Critical Analysis of Evolution of M&A in India

Author: Debayan Samanta

Institution: KIIT School of Law

ABSTRACT
Economic reforms in India resulted in significant changes in the corporate sector, resulting in a significant rise in mergers and acquisitions operations in the country. In India, there has been an increase in both in-country and cross-border M&As as a result of shifting government rules and the growing complexity of the industry. As a result, the current study takes a novel strategy to reviewing past research work done by various writers in order to examine M&As in India. We all know that in the present time, covid has changed the way our world lives and thinks. Through this article, the researcher examines various laws and theories regarding M&A. All the business sectors were affected by the covid. The Pharma sector was one of the exceptions as it showed a great growth prospect. The article also examines M& A in various sectors. Hence, it becomes quite important to learn how covid has changed the M&A activities in the market. Before doing that, we would have to learn the clear difference between the two.


INTRODUCTION
In every business sector at the same time, there exist firms that are struggling to stay afloat, which are the giants and which are the threat to the giants. Each company tries various methods of growing. One such option is to either go for a merger or an acquisition. In a layman’s language, both these words might sound the same to one. But there is a huge difference between the two. Both these activities are of great importance in any economy. M&A is undoubtedly the most common approach used by companies looking to gain a strategic edge over their competitors. Mergers and acquisitions as a strategy of inorganic expansion are increasingly being employed to restructure top business businesses around the world. To meet the growing domestic and worldwide markets, Indian enterprises are aggressively expanding their capacities through mergers and acquisitions. Mergers and acquisitions are frequently employed as preferred corporate structure instruments to meet a wide range of business goals. The Indian corporate sector is very interested in this new business approach, and businesses are rapidly increasing capabilities through mergers and acquisitions to meet the growing domestic and international markets. One helps the business in staying afloat, fighting the market leaders, and increasing its reach. Meanwhile, acquisitions help in removing competition, increasing market share, and improving the existing facilities. We all know that in the present time, covid has changed the way our world lives and thinks. All the business sectors were affected by the covid. Through this article, the researcher examines various laws and theories regarding M&A. The Pharma sector was one of the exceptions as it showed a great growth prospect. The article also examines M& A in various sectors. Hence, it becomes quite important to learn how covid has changed the M&A activities in the market. Before doing that, we would have to learn the clear difference between the two.


OBJECTIVES OF THE STUDY
The study is aimed to achieve the following specific objectives:
• To study merger and acquisition in India and compare and contrast the two.
• To understand theories of mergers and acquisition
• To examine legal aspects of M&A
• To study M&A in diverse sectors in India

  1. Horizontal Merger: In these mergers, the parties are two companies that are competitors of each other and have similar product lines. One may say that two rivals join their hand to form a new entity.
  2. Vertical Merger: In these types of mergers, a customer and a company or supplier of the company and the company merge themselves.
  3. Conglomerate Merger: There may a situation, where the companies which are merging do not have much in common and don’t have any existing relationship. When such a firm merges, we call it a conglomerate merger.
  4. Reverse Merger- A Merger where a parent company merges with its subsidiary or a profit making firm merges with a loss making firm. It also called a triangular merger.
  5. Congeneric Mergers- This is a form of merger in which two companies operate in the same or related industry or marketplaces but do not sell the same products. These companies merged to create synergies, boost market share, and extend product lines since they share similar distribution routes, intersecting technology, and production methods, among other things.
    ACQUISITION
    Another term that is closely associated with mergers and is used usually with the word merger is ‘acquisition’. It means that a minor business has been attained by a major business. The final consequence of acquisition marks the development of the industry rapidly and beneficially than any regular organic expansion might permit. It is also known as takeover or buyout. This may be done via share purchase or asset purchase.
    Types of Acquisition
  6. Friendly – When one firm buys another and both boards of directors approve the deal, it’s known as a friendly takeover. It operates for the mutual benefit of both companies. Both shareholders and management agree on both ends of the transaction in a favourable takeover. E.g. Facebook’s takeover of Whatsapp, Flipkart-Walmart
  7. Hostile Takeover – When the target firm refuses to approve to the acquisition, the procuring corporation must amass a majority ownership in order to force the deal through. A tender offer is usually used to complete a hostile takeover. In a tender offer, the business tries to buy shares from the target company’s existing stockholders at a higher price than the current market rate, and the shareholders have a limited time to accept. Take, for example, Hindujas’ acquisition of Ashok Leyland.
    Theories of Mergers and Acquisitions
    The motive with which a merger or an acquisition is undertaken will influence the way corporate performance is measured. There are several theories to explain the motives behind mergers and acquisitions:
    Efficiency Theory
    One of the most common reasons for mergers and acquisitions is synergy. According to this notion, some businesses function at or below their full capacity, resulting in low efficiency. Such businesses are more likely to be bought out by more efficient competitors in the same industry. This is because companies with higher efficiency would be able to spot companies with high potential but low efficiency. They’d also be able to improve the latter’s performance as a manager. For example, if the management of firm A is more efficient than the management of firm B, and if B merges with firm A, firm B’s efficiency is brought up to the level of firm A’s, the improvement in efficiency is credited to the merger. Logistic, managerial, and financial synergy are the three types of synergy identified by efficiency theory. According to the operating synergy idea, when businesses pool their capabilities, they gain synergistic benefits from efficiencies of magnitude and complementing advantages. Synergy is the driving force behind mergers and acquisitions. According to the financial synergy theory, the debt capacity of two joined enterprises will be greater than the sum of the loan capacities of two separate firms. Credit ratings of both organisations, tax differentials of both firms, and the mix of internal and external capital used all contribute to financial synergy. When bidder managers have superior management and execution abilities that help the objective accomplishment, management efficiencies are realised.
    Monopoly Theory
    According to this explanation, mergers and acquisitions are planned and performed in order to gain market power. Market leaders strive to strengthen their positions and attain market dominance. Companies commit to horizontal partnerships in order to develop market strength, limit competitors’ power, and make entrance to the market more difficult for them, according to the traditional economic theory of monopolisation.
    Valuation Theory
    This viewpoint regards acquisitions as being carried out by managers who have a better understanding of their precise target’s untapped future value than the stock market. The idea is that the acquirer has significant and distinctive information that may be used to increase the value of a merged firm by buying an inexpensive target or combining the target’s business with its own. According to this theory, purchases are planned and performed by those who know more about the target’s value than the stock market. Managers of bidders may have exclusive knowledge of the potential benefits of integrating the target’s firm with their own. According to this idea, capital markets do not have perfect knowledge regarding the things they value via share prices. According to this notion, a market will never be able to establish a precise value for a company because each potential buyer’s worth is dependent on their own expertise or perception. With this perspective, there would be nearly as many values as there are prospective buyers when determining a company’s value.
    Empire- Building Theory
    According to this view, M&As might also occur as a result of the agency problem that exists between shareholders and management, in which managers are more concerned with achieving their own goals than with growing shareholder wealth. Managers enter into such agreements in order to maximise their own profits at the expense of the company’s owners. The motivations behind such deals, from this perspective, may be to raise the salary and authority of management. Executives may also assume that the broader their organisation is, the less probable it is to be acquired by another firm, and hence the safer their employment are. M&As based on these criteria have no validity in terms of shareholder wealth because executives are likely to boost their own money at the cost of the investors.
    Process Theory
    This method is based on rationalisation, and it implies that strategic decisions are portrayed as outputs of processes guided by the central role of organisational routines or political power in the decision-making process, rather than fully rational choices. Managers have limited understanding and must make decisions based on that data. Mergers and acquisitions are the consequence of lengthy and difficult decision-making processes. The amount to which decision makers can plan and anticipate these procedures is restricted, which is why stakeholders must achieve a compromise between competing interests that retain weight all through the process.
    Raider Theory
    Raider theories focus on how an acquirer obtains a regulating stake in an acquiring company in order to transfer capital from target company stockholders to acquiring company with no corporate strategy of operating the companies themselves (commonly referred to as private equity firms – whose sole purpose is to earn monetary rewards from investments). Raiders hunt for struggling companies with cheap resources and then buy enough stock to take control. The raider’s goal is usually to make a lot of money in a short amount of time by dismantling the company’s shares and disposing off its assets. Collateralized buybacks and other sorts of reorganization are commonly used to take these companies private. Private equity firms with large sums of money have bought failing companies in a range of industries.
    Disturbance Theory
    Economic instabilities, according to this idea, cause merger waves. Economic disruptions make the prospect less expected, resulting in a rise in the variation in a firm’s value. Individuals’ attitudes and beliefs are altered as a result of macroeconomic shocks or disruptions, resulting in an economic environment marked by heightened uncertainty. This necessitates a company’s consideration of selling its ownership in another business. Non-owners of goods now value them more than their proprietors, and vice versa. The consequence is a wave of mergers.
  8. MOTIVES BEHIND M&A
  9. Economies of Scale: This is a term that refers to a method of lowering the average cost per unit by increasing output and spreading fixed expenses across a larger number of commodities.
    Greater Market Share: This motive predicts that the corporation would absorb a significant competitor, giving it more authority to set prices (due to increased market share).
    Complementary resources should be used more effectively. It could be in the form of revenue enhancement (generating more money than its two preceding standalone enterprises could) or cost savings (to reduce or eliminate expenses associated with running a business).
    Resource transfer: Because resources are distributed unevenly across organisations, the interplay of target and acquiring company resources can generate value by overcoming knowledge asymmetry or combining limited resources.
    Improved market reach and industry visibility – Businesses acquire other businesses in order to expand their market reach and earnings. A merger may increase the marketing and distribution capabilities of two organisations, opening up new sales prospects. A merger can also help a company’s reputation with investors: larger companies frequently have a simpler way raising funding than smaller companies.
    WHAT IS THE DIFFERENCE BETWEEN MERGER AND ACQUISITION?
    These two terms which are constantly used in the business world are often confused and interchanged. The reason for such confusion is that in both of these, two or more business activities are being consolidated for purpose of getting better synergies. However, there exist differences between the two.
  10. If we just read the definition of both words, there is a major difference lying there. In mergers, two or more companies join together to form a new business activity. But in the acquisition, one company takes over another company completely.
  11. A merger always happens with the consent of both parties. One cannot engage in a merger without the consent of the other company. But such a thing is not necessary in the case of an acquisition. When the acquisition happens without consent of it is called a hostile takeover.
  12. Whenever mergers take place, a completely new entity is born. Hence, the newly formed organization does not share the same title as the previous firm. A new name is registered to begin the operations. But when an acquisition occurs, there is no change like this. No change in the name takes place.
  13. When mergers happen, usually the business is of similar size. They have similar stature, position in the market and match in their scale of operations. But this is not the case when one talks about acquisitions.
  14. New shares might have to be issued (in case the companies were listed earlier). But there is no such need in the case of acquisitions.
    WHAT ARE THE REGULATORY FRAMEWORKS IN INDIA?
    There are different laws and regulatory frameworks which exist and deal with the merger and acquisition activities in India. There has been a drastic change in India before 1991 and after 1992. One major effect of the changes of 1991 was the increase in business in India. This caused an increase in the number of mergers and acquisitions happening in India. Here, we will discuss different laws which deal with M&A in India.
  15. The Companies Act, 2013: This act acts as the primary and foremost legislation governing the companies which have registered themselves in India. Like every other corporate transaction, mergers and acquisitions are also governed by the companies act. The term merger cannot be found in the act, but some provisions deal with how the proposal for the merger will be made, who will be the appellate authority for the same. Provisions regarding the merger can be found in sections 232-34 of the Indian companies act, 2013.
  16. The Competition Act, 2013: The competition act is the successor of the MRTP act,1969. The main motive of both these acts was similar. They were made to safeguard the competition in India. However, in 2002 the government of India introduced this act because of the wider ambit and better laws that this act provided. Also, the MRTP was not favorable to private investors and companies. The main motive of the Competition act, 2002 is to “…establishment of a Commission to prevent practices having an adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets…”
    If you read the main mission of forming the act, it is clear that the government formed this act to secure the competition in the market. Any form of trade practice that might hinder the free market is tried to be controlled by the act. Mergers can lead to oligopoly and hence, act as a hindrance to the free market. The commission keeps an eye on the mergers and listens to the complaints. If any merger may lead to the formation of a cartel, the commission can also take suo moto cognizance .
  17. Securities Laws: In India, SEBI is the regulatory body of security laws. The transactions of M&A are also covered by the SEBI Regulation,2018. Since the Indian economy was opened to the world or in a normal sense liberalized and globalized, an increase in M&A activities happened. SEBI is the country’s main authority regarding the security laws, keeps an eye on such activities. Mergers and acquisitions are the perfect opportunities for business owners to fool their investors and misappropriate the funds. To regulate the acquisitions, SEBI enacted the “SEBI (substantial Acquisition of shares and takeover) regulations, 1994” . India is now working on creating a new security law. So, it is going to be exciting to see how the government changes the existing laws regarding M&A activities.
  18. Foreign Exchange Management Act, 1999: FEMA guidelines act as one of the most important legislation in terms of funding from foreign countries. The guidelines make it necessary for overseeing executive or entire time chief and member secretary who would ensure the following of the existing guidelines. FEMA deals with cross-border mergers and hence is quite important for us. It defines cross-border mergers as
    “any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013”
  19. The Indian Income Tax Act (ITA), 1961: The term “merger” is not defined in the ITA, but it is covered by the term “amalgamation,” which is defined in section 2(1B) of the Act. Since its inception, the Income-tax Act has provided preferential consideration to mergers and demergers in order to encourage restructuring. Many concerns connected to business reorganisations were resolved by the Finance Act of 1999, making firm restructuring easier and more tax-neutral. This was done, according to the Finance Minister, to speed up internal liberalisation. The following provisions apply to mergers and demergers: Definition of Amalgamation/Merger — Section 2 (1B).
  20. Mandatory permission by the courts: Any merger strategy must be approved by the courts of the country. According to the company act, the high courts of the states where the transferor and transferee firms have their separate registered addresses have the authority to order the winding up or control the merging of companies incorporated in or outside India.
    After having approved the scheme of mergers under section 392 of the Company Act, the high courts might also monitor any arrangements or adjustments to the arrangements. Following that, if the courts are convinced that the upcoming merger is “fair and reasonable,” they will issue the requisite punishments for the design of mergers after engaging with the merger application.
    The courts’ rights to exercise authority are likewise limited, as a result of their own decisions. For example, the court system will not allow a merged entity to continue if the same can be accomplished through other requirements of the Companies Act; further, the courts will not allow a merger to move ahead if it is something that the stakeholders themselves cannot agree to; and finally, if the merger, if allowed, would be in violation of certain legal conditions, such a consolidation will not be authorised. According to section 391 of the Company Act, the courts have no particular jurisdiction over the granting of writ petitions to consider an appeals over a decision that is otherwise “final, conclusive, and binding.”
    Mergers and Acquisitions in India’s various sectors
    India has recently exhibited the greatest potential for mergers and acquisitions. It is successfully cooperating in a range of areas in the Indian market. Many Indian businesses have expanded organically to get access to new markets, while many foreign businesses are looking to expand and expand in India. It’s now widespread across all business strategy is a set.
    Pharmaceutical sector
    The pharmaceutical business is undergoing several mergers and acquisitions around the world. There is a scarcity of qualified research and development institutes within a certain pharmaceutical species.
    The upgraded shape components also play an important function in the industry’s expanding M&A. Several Indian pharmaceutical businesses have engaged in mergers and acquisitions, such as the combination of Ranbaxy and SunPharma and Abbott’s acquisition of Primal Healthcare. The Indian pharma industry must be restructured during M&A depending on business-related debates and business objectives. It is also recognised on a global level. As a result, a wide spectrum of enterprises are seeking for scheduled acquisitions both locally and worldwide. The sheer number of organisations that have acquired many branches of other companies has proven that Indian pharmaceutical research is poised to be a big role in this situation.
    Banking sector
    A vast number of foreign and domestic banks are merging and acquiring one other all around the world. As a result, mergers and acquisitions are now routine in almost every country on the planet. Following M&A, the banking division’s principal purpose is to reap the benefits of economies of scale. In India’s banking sector, mergers and acquisitions have become a popular practise. In the banking industry, the major objective for M&A is to obtain payback of monetary scales. M&A is regarded as a fairly faster and effective method of entering new markets and incorporating technology advancements.
    A company’s policy should aim to enhance and retain its competitive edge. Banks can accomplish considerable growth in their companies while also reducing their charge to a reasonable level with the help of M&A in the banking sector. Another significant benefit of such mergers and acquisitions is that they diminish competition in the banking business by removing rivals.
    Sector of Telecommunications
    The telecom industry is one of the world’s most profitable and quickly developing industries, and the volume of transactions in this sector has been continuously rising. It is widely acknowledged as an important component of the global utilities and service industries. Mobile phones, landlines, and internet and network connectivity are among the communication media used by the telecommunications sector.
    India is the world’s second-largest telecommunications industry, with more than 1.20 billion users, and it has grown rapidly in the last 15 years. The Indian mobile industry is growing and will make a big contribution to the country’s GDP. Because the parties engaged are in the same industry, namely the telecoms company, telecom mergers and acquisitions are characterised as horizontal mergers. The main reason for these mergers is to acquire a comparative benefit in the telecommunications business. M&A activity in the telecoms sector has increased in recent years, according to economists, and this pattern is likely to persist.
    COVID-19 AND M&AS
    In the time of the pandemic, when the world was in trouble corporate mergers saw drastic development. In the pharma industry, we saw different firms sharing assets to develop the vaccine. The same intent was however missing from merger and acquisition plans. Overall M&A saw a drop when covid was at the peak. According to a report published by Bain and company, the deal value and volume for the financial year 2020-21 dropped 15 percent and 11 percent respectively. The highest decline was noticed in the US region meanwhile the least in the Asia Pacific region. The US saw a decline of 4% and the Asia Pacific recorded a dropped off 4%. If we talk about India specifically then as per reports India faced a 37% drop and 22% drop in the aggregate M&A and PE deal volumes respectively. In 2020’s first half, India amounted to 12% of all the M&As activities that happened in the Asia Pacific region. This drop is supposed to vanish in the year 2021. Recent changes made by the government in 2020 have improved the regulations regarding M&A. This will help in speeding up the process of M&A. The amendment of the Companies act in 2020 was of most importance with regards to the dissent in the minority shareholders. It is speculated that the end of the moratorium period could launch a spree of M&As. A lot of companies which have already suffered badly on the hands of covid would be looking for a chance to improve their condition.
    But the covid 19 has also given us the chance of providing a push to the M&A activities. India has reduced the corporate tax with an effective tax rate of 17.16% along with other benefits. India has also started giving an opportunity of clearing backlogs of tax disputes. This will help in smoothening the process of winding up of companies. A lot of the present-day companies which were stand-alone have had troubling times in the recent past. This has pushed them to the brink of insolvency. To save their company from shutting down, many will opt for the consolidation of business with others to save themselves. Also, when businesses are in dire need of money, it is a good time for investors. India has seen recently a shift towards investing. Indians are slowly moving from saving in banks to saving by investing in businesses. Investors around the world must not let go of this opportunity easily. One must remember the advice of Winston Churchill that one must “never waste a good crisis”.
    ECONOMIC PERSPECTIVE
    A merger of two massive organisations has one of two outcomes: either completely eliminating the competition or marginalising it to the point where it goes out of business or falls into a bottom rung of the competition due to the combined power of the two companies’ technology, customer base, financial resources, and so on. This monopolisation of a market has a slew of side effects. Once a monopoly-like scenario is created, price markups, market control, total control over production and supplies, and a lack of replacements are all part of the market. Although the firm and its stockholders profit, the customer is usually the one who bears the brunt of such arrangements. Because the entire client base is dependent on it, the newly formed business has the capacity to raise prices, manage supply, and demand. A monopoly created by a merger, on the other hand, might have a favourable impact on the expenses and finances of the companies. Giant corporations can result in effective manufacturing at fair pricing if they are managed by the state through supporting and restrictive regulations. This is a crucial boosting element for a country’s economy.
    RECENT EXAMPLES:
    One of the biggest mergers that India saw in recent years was that of Vodafone and Idea. Both the companies were going through a rough patch after the introduction of Reliance Jio. The result of this deal was valued at nearly $23 billion. Vodafone formed a new identity Vodaphone and now holds a 45.1% stake in the newly formed Vi company. 26% stake is in the hands of Aditya Birla Group, meanwhile, the rest of the shares are in the hands of Idea.
    Another famous acquisition was the acquisition of Flipkart by Walmart. It was initially a bidding war between Walmart and Amazon, which was won by Walmart. It now acquires a whooping 77% stake in Flipkart. This deal was very important for Flipkart as they were lagging behind Amazon in India. The new influx of money in the company has given way for the expansion of Flipkart’s logistics and supply chain. Earlier, Flipkart itself had gone on a spree of acquisitions by taking over Myntra, Jabong, PhonePe, and eBay.
    Byju’s is another Indian giant that has gone on an acquisition spree. They have spent more than a billion dollars in the last few years in various acquisitions. They first took over an education platform Great Learning for $600 million and then in July 500 million dollars to take over American company Epic. One of the most significant acquisitions of Byju was the taking over of the Aakash institute for $1 billion. Byju’s is not stopping here and is soon going to finish another deal for acquiring its competitor Toppr for $150 million.
    Another major acquisition was made by Reliance Retail. They acquired Future Retail in 2020. However, this deal is sub judice and it does not appear that the case is going to end soon. Another acquisition in the food industry was made by Patanjali by acquiring Ruchi Soya.
    CONCLUSION
    In the current commercial world, mergers and acquisitions have a special place. In India, the process has been made in such a way that these commerce activities can take place easily. And in the times of the covid, we have seen the desperation in the eyes of the businesses to move fast. India’s GDP is doing great for the past 5 years and has shown a great fall. But the recent changes in the laws and the policies have acted as a positive reinforcement for the business. Reduction of corporate taxes will help in attracting investors from all over the place. Mergers and acquisitions act as a smart move in improving the overall position of the firms. Firms can acquire higher market share, or they can easily remove the competition from the market. We have also seen in the past that how acquiring a new business helps the existing giants. Acquisition of small software developing companies by Microsoft or the spree of acquisitions made by Byju’s can helps one understand the importance of mergers and acquisitions. In the after covid India, mergers and acquisitions are going to play an important part.

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