Procedure for Mergers and Acquisitions: A Simplified Guide

Procedure for Mergers and Acquisitions in India
Shivani Jain
| Updated: Mar 01, 2021 | Category: Mergers and Acquisitions, SEBI Advisory

Nowadays, every company wish to reach greater heights and want to expand its business operations. As a result, they tend to undergo the procedure for Mergers and Acquisitions. However, the term Mergers and Acquisitions are often considered as one, but the same are two different concepts, the former is carried out to increase goodwill, business growth, and customer reach. In contrast, the later one denotes an act wherein the acquirer or the bidder company acquires a target company through a legal document.

In this blog, we will cover the concept and procedure for Mergers and Acquisitions.

Benefits of the Procedure for Mergers and Acquisitions

The key benefits of the Procedure for Merger and Acquisitions are as follows:

Benefits of the Procedure for Mergers and Acquisitions
  • Assists in Increasing Companies Net Worth;
  • Reduces Market Competition;
  • Helps in Gaining Competitive Edge;
  • Facilitates Formation of Synergies;
  • Attracts Large Customer Base;
  • Provides various Tax Benefits;
  • Allows Set off of Losses against Earned Profits;
  • Increase Market Reach;
  • Offers Better Sales Prospects;

Also, Read: What are the Benefits of Mergers and Acquisitions?

Laws Governing the Procedure for Mergers and Acquisitions

The laws governing the procedure for Mergers and Acquisitions are as follows:

  • Companies (Compromises, Arrangements, and Amalgamations) Rules 2016;
  • Companies Act 2013;
  • Securities Exchange Board of India 1992;
  • The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011;
  • The SEBI (Delisting of Equity Shares) Regulations 2009;
  • Foreign Exchange Management Act 1999;
  • Competition Act 2002;
  • Income Tax Act 1961;
  • Insolvency and Bankruptcy Code 2016;

Points to Consider for Mergers and Acquisitions

The points to consider for the process of mergers and acquisitions are as follows:

  • The Company must pre-determine its aim and objective before undergoing the procedure for Mergers and Acquisitions;
  • The parties involved must sort out all the resolvable issues, such as Financial Liabilities, Sharing of Assets, Deal Pricing, before hand;
  • It shall be noted that the acquirer company must always undergo the process of Due Diligence to understand the significant terms of the target company, such as ITR Filing, Transfer Pricing, and other miscellaneous tax liabilities;
  • It shall be again noted that the acquirer company must always check and assess the insurance policies pertaining to Intellectual Property, General Liability, and Employee Liability, as offered by the Target Company. The reason behind the same is to determine whether such policies will be beneficial for the acquirer company or not;

Different Types of Mergers

The different types of Mergers prevalent in India are as follows:

Horizontal Merger

Whenever two or more companies, which are dealing in the same nature of products, decide to combine with each other, the same is known as Horizontal Merger.

The main benefits of this type of merger are reduced competition, increased market reach, expanded business, and acquired a dominant position.

For instance: Lipton India and Brooke Bond, and Patanjali and Unilever.

Vertical Merger

Whenever two or more companies who are engaged in similar nature of products but operating at different stages of production, the same is known as Vertical Merger.

For instance: Reliance and FLAG Telecom Group.

Co-centric Merger

The term co-centric merger denotes a type of merger in which the companies who are serving the same type of customers are involved. Further, under this concept, the products of the parties involved, can either complement each other or can be different as well.

For instance: Flipkart acquiring Walmart India, Axis Bank acquiring Freecharge, Acquisition of Salomon Smith by Citi Group.

Conglomerate Merger

Whenever two unrelated companies decide to associate or merge with each other, the same is termed as Conglomerate Mergers.

Further, it shall be noted that the purpose and goal of both the companies must be entirely different from each other.

Also, the main benefits of this merger are Increased Business Reach, Expanded Operations and Size, Gained Competitive Edge.

For instance: Voltas Ltd and L&T

Cash Merger

Whenever the shareholders of a company offer cash instead of shares of the merged company, the same is known as Cash Merger.

Forward Merger

If in case a company decides to merge with its customer, the same is termed as Forward Merger. For instance, Acquisition of Bank of Mathura by ICICI Bank.

Reverse Merger

Whenever a business establishment chooses to merge or combine with its raw material suppliers, the same will be termed as Reverse Merger.

For instance: Merger of Gujarat Godrej Innovative Chemicals and Godrej Soap.

Detailed Procedure for Mergers and Acquisitions

The steps involved in the procedure for Mergers and Acquisitions are as follows:

Procedure for Mergers and Acquisitions

Examine the MOA

In the first step of the procedure for Mergers and Acquisitions, there is a need to examine the MOA (Memorandum of Association) of the Company. The same is done to check whether the Object Clause allows the company with the power of merger or not.

Notify the Recognised Stock Exchange

Now, in the next step, the parties involved in the deal will need to inform the Recognised Stock Exchange (RSE) about the same. Also, they need to send copies of the notices, orders, resolutions passed to the stock exchange within the period specified.

Drafting of the Merger Proposal

In this step, the Board of Directors (BOD) of the parties involved need to confirm the drafting of the merger proposal. Also, they need to pass a special resolution to authorise Key Managerial Personnel to carry out the matter.

Furnish Application with High Court

When the Board of Directors have confirmed the procedure of Mergers and Acquisitions, the companies involved need to file an application with the High Court of said state, where the company has its registered office located.

Dispatch Notice to Shareholders

Further, if the application filed is approved by the High Court, then the companies involved need to send a notice of meeting to the stakeholders, i.e., Creditors and Shareholder.

Also, the notice must be sent at least 21 days prior to the date of the meeting. The said notice needs to be published in two newspapers as well, i.e., in Vernacular and English Newspaper.

File Order to ROC

Now, the company requires to file the certified copy of the High Court’s order with the Registrar of Companies within the period specified.

Merging of Assets and Liabilities

After that, to complete the process of merger and acquisitions, the companies involved need to combine or merge their assets and liabilities based on the stipulations specified in the merger proposal.

Listing of Shares

In the last step, the company newly formed will have the status of a separate legal entity and will be eligible to list the shares on RSE (Recognised Stock Exchange).

Conclusion

In a nutshell, the term mergers mean the alliance of companies, in which two companies decide to form a new company. In contrast, the acquisition means a process in which the acquirer company acquires another company through a legal document.

However, to undergo the procedure for Mergers and Acquisitions and to avail of its benefits, one needs to comply with the requirements stated in the blog above.

Also, Read: Difference between Mergers and Acquisitions in India

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Shivani Jain

Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a Delhi based Law Firm, but her interest in writing made her pursue Legal Content Writing as a career. Her core area of interest is in writing about various legal enactments, tax, and finance.

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