MERGER POLICY IN INDIA: A RECONSIDERATION

Abstract

Merger Policy In India: A Reconsideration

According to the Oxford Dictionary, the expression merger means ‘Combining of two commercial companies into one’. A merger is just one type of acquisition. One company can acquire another company in several other ways including purchasing some or all of the company’s assets or buying up its outstanding share of stock.

Merger is amalgamation of two or more business enterprises for better and efficient functioning. Entities merge for different business and commercial reasons; few of those could be, to achieve economies of scale and scope, to expand business capacity, to be operative in different markets, to produce at lowest marginal cost and various others. Though mergers being normal and regular practice in the market; there could be many reasons why Governments, market players, shareholders and individuals might object to mergers. Governments may object mergers because it may be against the industrial or foreign policy, or a transaction which could lead to production of illegal quality or quantity of a particular product. Market players might object to a merger transaction, at it could lead to monopoly or could create barriers to entry and similar anti-competitive practices. Shareholders might oppose to mergers which result in reduction of share value or share effectiveness or transaction.

Merger is a restructuring tool available to Indian conglomerates aiming to expand and diversify their businesses for various reasons whether it is to gain competitive advantage, reduce costs or unlock values. In commercial parlance, merger essentially means an arrangement whereby one or more existing companies merge their identity into another existing company or form a distinct new entity. Company law in India is undergoing a complete overhaul and a new law was finally passed in 2013. However, the provisions relating to mergers covered in Sections 230 to 240 were notified in the year of 2016.

A merger is a combination of two companies where one corporation is completely absorbed by another corporation. The less important company loses its identity and becomes part of the more important corporation, which retains its identity. It may involve absorption or consolidation.

Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and the stock of one company stand transferred to Transferee Company in consideration of payment in the form of:

(i) Equity shares in the transferee company,

(ii) Debentures in the transferee company,

(iii) Cash, or

(iv) A mix of the above mode

The 2013 Act significantly alters the manner in which mergers may be effected, with an objective of making them less time-consuming and providing more flexibility. In this context, the 2013 Act has introduced two concepts novel to Indian law, i.e., “fast track mergers” and “cross border mergers”. A fast track procedure for mergers involving certain types of companies is now possible. For instance, this would apply in a merger between a holding company and its wholly-owned subsidiary, subject to certain conditions such as approval of 90 percent of the shareholders of the company and no objections being raised by the Registrar of Companies and other authorities.

The 1956 Act permitted the mergers of foreign companies into Indian companies, but did not allow the converse. The 2013 Act now permits “cross border mergers”, i.e., both mergers of foreign companies into Indian companies and mergers of Indian companies into foreign companies; however, the practical utility will depend on yet-to-be-enacted Reserve Bank of India (“RBI”) regulations on this topic and necessary changes to India’s foreign direct investment policy. Currently, such a merger would require prior RBI approval. In the case of a company listed on an Indian stock exchange that seeks to merge with an unlisted Indian company, the transferee company can elect to remain unlisted, providing the shareholders of the listed company a consequent right to receive the value of their shares and then elect to stay out of the transferee company.