AUTHOR- PRIYAL GUPTA, IPEM LAW COLLEGE, CCSU
INTRODUCTION
Mergers and Acquisitions (M&A) offers an alternative to organic growth for buyers seeking to achieve their strategic goals, while offering sellers the option to cash in or share the risks and rewards of a newly formed business. A company may grow either by internal expansion or by external expansion. For internal expansion, a company grows gradually over time in the normal course of business. Acquisitions are part of corporate restructuring, or inorganic growth, so companies are looking for opportunities to grow outside rather than keep profits in-house. Indian companies have often outperformed their foreign counterparts in corporate restructuring both within and outside their borders.
REGULATORY FRAMEWORK
- COMPANIES ACT, 2013- It is the primary legislation in India that governs the incorporation, management, and operation of companies. It provides a legal framework for mergers, acquisitions and combinations in India.
- Foreign Exchange Management Act (FEMA), 1999- When money is moved between countries during a merger or acquisition, FEMA sets the rules. These rules are enforced by the RBI and cover things like how companies are valued and how funds can be transferred.
- Competition Act, 2002- This law ensures that mergers and acquisitions do not lead to the creation of monopolies or a significant reduction in market competition. When the companies involved cross certain asset or turnover thresholds, they are required to seek approval from the Competition Commission of India (CCI) before proceeding.
- Income Tax Act, 1961-Mergers and acquisitions often involve complex tax implications. Companies must carefully consider factors such as capital gains tax, withholding tax, and compliance with transfer pricing regulations. In certain cases—particularly those involving foreign entities or transactions with significant tax impact—prior approval from the Income Tax Department may also be necessary. India has agreements with many countries (DTAAs) to help avoid double taxation.
- SEBI – In case of Listed companies, prior approval from the Stock exchange where the company is listed, is required to be obtained.
TYPES OF MERGERS
- HORIZONTAL MERGER – Horizontal Merger is a merger between companies selling similar products in the same market and in direct competition and share the same product lines and markets. It decreases competition in the market. The main objectives of horizontal merger are to benefit from economies of scale, reduce competition, achieving monopoly status and control of the market.
Example- Disney bought Lucas firm and both companies were involved in production of film and running the TV shows
- VERTICAL MERGER -Vertical Merger is a merger between companies in the same industry, but at different stages of production process. In another words, it occurs between companies where one buys or sells something from or to the other.
Example Microsoft bought Nokia to support its software and provide hardware necessary for the smartphone.
- CONGLOMERATE MERGER- Conglomerate merger is a merger between two companies that have no common business areas. It refers to the combination of two firms operating in industries unrelated to each other. The business of the target company is entirely different from the acquiring company. The main objective of a conglomerate merger is to achieve big size e.g., a watch manufacturer acquiring a cement manufacturer, a steel manufacturer acquiring a software company, etc.
Example- The Lubrizol Corporation is an innovative specialty chemical company that produces and supplies technologies to customers in the global transportation, industrial and consumer markets. These technologies include lubricant additives for engine oils, other transportation-related fluids and industrial lubricants, as well as fuel additives for gasoline and diesel fuel.
- CONGENERIC MERGER- Congeneric merger is a merger between two or more businesses which are related to each other in terms of customer groups, functions or technology e.g., combination of a computer system manufacturer with a UPS manufacturer.
EXAMPLE- PVR/INOX Merger India’s two leading cinema franchises, PVR and INOX, merged in 2022 to create the largest multiplex chain in the country with over 1500 screens. The PVR and INOX merger resulted in synergies in the form of advertising revenues, reduced rental costs, and convenience fees for the merged entity, which will be called PVR-INOX.
- REVERSE MERGER – A reverse merger is a merger in which a private company becomes a public company by acquiring it. It saves a private company from the complicated process and expensive compliance of becoming a public company. Instead, it acquires a public company as an investment and converts itself into a public company.
Example of a reverse merger was when ICICI merged with ICICI Bank in 2002. The parent company’s balance sheet was more than three times the size of its subsidiary at the time.
PROCEDURE OF NCLT MERGER
- Planning – This is the starting point where the buying company identifies why it wants to acquire or merge
- Taking board approval – All merging companies hold Board Meetings and approve the draft scheme of merger/amalgamation
- Due Diligence- Once a target company is identified, the buyer investigates every aspect of that company — its finances, legal contracts, debts, employees, and risks. to avoid hidden problems.
- Valuation- A registered valuer is appointed to determine the share exchange ratio. This helps decide what price is fair and justified, and whether the deal makes financial sense.
- Negotiation- The buyer and seller discuss and agree on important deal terms: the final price, how the payment will be made (cash, stock, etc.), timelines, and any special conditions. Both sides aim to protect their interests and get a good deal.
- Documentation- Lawyers draft all the legal paperwork — including the purchase agreement and other key contracts — that outline the terms of the deal. These documents are signed by both all parties to make the agreement official and enforceable.
- Filing of application with the NCLT – A joint application (or individual applications) shall be filed with the NCLT under Sections 230–232 of the Companies Act, 2013, who shall further direct for shareholder and creditor meeting.
- Approvals- The approvals from shareholders, creditors and sometimes government regulators ensure the deal is legitimate and compliant with laws.
- Reports and hearings – The Regional Director and Official Liquidator shall send their reports to the NCLT providing their observations if any. Thereafter hearings take place for clearing the observations.
- Integration- After the deal is done, the companies must combine operations: staff, technology, systems, and cultures. This is often the hardest part and requires careful planning so the new entity functions smoothly and keeps customers and employees happy.
- Post- Transaction Evaluation- Once the dust settles, the buyer reviews whether the deal met its goals — for example, increased profits, market share, or efficiency. If things aren’t going as planned, adjustments are made to fix issues.
Conclusion
Mergers and Acquisitions are powerful tools for achieving rapid growth, accessing new markets, and gaining competitive advantages. However, their success hinges not just on strategic intent but also on navigating a complex legal and regulatory landscape. From the Companies Act to FEMA, the Competition Act, and various tax regulations, each step demands thorough planning, due diligence, and legal compliance. Understanding the types of mergers and following a structured procedure minimizes risk, while non-compliance can result in severe financial, legal, and reputational consequences. With proper execution and post-transaction integration, M&As can serve as a robust catalyst for transformation in an increasingly dynamic global business environment.
Based on your blog on Mergers and Acquisitions, here are 5 FAQs (Frequently Asked Questions) that can be included at the end of the blog for better clarity and reader engagement:
FREQUENTLY ASKED QUESTIONS (FAQ)
1. What is the primary law governing Mergers and Acquisitions in India?
The Companies Act, 2013 is the primary legislation that governs mergers and acquisitions in India. Additionally, transactions may also involve laws such as FEMA, the Competition Act, Income Tax Act, and SEBI regulations for listed entities.
2. How does a company get approval for a merger or acquisition?
The company must follow a multi-step process that includes board approval, due diligence, valuation, and filing with the NCLT under Sections 230–232 of the Companies Act, 2013. Approvals from shareholders, creditors, and regulators may also be required.
3. What are the different types of mergers?
Mergers can be classified into several types, including:
- Horizontal Merger (same industry & market)
- Vertical Merger (different stages of production)
- Conglomerate Merger (unrelated businesses)
- Congeneric Merger (related customer base or technology)
- Reverse Merger (private company acquires a public one)
4. Why is due diligence important in M&A?
Due diligence helps the buyer uncover hidden liabilities, financial risks, or legal issues in the target company. It ensures informed decision-making and helps avoid post-deal complications.
5. What role does the Competition Commission of India (CCI) play in M&A?
CCI ensures that a merger or acquisition does not create a monopoly or harm market competition. If the companies involved meet certain asset or turnover thresholds, they must seek CCI approval before proceeding.
