MERGERS AND ACQUISITIONS: AN OVERVIEW OF THE LEGAL FRAMEWORK UNDER COMPANIES ACT 1956
Authored By – Adnan Ahmad
INTRODUCTION
Mergers and acquisitions can be described as the integration of companies. While differentiating between these two, mergers can be defined as a situation where existing companies combine to form a new one, wherein acquisitions can be said as situations where a company takes over the other.
Mergers and acquisitions popularly known as M & A are defined as core concepts of the corporate financial world.
The general idea behind M & A is that two existing companies can generate more value by sticking together rather than being separate.
Companies always keep on searching for new opportunities and benefits which can be produced through the process of M & A, with wealth maximization being their primary objective.
For a long period, the legal framework of M & A was arranged by the government and financial institutions which regulated the initial period of M & A transactions.
However since the beginning of the last decade of the twentieth-century Indian corporate industries have been facing stiff competition from both domestic and international markets with such increasing competition it becomes a necessity for corporations to be competitive for survival, due to such complexities majority of the Indian corporations have emphasized M & A transaction to rise in the market. The current purpose of every corporation is to procure global consumer interferences and to maximize benefits from such influences association with existing and new corporations becomes a necessity both in the domestic and international spheres, M & A has proven to be a great tool in expanding portfolios, accessing new markets, access to research and development, and acquiring tools which can enable a firm to operate globally.
WHY COMPANIES ARE OPTING FOR MERGERS AND ACQUISITIONS?
Mergers and acquisitions are considered effective tools for expanding a corporation. Many companies in all sectors, like pharmaceutical, telecommunication, automobile, food, and beverages, have seen tremendous growth due to their M & strategy.
M &A strategies have diversely increased in India during these past few years. According to Refinitiv’s Investment Banking review, India’s incoming M & activity has already risen 17.9% from a year ago and has marked 11.6 billion which is said to be the highest since the first quarter of 2017. So why do mergers and acquisitions happen?
There may be several reasons for it, but the most common factor that aligns some existing companies is the value centred around it. Companies usually look for merging with another company because of the powers and weaknesses of each other.
Another prominent reason why companies opt for mergers and acquisitions is diversification.
When a company decides to diversify its business interests, the need for M & A strategy is inevitable, for example, a company that aims to diversify its operations may purchase a company dealing with a different line of products to improve its overall wealth and profit margins.
A company can also simply acquire or merge with its competitor to increase its market share and grow.
WHAT DOES THE INDIAN LAW SAY?
In India, the process related to M & A is governed by the companies act,1956 mentioned under sections 391 to 394.
However mergers and acquisitions can be initiated through mutual agreements among two firms, still, the procedure remains vested with the approval of the high court, the consent of the high court is essential for the commencement of such an activity, moreover, the such process must also be sanctioned by at least 3/4th members of the shareholders or creditors and they also need to be present before the General Board Meeting of the respective firm.
The general rule for application of the company’s acts usually depends upon the criteria of whether the corporation is public or private and listed on a stock or not, further, the law also permits a timeframe of 210 days for corporations involved in a process of mergers or acquisitions the allotted timeframe is clearly different from the minimum obligatory stay period for claimants. According to the law, the time gap can be either 210 days starting from the filing of the notice or on the acceptance of the commissioner’s orders.
The Indian M & provision also permit the amalgamation of any Indian firm with its international competitors providing access to cross-border transactions.
The Foreign Exchange Management by Act of 1999 talks about cross-border mergers and acquisitions.
The most prominent reason for introducing FEMA in India was to simplify external trade.
According to CAA Rules, rule no 25 cross-border transactions must be performed through the RBI.
The legislation regarding cross-border mergers and acquisitions was amended in 2017 to include section 234.
STEPS INVOLVED IN MERGERS AND ACQUISITIONS
While considering a merger and acquisition in India, the first and most essential step is to go through the MOA of the company in order to assess whether merger authority is permitted or not,
the second most important step is that there must be a stock exchange approval of all the essential documents within a certain time period for the proposed merger and acquisition such as notices, resolutions, and orders.
After the stock exchange processing of necessary documents, an affirmation is required from both the corporations regarding the merger proposal and administrative resolution authorizing key members to further pursue the subject.
Initially, mergers and acquisitions can proceed through mutual agreements but still, the process requires the assent of the high court,
an application is required to be filed before the same after the high court’s authorization notice is sent to all the investors and creditors along with a 21 days timeframe for the notification requirements.
Furthermore, a copy of the state’s high court request must be accounted with the registrar of companies according to the time period set by the high court.
The next step involves the transfer of assets and liabilities to the newly amalgamated firm.
In the last step, after the amalgamated firm is registered as a separate legal entity and gets listed on the stock exchange, it can issue shares and debentures on its behalf.
CONCLUSION
In general terms, the idea behind mergers and acquisitions is that two corporations are more of value combined rather than being separate M & A strategies lead to increased profitability other than that it can also increase shareholders’ value as it is greater with two corporations combined rather than being separate.
M & A continues to grow as an essential tool in boosting the company’s growth. The reason behind this is that when two organizations merge with each other, the economics of scale can be achieved and can also widen the reach of their operations with increased profit margins.
Currently, Indian markets have witnessed major spikes in mergers which may be due to takeovers by large business houses or consolidation of corporations by international counterparts operating in India, leading to increased competition in imports and acquisition activities.
Therefore, it is a golden hour for corporations to observe the Indian markets and seize the opportunity.
Also, read – https://blog.ipleaders.in/laws-regulating-mergers-and-acquisitions-in-india/
