INTRODUCTION
Mergers and acquisitions (M&A) are business consolidations. While ‘Merger’ as a term is not explicitly defined in neither Companies Act, 2013 nor Income Tax Act, 1961, it can simply be defined as the combining of two or more firms to become one, whereas Acquisition refers to the purchase of the shares or assets and/or liabilities of a company (target) using the stock, cash or other securities of purchaser’s company (acquirer). Acquisition can also be known as a takeover. M&A is a significant element of the corporate finance industry. The main premise behind M&A is that two distinct companies combine to produce greater value than operating on their own. Therefore, companies continue to evaluate various merger and acquisition alternatives in order to boost their wealth.
WHY SHOULD A COMPANY OPT FOR MERGER AND ACQUISITION?
There are numerous benefits to a good merger and acquisition. Any company which is serious about its growth should make mergers and acquisitions as a central part of their strategy. If implemented well, an active mergers and acquisitions strategy can be a highly fruitful process for any company. Following are some benefits a company should be aware of, before moving forward with the process of a merger or acquisition.
Synergies: When the merger takes place between two or more companies, the efficiency of companies increase and at the same time there is a reduction in cost because each company has rights and obligations towards the new company in terms of managing the company and contribution of capital.
Growth: Merger can lead to the growth of the company. This gives an opportunity to the acquirer company to grow its share. For example, a beer company may choose to buy out a smaller competing brewery to sell it to a loyal customer base and produce more beer.
Increases supply chain power: Buying out a supplier and distributor is known as a vertical merger. Buying a supplier and distributor reduces the cost compared to before and it also helps in the easy distribution of products.
Eliminate competition: Many mergers and acquisitions deal with eliminating future competition and acquire a large market share. Therefore, a lot of cost is required to convince the shareholders to accept the offer.
Surviving: It is difficult for companies to survive in the long run. So, during the financial crisis from 2008 to 2012, the only option left with the companies was to either merge or acquire in order to survive in the long run.
Listed above are the various advantages of mergers and acquisitions. The better the contract, the more benefits a company receives. Those considering a merger or acquisition should determine which advantage they require following the transaction. They should also analyze their purpose for the merger and acquisition deal. Again, when merging organizations establish good workforce, they may expect sustained improved performance.
WHAT ARE THE VARIOUS TYPES OF MERGERS A COMPANY CAN OPT FOR?
Mergers are divided into various forms on the basis of economic perspective and business combinations. The following are listed stated below as:
1. Horizontal merger: This type of merger takes place when Company A and Company B are affiliated with the same type of industry, have the same line of business and similar level of supply chain. In other words, they are known as competitors who are merging for an expansion in customer base, increase in market share and market power, creation of synergy etc.
2. Vertical merger: This type of merger takes place when Company A and Company B are affiliated with the same type of industry, have the same line of business but have a different level of supply chain. It is mostly carried out in order to run the company more efficiently along with increasing the size.
3. Congeneric merger: This type of merger takes place when Company A and Company B are in the same/connected industries or markets but do not offer the same products. This merger usually takes place in order to increase synergies or market share, for the expansion of their product lines as they share similar distribution channels, overlapping technology or production systems etc.
4. Conglomerate merger: This type of merger takes place when Company A and Company B are affiliated with the same line of business. This kind of merger takes place to diversify and take risk in case the current business does not yield much profit.
5. Reverse merger: This type of merger takes place when Company A, being a parent company merges with its subsidiary or when Company A (profit making firm) merges with Company B (loss making firm). This type of merger is also called a triangular merger.
6. De-merger: This type of merger takes place when Company A transfers one or more of its business undertakings to company B (resulting company). In other words, when a company splits off its existing business activities into several components, with the intent to form a new company that operates on its own or sell or dissolve the unit so separated, is called a demerger. This type of merger usually takes place when a company desires the benefit of focused leadership which in turn helps to streamline the business and provides distinct levels of growth.
WHAT ARE THE TYPES OF ACQUISITION A COMPANY CAN OPT FOR?
1. Friendly- This kind of acquisition takes places when Company A acquires Company B with the approval of the board of directors from both the companies. It works towards shared advantage of both companies and both shareholders and management are in concurrence on both sides of the deal.
2. Hostile takeover- This kind of acquisition take place when the Company A (Target company) does not consent to the acquisition, therefore Company B (the acquiring company) must gather a majority stake to force the acquisition. A hostile takeover is typically consummated by a tender offer. In a tender offer, the corporation tries to purchase shares from outstanding shareholders of the target company at a premium to the current market price for which the shareholders have limited time to accept.
WHAT ARE THE KEY DIFFERENCES BETWEEN A MERGER AND AN ACQUISITION?
WHAT ARE THE REGULATIONS THAT NEED TO BE COMPLIED WITH IN A MERGER AND ACQUISITION PROCESS?
M&A are usually used interchangeably, however as we have seen there is a slight difference between them which makes them distinct from each other. They are based on the company’s vision and mission statements. A proper course of action and procedure is followed to undertake M&A governed by various legislations such as Companies Act, 2013, Income Tax Act, 1961, etc. Following are the list of important provisions set out for the regulation process of Merger and Acquisitions:
1. The Companies Act, 2013: Section 230 to 240 of this act deals with mergers and acquisitions. Even though, merger and acquisition are agreements between two parties, the approval of the High Court is necessary for its transaction. Also, for the process of merger and acquisition, 3/4th of members and creditors should agree in the general board meeting. The law permits 210 days of going ahead for merger and acquisition and obligatory time for the claimant is 210 days before commencing of merger and acquisition transaction.
2. Income Tax Act 1961: According to Section 50 of this act, in case of slump sale and share sale and if the company is unlisted then tax deductible is 20 or 30%. In case of the share sale of the listed company, the company has to pay a rate of interest for 15% depending upon the period of share held. And under section 47 of this act, amalgamation and demerger process where it involves the issuance of 3/4th of the share, then it is considered as tax-neutral and no tax is deducted.
3. Securities law: According to Clause 6 of the Takeover code, any acquisition of share more than 25% is considered as an open offer to public shareholders. And according to Regulation 37, any merger and acquisition where the stock exchange is involved permission from NCLT and SEBI is required.
4. Foreign Exchange Regulations: According to Section 5, sale of equity share involving resident or non-resident is allowed, subject to the permission from R.B.I and sectoral caps in FDI policy. Any transaction involving the issuance of shares to non-resident shareholders doesn’t require permission from R.B.I.
5. Competition Regulation: According to Section 5 of the competition act, 2002, if acquisition exceeds certain limits as specified by the Competition Commission of India, it would require permission from CCI.
WHICH COMPANY WENT THROUGH A HORIZONTAL MERGER IN INDIA?
Case of horizontal merger between Vodafone and Idea-
Vodafone group is British multinational company with its services based in 25+ countries including India. While Idea cellular is owned by Aditya Birla Group which was the first multinational company under the Birla group.
As the telecom business became increasingly competitive, both the companies struggled to gain necessary profits required for the smooth running of their business. Moreover, the telecom sector had been in dire straits for a long time. Since the allegations of the 2G Scam appeared, government regulations and market factors have harmed this sector. Although the merger created a telecom behemoth, it is safe to claim that the two businesses were pushed to do so by Reliance Jio’s arrival and the ensuing price war. The agreement that took place in 2017 was beneficial for both Idea and Vodafone, since Vodafone now owns 45.1% of the combined firm, with the Aditya Birla group owning 26% and Idea owning the rest. The promoters of both companies have equal rights on important matters. Both the companies have joint control over the appointment of the Chief Operating Officer (COO) and the Chief Executive Officer (CEO). Furthermore, Vodafone Idea launched its new corporate identity, ‘Vi,’ which marked the culmination of the two businesses’ unification. After Airtel, the Vodafone-Idea group is India’s second-largest telecom network. This is a prime example of Horizontal merger and is estimated to be worth $23 billion.
WHICH COMPANY WENT THROUGH A FRIENDLY ACQUISITION IN INDIA?
Case of Friendly acquisition between Zomato and Uber eats-
Zomato is an online food delivery and restaurant discovery platform with services based in 24 countries and 10,000 cities. While UberEats was founded in 2009 with its launch in India in the year 2017, it had partnered with 200 restaurants. The otherwise successful international food delivery platform was running in losses and found it difficult to gain momentum and market share since the time of its launch in India.
In 2020, Zomato purchased the Indian operations of Uber Eats, Uber’s food delivery service, for roughly $350 million. The all-stock transaction gives the ride-hailing giant a 10% stake in Zomato. The decision was intended to reduce losses in the ride-hailing startup’s food delivery service in India, which has been a source of revenue for the company. Zomato’s founder and CEO, Deepinder Goyal, stated that the acquisition substantially improves the company’s position in the category.
While the Uber Eats brand in India has cease to exist, all its customers had been transferred to Zomato’s app. Zomato’s fleet now includes delivery partners who were formerly involved with Uber Eats India, according Deepinder Goyal, the creator of Zomato. Therefore, because of this acquisition, Zomato now has a 55% share of the food delivery industry, and mostly competes with Swiggy, which is based in India.
WHICH COMPANY OPTED FOR SINGAPORE INTERNATIONAL ARBITRATION CENTRE UNDER MERGERS AND ACQUISITIONS IN INDIA?
The case of Amazon, Future Group and Reliance Industries Ltd.
In 1997 Amazon Investment Nv Holdings(“Amazon”) launched its first distribution network with various facilities including delivery stations, Prime now and air hubs, fulfillment, cross-deck and sortation centers. With more than 125000 employees, it has 25 sortation and 75 fulfillment centers. Although Amazon is well known for the widest range of products but it strives for the detailing and employs all strategies towards customization of the experience for a purchaser and this is what attracts its consumer base making it the third largest retailers on this planet after Walmart and CVS.
Future Coupons Limited (“Future Coupons”) is a private on 26 February 2008. It is classified as non-govt company and is registered at Registrar of Companies, Mumbai. Its authorized share capital is Rs. 199,681,456 and its paid-up capital is Rs. 199,681,456. It is inolved in Business activities n.e.c and is a promoter group entity of Future Retail Limited (“Future Group”). In the month of November 2019, this global e-commerce giant, Amazon NV Investment Holdings had acquired 49% equity stake in Future Coupons Limited. The deal was worth approximately Rs. 2000 Crores. Future Coupons held 7.3% stake in the Future Retail, which meant that pursuant to the deal, Amazon would hold 3.5% stake in Future Retail indirectly. The main reason behind Amazon’s investment in the Future Coupons was to expand the retail business in India by synergizing the two businesses, i.e., merging Amazon’s technology with Future Groups’ supply chain efficiencies and inventory. The 15,000 grocery stores owned by the Future Group, were to be used as fulfillment centres by Amazon to timely deliver groceries in tier-1 and tier-2 cities. The deal allowed Future Retail to place its products on Amazon’s online market-place and release debt burden on the company, which was approximately Rs. 3,000- 3,500 Crores at the said time.
Main Highlights of the Deal-
Call-option: Amazon was given a call-option which could be exercised from 3rd year onward till the 10th year of the agreement, to acquire all or part of Future Coupons shareholding in Future Retail.
Restricted Companies/ Competing business clause: The Agreement specified 15 (fifteen) companies, including Reliance Industries, Walmart, Alibaba, Softbank, Google, Naspers, eBay, Target, Paytm, Zomato and Swiggy, which were barred from investing/ buying stakes in Future Group’s retail assets.
Situation of Future Group and Reliance Industries Limited-
In 1966, Reliance Textiles Engineers Pvt. Ltd. was incorporated in Maharashtra. It established a synthetic fabrics mill in the same year at Naroda in Gujarat. On 8 May 1973, it became Reliance Industries Limited. In 1975, the company expanded its business into textiles, with “Vimal” becoming its major brand in later years. In 1985, the name of the company was changed from Reliance Textiles Industries Ltd. to Reliance Industries Ltd. Reliance Industries Limited is an Indian multinational conglomerate company, headquartered in Mumbai. It has diverse businesses including energy, petrochemicals, natural gas, retail, telecommunications, mass media, and textiles. Reliance is one of the most profitable companies in India. The retail business of contributes towards about 1/4th of Reliance Industries Limited (“Reliance”) total revenue. In the Annual General Meeting of Reliance, 2020, Mukesh Ambani had first expressed the intention of inducing partners to expand Reliance Retail and initiating initial public offering for Reliance Retail in the coming years. Pursuant to which, in August 2020, Mukesh Ambani’s Reliance Industries Limited bought retail and wholesale business and the logistics and warehousing businesses of Future Group as a going concern on a slump sale basis for a lump sum aggregate consideration of Rs. 24,713 Crores. Through the deal, Reliance acquired Future Retail that owned Big Bazaar, fbb, Foodhall, Easyday and Nilgiris, Future Lifestyle Fashion Limited that operates Brand Factory, a fashion discount chain and Future Consumer Limited. However, Future Groups’ financial and insurance businesses were not a part of the deal. The main reason behind Reliance’s investment in Future Group was to expand offline retail presence and improve margins by creating economies of scale.
Deal Structure:
Part 1: Merging of listed entities, i.e., Future Retail Ltd., Future Lifestyle Fashions Ltd., Future Consumer Ltd., Future Supply Chain Solutions Ltd. and Future Market Networks Ltd. into Future Enterprises.
Part 2: Future Enterprises, by way of a slump sale shall transfer the retail, wholesale and warehousing business to Reliance Retail and Fashion Lifestyle Limited, a wholly owned subsidiary of Reliance Retail Ventures Limited.
Part 3: Reliance Retail and Fashion Lifestyle shall invest Rs 1,200 crore in a preferential issue of shares and Rs 400 crore towards warrants of Future Enterprises. These investments were done to reverse the adverse effects of Covid-19 pandemic on Future Groups business.
It is pertinent to note that, Future Group had lost Rs. 7,000 Crore of revenue during the first 4 months of the pandemic and sale of business was a consequence of the loss of revenue owing to the pandemic which engulfed the world. Future Group is not the only company being forced to sell its business due to Covid-19 outbreak, the trend is being observed worldwide. There is a global resurgence in mergers and acquisitions presently.
In the month of October, 2020, Amazon filed a case for emergency arbitration to Singapore International Arbitration Centre (SIAC) against Future Group for forging an alliance with Reliance to sell Future Group’s retail, wholesale and logistics business without Amazon’s consent, which was required according to an agreement signed between Future Group and Amazon in the month of August, 2019.
Amazon contended that the deal between Future Group and Reliance was invalid as it was violative of the agreement signed between Amazon and Future Coupons in 2019. According to Amazon, the deal interfered with Amazon’s call option to buy Future Coupons’ stake in Future Group, which could have been exercised from the 3rd anniversary of the agreement to the 10th anniversary and at the same time, the deal was also in contravention of the competing business clause in the agreement, which specifically mentioned Reliance as a restricted company for the purposes of investment in Future Group.
The Singapore arbitrator ruled in favor of Amazon and passed an interim relief by putting a stay on Future- Reliance deal, which was primarily for 90 days but later was extended. Pursuant to this, Amazon approached, Competition Commission of India (“CCI”) and Securities Exchange Board of India (“SEBI”). Later in December 2020, it also approached Delhi High Court in the case of Amazon.Com Nv Investment Holding LLC vs. Future Coupons Private Limited & Ors. to enforce the arbitration order and prevent the Future- Reliance deal. Learned Judge Justice Midha upheld the emergency arbitrator award from Singapore that was in Amazon’s favor and ordered a status quo but also upheld Future Retail’s claim of tortious interference by Amazon. Consecutively, in January, the future Group appealed to the Singapore arbitrator to exclude Future Retail from the interim order passed. On 8th February 2021, the Delhi High Court’s division bench set aside the single-judge order passed by learned Single Judge, Justice Midha, and allowed deal to between Future-Reliance Ltd. to proceed.
Later in the case of Future Coupons Private Limited vs. Amazon.Com Nv Investment, the top court was hearing an appeal of e-commerce giant Amazon who challenged the Delhi High Court’s decision to stay an order upholding an emergency arbitrator award restraining Future Retail Limited (FRL) from going ahead with its ₹ 24,731 crore assets sale deal with Reliance Retail. The division bench which consisted of Justice H Kohli, Justice A Bopanna and Justice N Ramana, gave its judgement in the Amazon-Future-Reliance case and upheld the Singapore’s Emergency arbitrator Award of restraining Future Retail Ltd (FRL) from going ahead with its merger deal with Reliance Retail also stated that it is valid under Indian arbitration law and can be enforced.
WHICH IS THE FAMOUS COMPANY THAT WENT THROUGH A REVERSE MERGER IN INDIA?
Ruchi Soya and Patanjali
Ruchi Soya is one of the largest manufacturers of edible oil in India. Ruchi Soya Industries Limited, through its subsidiaries, engages in the manufature and sale of edible oils, vanaspati, bakery fats, and soya food primarily in India. It also offers soya chunks, granules, and soya flour products. Ruchi Soya made most of its money supplying refined edible oil to other consumer goods companies. However, in a bid to push sales, they offered very generous credit terms to their customers. Collecting cash became an afterthought and at the end of the day, they were left with receivables to the tune of 5000 crores. Receivables they simply couldn't retrieve. Their debt burden spiraled out of control.
In December 2017, Ruchi Soya Industries entered into the Corporate Insolvency Resolution Process because of its total debt of about Rs 12,000 Crores. The lenders agreed to resolve the bankruptcy proceedings by selling Ruchi Soya to another FMCG company. Patanjali and Adani Wilmar were top contenders from which Patanjali won out. They acquired 99% of the company and settled 4000 crores in dues. Putting up 4000 odd crores is no easy task and Patanjali did not have the resources to buy Ruchi Soya upfront. Instead, they put up around 1000 crores on their own and borrowed the rest from the same banks that had sold Ruchi Soya. So technically, the banks loaned out 3000 crores to Patanjali in a bid to retrieve 4000 crores in dues from Ruchi Soya.
Loans are often backed by collateral that’s usually worth something. So, when Patanjali borrowed 3000 crores, they borrowed all this money by pledging Ruchi Soya shares as collateral. In fact, they pledged almost their entire shareholding (99% of Ruchi Soya) in the process. The company relisted on the market on January 27th, 2020 and the shares that were previously almost worthless began trading at Rs.17 after equity restructuring. In almost spectacular fashion, the company’s stock price rallied by a whopping 9100% defying all odds. The market capitalization of Ruchi Soya changed from INR 4,350 crore to INR 45,000 crore in just 5 months because the low public float created an artificial demand for its shares which increased its share price and market capitalization. This is also adding greater volatility to the price movements. BSE data shows that of the total 29.58 crore equity shares, the promoters owned 29.29 crore (99%) shares. This left only about 1% with the public. The low level of public shareholding has also translated into low trading volumes for the stock.
According to existing listing guidelines, companies have to ensure 25% public shareholding. However, since Ruchi Soya Industries was relisted following the resolution process, the promoters have 18 months to raise the non-promoter shareholding to 10% and 3 years to take it to 25%. Such high levels of promoter shareholding also led to speculation that Patanjali Ayurved, a private unlisted company, may be considering a reverse merger with Ruchi Soya, a claim that the latter denied as factually incorrect in a disclosure to the stock exchanges. A reverse merger is a situation where a private company could take over a publicly listed company thus indirectly listing itself without undergoing the lengthy process of an initial public offer.
After Ruchi Soya’s takeover, Patanjali owns its oilseed processing facilities and popular brands like Nutrela, Ruchi Gold, Ruchi Star. At the time of acquisition, Patanjali had expected the combined turnover to be Rs 20,000-25,000 crore in the financial year ended March 2020, of which around Rs 13,000 crore would come from Ruchi Soya alone. In terms of market-cap, Ruchi Soya is now bigger than several biggies like Lupin, Torrent Pharma, Tata Steel, Ambuja Cements, PNB, Hindalco, UPL, Colgate-Palmolive and Havells India.
It is important to note that only 1% of Ruchi Soya’s entire stake is being freely floated in the markets. The rest 99% of its stake is with the promoters. This happens to be a major reason for its inflated price. Apart from that, the P/E of the company is also quite higher than usual, owing to the extraordinary profits. Therefore, SEBI is looking into the matter. As per the regulations, Patanjali is now forced to increase the free float in the market by either going in for a further issue of shares or by giving up its ownership on existing ones.
CONCLUSION
Mergers and acquisitions (M&A) refer to transactions between two companies combining in some form. Although mergers and acquisitions (M&A) are used interchangeably, they come with different legal meanings. In a merger, two companies of similar size combine to form a new single entity. On the other hand, an acquisition is when a larger company acquires a smaller company, thereby absorbing the business of the smaller company. As we have seen, M&A deals can be friendly or hostile, depending on the approval of the target company’s board. M&A are vital for a firm’s success as it is useful when a company needs to be recognized in the new market, when an organization needs to achieve administrative benefits or when the firm needs to introduce new products in the market. Furthermore, for a successful M&A to take place, a proper course of action and procedure is necessary to be followed as governed by the various legislations that have been listed above such as the Companies Act, 2013, Income Tax Act, 1961, Foreign Exchange Regulations, Competition regulation etc.
As a result, it is reasonable to infer that the key to a successful M&A is maintaining the fundamentals, namely, aligning acquisitions with the overall company strategy, planning and executing a rigorous integration process, and maintaining proper awareness of all regulatory compliances.
SUGGESTIONS
Since India is becoming a highly sought-after destination for M&A deals, it is considered to be the lifeblood of Indian business now. Therefore, it needs the support and constancy to ensure that it remains progressive in the coming years. Furthermore, due to the ongoing development of regulations and laws regarding M&A, several regulators interpreting the same concept differently increase confusion in the minds of foreign investors. This adversely affects the deals certainty which needs to be resolved if the Indian system wants to attract investments from foreign economies.
Even though India is able to provide foreign investments despite M&A being at its infant stage because of its huge economy, it must concentrate upon refining the processes, increasing the simplicity in doing business abroad and the legalities involved in them for greater and easier development of its economy.
Written By,
Kalpana Nailwal,
Intern, Chanchlani Law World
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