MERGERS AND ACQUISITIONS- CROSS BORDER MERGERS AND AMENDMENTS IN OUR LAWS
Author: Shivangi Sharma
Co-Author: Riya Jain
With the changing trends and the onset of technology and changing customer preferences, companies face various problems every day. In these times of tough competition, companies have to keep innovating and changing to attract more customers and survive. Every business has the ultimate motive of earning profits and new ways to earn profits have to be devised. Corporate re-structuring serves as one of how companies can continue to survive and grow and also in cases share expertise. Mergers and Acquisitions serve as a bridge that helps companies collaborate, share resources and also function more effective and efficient way. Mergers and acquisitions have served as a major corporate restructuring tool over the past couple of years. Though these are undertaken for corporate benefit, they are bound certain rules and regulations and laws that govern them. The companies before entering into a merger or an acquisition have to ensure that one of these laws are violated. This form of corporate restructuring brings about stability and efficiency and creates a better market for companies. Mergers and acquisitions are not just nationally undertaken but these days these are international or cross border mergers also taking place all over the globe. This helps various domestic companies to reach an international platform as well. These have helped the economies to grow stronger in a world of globalization and create an international market. They also suffer from drawbacks like lack of international regulatory framework. Through this paper we aim to discuss various types of mergers and acquisitions, the regulation governing them and also address the various drawbacks that mergers and acquisitions face legally and what are the solutions to all these issues.
Corporate Restructuring is a process of arranging business activities as a whole to achieve predetermined objectives at a corporate level. It aims at exploiting the strategic assets accumulated by businesses to achieve competitive advantages. Restructuring is meant to create synergy and it takes the form of revenue generation and cost-effectiveness. The Ministry of Corporate Affairs under section 230, 231 to 240 except section 234 which provides a merger with a foreign company relates to compromises, arrangements, and amalgamations. The Companies Act defines a merger as a combination of two or more entities or companies into one. It is a legal consolidation of two entities that can be merged either by way of amalgamation, absorption or by the formation of a new company.
Cross border mergers and acquisitions have been ascending rapidly in recent years. A cross border mergers refer to any combination or arrangement between an Indian company and a foreign company.
Amalgamation or takeover refers to a process in which one entity takes ownership of another’s entity, stock, equity interest or assets. It is the purchase by one company of controlling interest in the share capital of another’s existing company. The takeover bid is a technique that offers to the shareholders of a company under an agreement to buy their shares at the offered price within the stipulated time which is adopted by a company for taking control of the management and affairs of another company. Bids are offered through public announcement issued to the stock exchange.
Cross border takeovers have become prominent in recent years which created competitiveness among the domestic firm’s forces business to go global.
REGULATORS GOVERNING MERGER AND ACQUISITION
1. Income Tax Act, 1961
The Income Tax Act, 1961 contemplates and recognizes the following types of merger and acquisition activities such as Amalgamation, Demerger, slump sale or transfer of shares. Tax Laws affect the merger of firms from for tax savings/liabilities. However, the benefits under this act are available only if the following condition mentioned in Section 2 (1B) of the Act are fulfilled:
a) All the amalgamating companies should be companies within the meaning of section 2 (17) of the Income Tax Act. 1961.
b) All the properties of the amalgamating company (i.e.. the target firm) should be transferred to the amalgamated company (i.e., the acquiring firm).
c) All the liabilities of the amalgamating company should become the liabilities of the amalgamated company, and
d) The shareholders of not less than 90% of the share of the amalgamating company should become the shareholders of amalgamated company.
Under Section 72A(1) of the Income Tax Act. 1961 deals with the mergers of the sick companies with healthy companies and to the fake advantage of the carry forward losses of the amalgamating company. But the benefits under this section concerning an unabsorbed depreciation and carry forward losses are available.
2. Securities and Exchange Board of India
Sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 provides that Securities and Exchange Board of India (SEBI) may, at its discretion or on the recommendation of a recognized Stock Exchange, waive or relax the strict enforcement of any or all of the requirements concerning listing prescribed by these rules. The listed entity shall ensure that any scheme of arrangement /amalgamation /merger /reconstruction/reduction of capital etc. to be presented to any Court or Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchange.
3. Foreign Exchange Management Act
Section 234 of the Companies Act, 2013 deals with the merger or amalgamation of companies with a foreign company. The provision under this chapter deals with the schemes of mergers and amalgamations between companies registered under this Act and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.
4. Insurance Development Regulatory Authority
Under section 30 of the Insurance Act, the Authority shall cause, a notice of the application to be given to the holders of any kind of policy of insurer concerned along with the statement of the nature and terms of the amalgamation or transfer, as the case may be, to be published in such manner and for such period as it may direct, and, after hearing the directors and considering the objections of the policyholders and any other persons whom it considers entitled to be heard, may approve the arrangement, and shall make such consequential orders as are necessary to give effect to the arrangement.
COMPETITION LAW AND MERGERS
Competition Law seeks to maintain and control market stability while promoting competition at the same time. The competition Act came into existence in India in 2002 by replacing the Monopoly’s restrictive Trade policy Act. The Competition Act aims to ensure that Competition is promoted and to stop the abuse of dominant powers that may be attained by a firm. The Act was introduced with the motive of introducing a more modern Act that would be more relevant in the changing market environment. The introduction of the Act led to the establishment of the Competition Commission of India which is the sole regulator for matters regarding Competition in India.
Over the years due to various changes in the market and sue to the market being dynamic, there has been a need for regulation to promote free and fair competition whilst protecting the interests of the consumers as well. Competition Law can be said to be as old as the Roman Law. Over time, many nations have developed their competition laws. The most influential ones being the United States Anti Trust Laws and the European Union Competition Law. These 2 laws have also played a crucial role in helping develop the Competition Laws in India.
The Indian Competition Act deals with provisions regarding Anti Competitive Agreement, abuse of dominance, combinations among others. Thee provisions are a few of the most important provisions of the Act. India has borrowed a few provisions from the other countries’ Anti Trust Laws.
Modern Competition Law has evolved over the years with new provisions being added and the regulator becoming more aware and active of the practices by various companies. Various nations over the world have different competition laws for their respective nations but there is no international regulatory body for the law. Competition plays a pivotal role in ensuring that competition if freely and fairly regulated and that the market does not get concentrated in the hands of a powerful few.
PURPOSE OF MERGERS AND ACQUISITIONS
Over time, it has become extremely important for a business to find new ways to survive and grow in the market. If they are not able to do so then they might have face to face the danger of becoming extinct. They will run out of business as the competitor will be better equipped and more efficient. Therefore came into existence Mergers and Acquisitions. The question that arises is why companies undertaking mergers and Acquisitions? What purpose does it serve?
Mergers and Acquisitions serve the following purposes-
1) COLLABORATION– The overall efficiency of the company becomes better and the company becomes stronger. The company can do better because they are also using the strengths of the other company and also profiting off of it. The company can achieve its goals in a shorter time frame and also achieved its targets.
2) GROWTH – It gives the company a chance to grow and become better without undergoing a lot of hardships. The company has to identify the right business to acquire or merge with and that would help in the growth of the company. The identification is a very crucial part that needs to be done with the utmost care and due diligence.
3) Increase in supply chain pricing power– By buying one of the distributors or suppliers or any intermediary, the company now possesses the capability of producing on its own which in turn helps to increase the supply chain pricing power. The company has now become more efficient and can produce on its own. Mergers and Acquisitions thus give the company the power to produce on its own especially if merged with a supplier.
4) Elimination of competition– It is also believed that mergers and acquisitions also help a firm to finish off its competition. If supposedly a smaller new firm is competing with an old established firm and the old firm buys out the new one, the old firm has finished its competition. Thus it is one of the most effective ways to finish off the competition.
CROSS BORDER MERGER
Any merger, combination or acquisition of two or more businesses incorporated between two or more companies. Under section 234 of Companies Act, 2013 has regulated the merger along with the guidelines of the Reserve Bank of India and Merger and Acquisition (Regulation) 2016. 
Cross Border Merger helps the companies for global expansion in compliance with the sound and legal framework. The merger and Amalgamation between the companies registered under the companies act, 2013 and the company which is incorporated with the jurisdiction of such country shall be guided by the schemes as it may be notified and with the consultation of the Reserve Bank of India and Central Government. Before the approval of the Reserve Bank of India, the terms and conditions of the schemes shall be presented before the shareholders, creditors and other members of the company and a resolution shall be passed by way of the majority. Under Rule 25A of the Companies (Compromises, Arrangement, and Amalgamation) Rules, 2016 deals with the procedure and attachment of relevant documents which are essential for corporate restructuring. Valuation of the company is conducted by the valuer who is a member of a registered professional body and such valuation is done by the internationally accepted principles and accounting standard. Both companies must be governed by their concerned jurisdiction. The foreign company is regulated either by the International organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to bilateral Memorandum of Understanding with SEBI.
Inbound Merger – When foreign companies get a merger with the Indian company resulting in an Indian Company being an establishment with a new structure in regulating the company. Transfer or issue of securities to a person resident outside India is required to comply with the provisions of Foreign Exchange Management Regulations. The Borrowings of transferor company would become the borrowings of the resultant company for which an External Commercial Borrowings, a tripartite agreement is formed between the Indian Buyer and Foreign bank where a foreign bank is funding the foreign currency loan.
Outbound Merger – Where an Indian Company gets merged with a foreign company resulting in a foreign company being formed. The securities are issued to a person resident of India and it has complied with the Overseas Direct Investment.
VODAFONE- IDEA MERGER
The Indian telecom market is extremely diverse and dynamic. It keeps changing from time to time. Several telecom companies were offering mobile services to the users in India, but lately, only a few key players have survived in the market. Earlier players like Aircel, Uninor, and MTNL Dolphin also existed. But now due to the changing trends, only a few are left. Recently a new company emerged by the name of Reliance JIO which gave many free and affordable benefits to the customers. To fight off the competitive challenges posed by Jio, Vodafone and Idea had to undertake a merger. This was done so that they could have a combined subscriber base and also surpass the number of subscribers Jio had.
The merger of Idea and Vodafone had to be approved by the Competition Commission of India before coming into existence. The CCI was well aware of the fact that they would have a major subscriber base but it did not enjoy dominance. They both decide to have joint-equity and to become promoters. Vodafone was an allotted equity stake of about 50.3% which has an approximate value of Rs. 27,600 crores.
The consolidation position and the post-consolidation position is as follows-
· Creating the largest telecommunications company in India
· Holding a combined Subscriber base of approximately 400 million
· Collective Revenue Market Share of 40.7% with Customer Market Share of 35.1%.
· Largest existing Mobile Voice population coverage of 1.1bn Indians
· Pan India Broadband presently covering 650mn Indians
· Rapidly developing Mobile Broadband network spreading over 189,000 sites
- HIGHEST BROADBAND CAPACITY
· 163 mobile broadband carriers – highest amongst all operators
· 3G – Across India 344 carriers with 2 carriers in 11 leadership telecommunication markets
· 4G -Pan India 1294 carriers & capability to offer up to 250 Mbps in 12 markets
· Massivefiber network of approximately 2,50,000kms
· Capacity to build a large broadband network on current spectrum
- EXTENSIVE DISTRIBUTION CHANNEL
· Leading pre-paid reach with over 2 million retailers
- PAYMENT BANKS:
· Idea Money, M-Pesa, and Aditya Birla Payment Bank:
Launch of Payments Bank services, with the power of domain expertise. The canvas of 400mn customers and global expertise of M-Pesa available for Digital
· Rationalisation of operating expenses including Network Infrastructure & IT Services. Channel & Service partner, brand efficiencies, etc.
· Estimated NPV of net synergies of approximately INR 670 billion (NPV of cost and CAPEX synergies post-integration costs and spectrum liberalization fees). Annual synergy run-rate of INR 140bn (60% operating expenditure) by the 4th year of full operation. 
The Competition Commission of India after due compliance and after seeing all the paperwork approved the merger of the two telecommunication giants. Their resources are combined along with their market share and subscriber base. The CCI has to take into consideration various factors while determining if a merger should be approved. If it believes that the merger or acquisition would lead to the Appreciable Adverse Effect on Competition, then it can block the merger or the acquisition as well.
Therefore before companies go ahead with mergers and acquisitions they need prior approval from the Competition Commission of India. Only then can they proceed to complete the merger or the acquisition.
CASE STUDY ON SIEMENS AND ALSTOM
One of the examples where a merger was blocked by a regulatory authority was that of Siemens and Alstom. Both of these companies are competitors in the field of Railway manufacturing. Both these companies had the intention to merge to compete internationally with the Chinese manufacturers. But this merger was blocked by the European Commission. The commission states that their merger would lead to an adverse effect on Competition in Europe and this would lead to a monopoly.
The Commission arrived at this decision after considering about 800000 documents and after receiving numerous complaints from various creditors, shareholders, suppliers and so on. After the commission asked them for a remedy, they were not able to satisfy the fears of the various stakeholders.
The Government of Germany and France have decided to push for an amendment that makes the European competition law more market-friendly and also understands the problems of modern concerns and give judgments accordingly.
WALMART AND FLIPKART CASE STUDY
The competition commission of India has approved the acquisition of Walmart and Flipkart stating that it is not likely to have an appreciable adverse effect on competition in India. Walmart has acquired 77% of the outstanding shares with the motive that ‘the investment will help to accelerate the customer-focused mission to transform commerce through technology and underscores Walmart’s commitment to sustained job creation and investment in India, one of the largest and fastest-growing economies in the world.’ The company expects that the deal will benefit the Indian market by providing quality and affordable goods. The competition commission of India considered various factors for evaluating the competitiveness of the company after getting acquired. Such factors are market shares, sustainability, entry and exit barriers, etc. The main agenda of the authority is to bring the best outcome for the consumers and producers. Under section 6 of the competition commission of India, entities or enterprise entered into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such combination shall be void”.
According to the relevant market, the growth of e-commerce has resulted in the emergence of multisided markets and with the presence of substitute platforms, the market share and effect of the competition were assessed. Both the entities are primarily engaged in trading includes offline and online markets in which Flipkart caters online markets and Walmart offers products offline. Competition Commission of India observed that both online and offline markets are two alternate sources of distribution of the same products but have a similar relevant market to cater to.
Assessment is made according to the organized sector offline wholesale products and the combined product of the market share of the offline and online market. The opportunity was assessed for the backdoor entry into the inventory of e-commerce and multi-brand retail trading. As per the scheme, Walmart and Flipkart will co-ordinate with their operations and Walmart will help Flipkart to compete offline as well as in the online market.
While analyzing the market share of the e-commerce sector, Flipkart would cater to approximately 20% of the total market. Flipkart was dealing in different categories of products such as fashion clothing, household, electronics, appliances and many more which provided an opportunity for Walmart to create a scheme for providing diversified products portfolio, particularly in food products which were absent and will be able to compete with other Amazon.
Flipkart has acquired 23 companies due to which it has an increasingly active consumer base and has a substantial product profile, digital platform as well as product delivery so, it would be able to compete with the strongest competitor. The commission has observed that there are a small number of sellers in Flipkart’s online marketplace which has contributed to substantial sales. It is a difficult task for the existing players competing with the small players, the nature of discounts provided by the banks and other companies and so on. The essential element for the company is to create friendly web-design, easy mode of payments, strong tie-ups with the producers and efficient delivery infrastructure.
The Walmart-Flipkart deal has encountered many issues and the Competition Act is not dealing with foreign acquisitions. There are no absolute and appropriate provisions under the Foreign Direct Investment Policy. The deal has domestically developed capabilities of Indian companies being transferred into the foreign hands. However, there is an increase in the domestic capabilities to compete with the global market.
1) FDI norms would also need to address cross-border transactions from the perspective of the issue of shares, depository receipts, sectoral guidelines, etc. A cross-border merger may have multiple implications, namely transfer of assets/loans, acquisition of new property, etc., which are not currently dealt with.
The law needs to evolve to facilitate seamless transactions. For instance, on
the merger of a foreign company into an Indian company, a loan/borrowing appearing in the books of the foreign company will get transferred to the Indian company.
2. When an Indian and foreign companies get merged, Indian companies shall comply with the cross border merger regulation but the foreign company shall comply with the authorized authority in their jurisdiction. It creates difficultly and confusion while the procedure is followed. So, there must be international authority binding for the cross border merger.
3) The International authority shall also create regulations that help in mergers and also regulations which are dealing with an aspect of international competition law and help international companies merge which may be regulated by international competition law and not the domestic Competition Law.
4) Lastly, the regulations need to be clear about the various aspects that are involved in a merger and these shall be complied with by the companies undertaking mergers.
Under the new cross border regime, the path to pursue group restructuring exercises and to make Indian companies more globally relevant, competitive and stronger than before. Every cross-border M&A activity requires a comprehensive understanding of regulatory requirements and evaluation from both foreign and domestic considerations. It shall be necessary to look at these aspects upfront and ensure that all related issues are well addressed or else there could be repercussions for the transacting parties and the entire purpose of the deal could be defeated in some cases.
The necessity of performing a due diligence exercise on the target before proceeding with the deal/acquisition is evident. The need is to minimize the difficulties in cross-border merger and acquisition particularly related to cultural and regulatory differences between various jurisdictions. One cannot deny the importance of various regulations and laws that govern Mergers and Acquisitions and also there need to be further clarities in the Law. All the provisions of the Companies Act 2013 have not yet been notified and one cannot assess the effect they might have on Mergers and Acquisitions once they are notified. Also, Competition Law plays a very major role when it comes to Competition Law and there needs to be an International Regulation regarding Competition Law to make it easier for companies to merge internationally.
Mergers and Acquisitions have only grown with time and have become a more significant part of the corporate world. One can only say that the future of Mergers and Acquisitions is very bright.
The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, Competition Act 2002
 Section 6 of Competition Act, 2002