-extension merger: Conglomerate merger companies involved in selling the same products but in different geographic market.

iii) Pure Conglomerate merger: two companies which merge together but have no obvious relationship of any kind

The whole circumstance of merging impacts upon the process of dealing, executing and strategizing. Horizontal merging impacts upon the number of sellers and effects the market structure but on the other hand the vertical and conglomerate does not impact upon the market structure. 

The famous idea underlying M&A is that when two distinct firms function together, they create greater value than if they functioned alone. To maximise their wealth, all companies try to execute different options through merger and acquisition. Both the sides of the M&A negotiation will have different viewpoints in case of the valuation of the acquiring company.Greater revenues, lower expenses, the cost of capital that can be used to lowering the overall cost of capital or synergy value. 

Companies compare themselves with other similar companies,which are present in the market of the same industry. As approaches and tools to evaluate target companies,comparative ratios, Enterprise-Value-to-Sales ratio, Discounted Cash Flow are used. 

In India, mergers and acquisition takes place in different ways across different sectors like pharmaceutical company, banking company, pharmaceutical company. Among all these sectors, telecommunication is the prime sector in which India holds the second-largest position worldwide in terms of consumers.

Conclusion

The article briefly explains the process of merger and acquisition in India in terms of corporate laws and the reason there are corporate laws in the tertiary sector. It briefly explains the basics of the mergers and acquisition and how the merging and acquisition generally takes place. 

The tools and approaches used for the evaluating a company’s worth in an industry’s market. India’s merger and acquisition process are different for the three main sectors of pharmaceutical, banking and telecommunication.

written by:

Sohankita Mukherjee.