The terms “mergers” and “acquisitions” (M&A) relate to business transactions in which two or more companies join their resources, ownership, and operations to form a new organisation (merger) or where one company buys another, taking over its resources and operations (acquisition). Businesses pursue these strategic actions to create synergies, broaden their market reach, increase their competitiveness, and spur growth through combination or absorption.
Example of Merger:
- Vodafone and Idea in the year, 2017
- Bank of Baroda and Vijaya Bank, Dena Bank in the year, 2019
Example of Acquisitions:
- Flipkart acquiring Myntra in the year, 2014
- Tata Motors acquiring Jaguar in the year, 2008
Law Regulating (M&A) in India:
- The Companies Act, 2013
In India, Companies Act plays a vital role in governing M&A. The M&A provisions for corporations, shareholders, and bondholders are governed by Sections 230 to 240. The Companies Act of 2013 offers a more modernised framework than the Act from 1956. M&A is effectively governed by these clauses and the CAA Rules. Sections 231 and 232 give the NCLT authority to manage insolvency issues. Under Section 233 and Rule 25 of the CAA, fast-track mergers only need the approval of directors, shareholders, and creditors, which eases the burden and boosts productivity. The “squeezing out” of minority stockholders is authorised by Section 236. Under Section 237, NCLAT arbitrates business law disputes. These policies support an environment that is fair and competitive for mergers and acquisitions while protecting the interests of stakeholders and advancing India’s economy.
- Competition Act, 2002
To replace the MRTP Act , the Competition Act was passed in 2002 with the objectives of policing business practises in India, preventing monopolies, and promoting healthy competition. Its main goals are to protect consumer interests, stop unethical business practises, and stop abuse of market dominance. To monitor ethical business practises and look into anti-competitive behaviour, the Competition Commission of India (CCI) was founded. The Act also keeps track of corporate mergers, consolidations, and purchases made by businesses that fulfil certain asset and turnover thresholds. While Sections 5 and 6 deal with exempted corporations and void combinations, Sections 3 and 4 address anti-competitive practises and dominant positions.
- The Indian Income Tax Act, 1961
According to Section 2(1B) of the Income Tax Act, “amalgamation” is defined as the combination of two or more existing enterprises to form a new corporation. The combining company takes over the merging corporation’s assets and obligations. The Act defines capital gain as taxable in the year of acquisition. Certain merger transactions, such as foreign corporate mergers that result in Indian corporations, are, nevertheless, excluded from capital gains tax under Section 47. Inherited, bequeathed, or willed property is tax-free until it is sold for a profit.
- Foreign Exchange Management Act, 1999 (FEMA)
In India, the Foreign Exchange Management Act (FEMA) and Companies Act both apply to cross-border mergers. The 2017 addition of Section 234 handles international mergers. According to Rule 25 of the CAA Rules, 2016, the RBI must give its consent. International and FEMA regulations are followed by both inbound and outbound mergers.
- The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
SEBI Regulations are critical for listed companies during mergers and acquisitions, amalgamations, and arrangements. Acquirers that own 25% or more of the company must make open offers to public shareholders. To avoid ambiguous readings, the term of ‘control’ and its connotations must be clarified.
- The Insolvency and Bankruptcy Code, 2016 (IBC)
The Sick Industrial Companies Act, 1985 (SICA), which intended to identify and restore financially unstable enterprises through mergers, acquisitions, or wound up, if necessary, was replaced by the Insolvency and Bankruptcy Code, 2016 (IBC). The NCLT administers the IBC, which expedited the process by eliminating SICA in 2016. An application must be submitted with NCLT to begin the corporate insolvency resolution process. Several changes have been made, the most recent being in 2020 and 2021. IBC organises asset auctions for businesses in financial trouble.
In India, there are a number of legal issues that can hinder the smooth execution of mergers and acquisitions (M&A) transactions are as follows:
- Regulatory Approvals: Several regulatory organisations, including the Competition Commission of India (CCI), the Reserve Bank of India (RBI), and the Securities and Exchange Board of India (SEBI), frequently need to grant approval to M&A transactions. Deal closings may take longer if these approvals are delayed.
- Due Diligence: To detect any legal challenges, financial responsibilities, and compliance difficulties related to the target organisation, comprehensive due diligence is essential. Poor due diligence might result in unanticipated legal problems and financial obligations after the acquisition.
- Taxes and stamp charges, can have a substantial impact on the financial structure of a contract and raise overall transaction costs due to India’s complicated tax laws and stamp duty consequences. To ensure tax compliance and efficiency, effective tax planning becomes essential.
- Employment Laws: Mergers and acquisitions (M&A) transactions can have major impacts on the workforce, including employee rights, transfers, and potential layoffs. To prevent legal issues, labour rules must be followed and employee concerns must be addressed.
- Contractual Obligations: Merger and acquisition deals (M&A) require numerous contracts and agreements. To prevent legal issues, it is essential to ensure contractual commitments are met and to deal with any violations.
- Rights to intellectual property (IPR): It can be challenging to transfer and preserve intellectual property during M&A deals properly. To protect the value of acquired assets, concerns regarding trademarks, patents, copyrights, etc., must be carefully addressed.
- Antitrust and competition law compliance is essential to evade regulatory inspection and subsequent penalties. Every move that might result in a monopoly or anti-competitive behaviour needs to be carefully examined.
- Corporate Governance: In M&A deals, adherence to corporate governance norms, such as transparency, disclosure, and protecting the rights of minority shareholders, is crucial.
- Cross-border Business: Cross-border transactions are more complicated since they include navigating several legal systems, cultural differences, and adherence to international regulations.
- Coordination after the merger: After the acquisition, a successful merging of the two companies is essential for realising anticipated synergies. Aligning corporate practises, policies, and legal frameworks may present legal issues.
To speed up approvals and reduce delays, the M&A process in India must be simplified. This calls for proactive involvement with regulatory organisations. To ensure a smooth acquisition, extensive due diligence should be carried out to detect legal risks and financial liabilities. Optimising financial architecture and lowering transaction costs require effective tax planning. A smooth labour transition is guaranteed by abiding by employment rules and attending to employee concerns. To avoid legal issues and breaches, strict adherence to contractual commitments is essential. It is essential to put in place reliable methods for securing and transferring intellectual property assets. Antitrust issues are assessed, and approval is requested to assure compliance and avoid fines. The rights of minority shareholders must be protected, and corporate governance practises must be open and transparent. Successful cross-border transactions are guaranteed by skilfully navigating various legal frameworks and cultural differences. Last but not least, a well-organized integration plan that harmonises company procedures, laws, and regulatory frameworks aids in realising predicted synergies following a merger.
To summarise, optimising the M&A process in India necessitates proactive involvement with regulatory organisations in order to expedite approvals and reduce delays. Thorough due diligence is required for a successful acquisition, and good tax preparation optimises financial structuring and lowers transaction costs. Compliance with employment legislation facilitates a smooth labour movement, while contractual duties prevent legal issues. It is critical to protect intellectual property assets and evaluate antitrust risks. Transparent corporate governance and minority shareholder interests must be prioritised. A well-structured integration plan for post-merger alignment of business practises completes the solution, ensuring a fair and competitive M&A environment in India while furthering economic development.
3rd Year, BBA LLB (HONS.)
Shri Ramswaroop Memorial University