Mergers and acquisitions in recent times due to globalization have gained
significant importance. It plays a major role in the activities of the
organization. Mergers and acquisitions are considered as one of the best
strategies to confront the global competitive market. With globalization, unless
the company is large in size and capital, it will be very difficult to compete
with nations where the cost of production is lower due to economies of scale.
In a free competitive world, it is necessary to position oneself in such a
manner to compete with the best. For this the faster route is necessary. Mergers
and acquisitions that are successful are highly proven to be beneficial for the
companies as well as the economy. Especially in developing countries like India
mergers and acquisitions play a major role in the growth of India's economy.
Such a legal framework for corporate restriction must be easy, facilitative in
nature, non-restrictive, and free from regulatory hurdles.
One such hurdle in the way of completing mergers and acquisitions is the long
drawn-out court procedure required for the approval of the scheme of
arrangement. In India, the process of merger and acquisition is court driven,
lengthy, and hence problematic. In India, the Companies Act, 2013, and the
Competition Act, 2002, govern mergers and acquisitions involving Indian
companies while the Competition Act, 2002 ensures fair competition and prevents
monopolistic practices in the market.
Objectives Behind Corporate Mergers And Acquisitions
- To achieve economies of scale
- To compete globally in a free competitive market
- To use the liquidity available with the company for achieving growth through diversification.
- For overall improvement of the industry
- Tax purpose
- Diversification, Increase in financial capacity act.
What Is Merger And Acquisition?
When two or more individual businesses consolidate to form a new enterprise, it
is known as a merger. The merged entity usually takes on a new name, ownership,
and management that is composed of employees from both companies.
An acquisition entails one organization acquiring the business of another. The
acquirer must purchase at least 51% of the target company's stock in order to
gain absolute control over it. It usually occurs between two companies that are
not equal in stature: a financially stronger entity generally acquires a
smaller, relatively weaker one.
Key Differences Between Mergers And Acquisition
Merger And Its Types:
||Two or more individual companies join to form a
new business entity
||One company completely takes over the operations
||New shares are issued
||No new shares are issued
||The merged entity works under another or new
||The acquired entity operates under name of parent
||There is a harmony and dilution of powers
||The acquiring company has a power and authority.
|Minimum no od companies involved
||To increase operational efficiency
||For faster growth
||Flipkart and E-bay India (2017)
||Zomato Uber eats (2020)
Horizontal mergers occur when the two merging companies produce similar products
in the same industry. Example: Merger of Vodafone India and Idea cellular
limited, merger of two telecommunication companies.
Vertical mergers take place when two companies working at different stages in
the production of the same good, combine. Example: Zee Entertainment enterprises
ltd. And Dish Tv India ltd. The merger between a broadcast and distribution
A congeneric merger takes place when two merging firms are in the same general
industry, but have no mutual customer or supplier relationship. Example: Thomas
Cook India limited and Sterling Holiday resorts (India) Limited merger between
these two companies which were involved in the tourism business, but their
customer base is unrelated.
Legal Framework On Mergers And Acquisition In India Under The Companies Act, 2013:
The provisions governing mergers and acquisitions under the Companies Act, 2013,
are as follows:
- Section 230-232: These sections deal with the scheme of compromise, arrangement, and amalgamation. They provide a framework for mergers and acquisitions, including demergers, amalgamations, and arrangements between companies.
- Section 235: This section empowers the National Company Law Tribunal (NCLT) to order an investigation into the affairs of a company in the event of a merger or amalgamation.
- Section 236: This section provides for the submission of a report by the company's auditor to the NCLT regarding the proposed merger or amalgamation.
- Section 237: This section enables the Central Government to order an investigation into the affairs of the company before granting approval for the merger or amalgamation.
- Section 240-242: These sections deal with the powers of the NCLT to order the convening of meetings of shareholders and creditors, the notice of the meeting, and the procedure for the approval of the merger or amalgamation.
Legal Framework On Mergers And Acquisition In India Under Competition Act, 2002:
The relevant sections of the Competition Act 2002 that deal with mergers are
Sections 5 and 6 are as follows:
Section 5 of the Competition Act deals with combinations, which includes mergers
and acquisitions, and lays down the threshold limits for the parties involved in
the combination. It requires parties to notify the Competition Commission of
India (CCI) when the assets or turnover of the combination exceed the prescribed
Section 6 of the Competition Act provides for the scrutiny of combinations by
the CCI to determine whether they are likely to have an appreciable adverse
effect on competition in the relevant market in India. The CCI has the power to
approve, reject or approve the combination with modifications. Together, these
sections regulate the process of mergers and acquisitions in India and ensure
that they do not harm competition in the relevant market.
Conflict Between Companies Act 2013 And Competition Act 2002 With Respect To Mergers And Acquisition:
The Companies Act 2013 and the Competition Act 2002 both play an important role
in regulating mergers and acquisitions in India. However, there have been
instances of conflict between the two acts, leading to legal uncertainty and
delay in the approval process.
Some of the key areas of conflict include:
Thresholds for merger control:
The Companies Act 2013 and the Competition Act 2002 have different thresholds
for determining whether a merger or acquisition is subject to competition law
review. Under the Competition Act, a combination (which includes mergers and
acquisitions) is notifiable if it meets certain asset and turnover thresholds.
However, the Companies Act has a different set of thresholds for mergers and
acquisitions, which are based on the size of the companies involved. This has
led to confusion and uncertainty as to which transactions are subject to
competition law review.
Timeframe for approval:
The Competition Act provides for a mandatory waiting period of 210 days for the
approval of combinations, which can be extended in certain circumstances.
However, the Companies Act does not have a specific timeframe for the approval
of mergers and acquisitions. This has led to delays in the approval process, as
companies have to wait for approvals from both the Competition Commission of
India (CCI) and the Registrar of Companies.
There have been instances where the CCI and the National Company Law Tribunal (NCLT)
have differed in their interpretation of the law with respect to mergers and
acquisitions. This has led to jurisdictional issues and confusion, as companies
are unsure which authority to approach for approval.
Role of minority shareholders:
The Companies Act 2013 provides for the protection of minority shareholders in
mergers and acquisitions, while the Competition Act does not explicitly address
this issue. This has led to conflicts between the two acts, as the protection of
minority shareholders may require changes to the terms of the merger or
acquisition, which may in turn affect competition in the market.
One example of conflict between the two acts is the Tata-Docomo case, where the
NCLT and the CCI had differing opinions on the legality of the termination of a
joint venture agreement between Tata Teleservices and NTT Docomo. Another
example is the proposed merger between Uber and Ola, which was challenged by the
Competition Commission on the grounds that it would create a monopoly in the
To address these conflicts there have been calls for greater coordination
between the CCI and the NCLT, as well as the need for clear guidelines on the
role of each authority in the approval process. There is also a need to
harmonize the threshold for merger control under both Acts, to avoid confusion
and legal uncertainty.
It is important to note that the objective behind both Acts is to ensure fair
competition and protect the interest of the stakeholders. hence compliance with
both Acts is necessary to avoid attracting unnecessary legal uncertainties. It
is important that government take the necessary steps to address the conflicts
between Companies Act 2013 and Competition Act, 2002 to ensure a smooth and
efficient approval process for mergers and acquisitions.