What is the meaning of Merger and Acquisition?
There exists confusion between the meaning of merger and acquisition and a lot many times, both are considered the same. However, there is a considerable difference between these two terms.
Merger involves combining or coming together of two entities and formation of the two into a single entity. Acquisition takes place when one entity buys another entity and the buyer entity combines the other entity with itself. Both, merger and acquisition, represent organic growth process.
De-mergers are also considered at par with mergers and acquisitions in India. They involve division of an entity into two or more entities.
Why you should opt for Mergers and Acquisitions?
Mergers and Acquisitions are one of the most significant tools that companies can consider for sustainable development and for expanding their services.
Therefore, reasons why you should opt for Mergers and Acquisitions are as follows:
- To eliminate competition;
- For establishing a bigger market share;
- Creating a powerful brand;
- Setting off the losses of one company with the profit of the other.
Advantages of Mergers and Acquisitions
Increase in size: Via merger or acquisition, companies can increase their size manifold, which otherwise could have taken years. These strategic tools are quicker way of increasing the company size ad operations.
Reduced competition: Mergers and acquisitions are a quick way for reducing the competition as they allow for combining strengths with one’s own competitors. This way the company taps the consumer base of the other. The mergers and acquisitions aim at winning more consumers by synergizing their strengths and cutting the competition.
Increased power: When two companies combine their power, they become dominant players in the market. This way they can dominate the other players as they now have a bigger market share. Attracting more customers also becomes easier.
Tax benefits: Mergers and Acquisitions also have the tax benefits. The losses of one company can be written off against the profit of the other, thereby reducing the net taxable income. Also, foreign entities with high corporate tax can use its overseas merged/acquired company’s domestic tax payment system in order to pay lower amount of tax.
Better research and visibility: Since mergers and acquisitions make two market players come together, their resources of research and market visibility combine. This way they can come up with better and more innovative ideas of attracting consumers and increasing their market share.
Types of Mergers
Horizontal Merger: This occurs when two or more companies which are in direct competition and indulge in identical products and markets bases, merge.
Vertical Merger: This is the merger between a company and its supplier or a company and its customer.
Congeneric Merger: This is the merger between companies that offer complimentary products to the same consumer base. This way the new company is the expanded version of the merged companies.
Conglomerate: This is the merger of companies that have completely different business fields and have no common ground.
Market-extension merger: This is the merger of the companies that sell similar products in different markets.
Product-extension merger: This is the merger between companies that sell related products in different markets.
Applicability of Company Law
The strategic arrangement of merger between the company, the shareholders and the creditors are governed by Sections 390 to 394 of the Companies Act, 1956 and Sections 230-234 of the Companies Act, 2013.
As per the provisions of the Indian law, acquisition can take place in the following two forms:
- Acquisition of existing shares of the target company
- Subscription to new shares of the target company
Procedure for Mergers and Acquisitions in India
The process of Mergers and Acquisitions (M&A) in India takes place as per the Companies Act, 2013. You need to follow the steps as described below while proceeding for Mergers and Acquisitions in India:
Step 1: Examine the MOA of the Company
The very first step to M&A is to scrutinize the Memorandum of Association (MOA) of the company properly to conduct a search and verify whether the power of merger is bestowed on or not.
Step 2: Inform the stock exchange
Secondly, when you are going to enter mergers and acquisitions, you must inform the stock exchange of the same. Further, you need to send copies of resolutions, orders, and notices to the stock exchange on a timely basis.
Step 3: Drafting of Merger Proposal
The Board of the Director of both the involved companies needs to submit a confirmation on the draft of the merger proposal. Besides, it is also required to pass the resolution to authorize its key managerial personnel to carry on the matter.
Step 4: Filing application to the High Court
Once the Board of Directors have confirmed, the merger company needs to send an application to the High Court of the concerned state where the company has its headquarter.
Step 5: Notice to Creditors and Shareholders
If the High Court has granted the approval, the company must send a notice to all the creditors and shareholders regarding the meeting to be held 21 days prior. The notice must be published in two newspaper- in Vernacular and English newspaper.
Step 6: File orders with the ROC
The company needs to file a truly certified copy of the order from the High Court with the Registrar of Companies within the prescribed limit as specified by the High Court.
Step 7: Merging of assets and liabilities
Next, the process of merging of assets and liabilities of both company will take place.
Step 8: Issuance of shares and debentures
Lastly, when the companies have been merged and got the status of a separate legal entity, then the company is eligible to issue its shares and debentures on the stock exchange after listing.
Mergers and Acquisitions are strategic tools used by companies for immediate tremendous growth. The companies use the strengths of each other for getting a larger consumer base and entering more markets. The legal aspects of getting into a merger or acquisition are quite complicated. These processes are usually undertaken by professionals who hold years of expertise in the field.
Our team of experts is well-versed with the entire procedure of mergers and acquisitions. We have various satisfied clients for whom the same procedures have been undertaken by our team. We can assist you in choosing the prospective company for merger/acquisition, planning the entire process and making all the compliances to avoid any penalties later on.
For more information on mergers and acquisitions, contact us.
Frequently Asked Questions (FAQs)
The mergers and acquisitions in India are governed by:
- The Companies Act, 2013
- FEMA, 1999
- The Competition Act, 2002
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011
- The Indian Stamp Act, 1899
- The Income Tax Act, 1961
The documents required are:
- Documents containing approval of the directors, creditors and shareholders of the companies
- Petition- which is required to be filed in front of the concerned authority
- Publishing of notice sent to shareholders and creditors in the newspaper
- Public announcement to be made in case the shares of a listed company are being acquired
- Affidavits and declarations
- Share subscription
- Purchase agreement
- In case listed company is involved, reporting to the stock exchange
Government fee is applicable on the following:
- Filing merger before the National Company Law Tribunal
- In case the shares are held in physical form, the share transfer stamp duty for acquiring shares has to be paid
- Fee payable to ROC/RD upon filing of forms and applications
- Notary fee for notarization of affidavits
- Stamp duty on affidavits, merger order, etc.
Foreign Exchange Management Act
SME-IPO, Initial Public Offering
Alternative Investment Fund, AIF Registration
NCLT, National Company Law Tribunal