Introduction to Mergers and Acquisition

We have been learning about the companies coming together to from

another company and companies taking over the existing companies to
expand their business.

With recession taking toll of many Indian businesses and the feeling of
insecurity surging over our businessmen, it is not surprising when we hear
about the immense numbers of corporate restructurings taking place,
especially in the last couple of years. Several companies have been taken
over and several have undergone internal restructuring, whereas certain
companies in the same field of business have found it beneficial to merge
together into one company.

In this context, it would be essential for us to understand what

corporate restructuring and mergers and acquisitions are all about.

All our daily newspapers are filled with cases of mergers, acquisitions,
spin-offs, tender offers, & other forms of corporate restructuring. Thus
important issues both for business decision and public policy formulation
have been raised. No firm is regarded safe from a takeover possibility. On
the more positive side Mergers & Acquisition’s may be critical for the healthy
expansion and growth of the firm. Successful entry into new product and
geographical markets may require Mergers & Acquisition’s at some stage in
the firm's development. Successful competition in international markets may
depend on capabilities obtained in a timely and efficient fashion through
Mergers & Acquisition's. Many have argued that mergers increase value and
efficiency and move resources to their highest and best uses, thereby
increasing shareholder value. .
To opt for a merger or not is a complex affair, especially in terms of the
technicalities involved. We have discussed almost all factors that the
management may have to look into before going for merger. Considerable
amount of brainstorming would be required by the managements to reach a
conclusion. e.g. a due diligence report would clearly identify the status of the
company in respect of the financial position along with the networth and
pending legal matters and details about various contingent liabilities.
Decision has to be taken after having discussed the pros & cons of the
proposed merger & the impact of the same on the business, administrative
costs benefits, addition to shareholders' value, tax implications including
stamp duty and last but not the least also on the employees of the
Transferor or Transferee Company.

Merger:

Merger is defined as combination of two or more companies into a

single company where one survives and the others lose their corporate
existence. The survivor acquires all the assets as well as liabilities of the
merged company or companies. Generally, the surviving company is the
buyer, which retains its identity, and the extinguished company is the seller.

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:

• Equity shares in the transferee company,

• Debentures in the transferee company,
• Cash, or
• A mix of the above modes.
Acquisition:

Acquisition in general sense is acquiring the ownership in the property.

In the context of business combinations, an acquisition is the purchase by
one company of a controlling interest in the share capital of another existing
company.

Methods of Acquisition:

An acquisition may be affected by

(a) agreement with the persons holding majority interest in the company
management like members of the board or major shareholders
commanding majority of voting power;
(b)purchase of shares in open market;
(c) to make takeover offer to the general body of shareholders;
(d)purchase of new shares by private treaty;
(e) Acquisition of share capital through the following forms of
considerations viz. means of cash, issuance of loan capital, or
insurance of share capital.

Takeover:

A ‘takeover’ is acquisition and both the terms are used

interchangeably.
 Takeover differs from merger in approach to business combinations i.e.
the process of takeover, transaction involved in takeover, determination of
share exchange or cash price and the fulfillment of goals of combination all
are different in takeovers than in mergers. For example, process of takeover
is unilateral and the offeror company decides about the maximum price.
Time taken in completion of transaction is less in takeover than in mergers,
top management of the offeree company being more co-operative.

De-merger or corporate splits or division:

De-merger or split or divisions of a company are the synonymous

terms signifying a movement in the company.

What will it take to succeed?

Funds are an obvious requirement for would-be buyers. Raising them

may not be a problem for multinationals able to tap resources at home, but
for local companies, finance is likely to be the single biggest obstacle to an
acquisition. Financial institution in some Asian markets are banned from
leading for takeovers, and debt markets are small and illiquid, deterring
investors who fear that they might not be able to sell their holdings at a later
date. The credit squeezes and the depressed state of many Asian equity
markets have only made an already difficult situation worse. Funds apart, a
successful Mergers & Acquisition growth strategy must be supported by
three capabilities: deep local networks, the abilities to manage uncertainty,
and the skill to distinguish worthwhile targets. Companies that rush in
without them are likely to be stumble.

Assess target quality:

 To say that a company should be worth the price a buyer pays is to
state the obvious. But assessing companies in Asia can be fraught with
problems, and several deals have gone badly wrong because buyers failed to
dig deeply enough. The attraction of knockdown price tag may tempt
companies to skip crucial checks. Concealed high debt levels and deferred
contingent liabilities have resulted in large deals destroying value. But in
other cases, where buyers have undertaken detailed due diligence, they
have been able to negotiate prices as low as half of the initial figure.

Due diligence can be difficult because disclosure practices are poor

and companies often lack the information buyer need. Moreover, most Asian
conglomerates still do not present consolidated financial statements, leaving
the possibilities that the sales and the profit figures might be bloated by
transactions between affiliated companies. The financial records that are
available are often unreliable, with different projections made by different
departments within the same company, and different projections made for
different audiences. Banks and investors, naturally, are likely to be shown
optimistic forecasts.

Purpose of Mergers and Acquisition

The purpose for an offeror company for acquiring another company

shall be reflected in the corporate objectives. It has to decide the specific
objectives to be achieved through acquisition. The basic purpose of merger
or business combination is to achieve faster growth of the corporate
business. Faster growth may be had through product improvement and
competitive position.

Other possible purposes for acquisition are short listed below: -

(1)Procurement of supplies:

1. to safeguard the source of supplies of raw materials or intermediary

product;
2. to obtain economies of purchase in the form of discount, savings in
transportation costs, overhead costs in buying department, etc.;
3. to share the benefits of suppliers economies by standardizing the
materials.

(2)Revamping production facilities:

1. to achieve economies of scale by amalgamating production

facilities through more intensive utilization of plant and resources;
2. to standardize product specifications, improvement of quality of
product, expanding
3. market and aiming at consumers satisfaction through
strengthening after sale
4. services;
5. to obtain improved production technology and know-how from
the offeree company
6. to reduce cost, improve quality and produce competitive
products to retain and
7. improve market share.

(3) Market expansion and strategy:

 1. to eliminate competition and protect existing market;
2. to obtain a new market outlets in possession of the offeree;
3. to obtain new product for diversification or substitution of existing
products and to enhance the product range;
4. strengthening retain outlets and sale the goods to rationalize
distribution;
5. to reduce advertising cost and improve public image of the offeree
company;
6. strategic control of patents and copyrights.

(4) Financial strength:

1. to improve liquidity and have direct access to cash resource;

2. to dispose of surplus and outdated assets for cash out of
combined enterprise;
3. to enhance gearing capacity, borrow on better strength and the
greater assets backing;
4. to avail tax benefits;
5. to improve EPS (Earning Per Share).

(5) General gains:

1. to improve its own image and attract superior managerial talents to

manage its affairs;
2. to offer better satisfaction to consumers or users of the product.

(6) Own developmental plans:

The purpose of acquisition is backed by the offeror company’s own

developmental plans.
 A company thinks in terms of acquiring the other company only when
it has arrived at its own development plan to expand its operation
having examined its own internal strength where it might not have any
problem of taxation, accounting, valuation, etc. but might feel resource
constraints with limitations of funds and lack of skill managerial
personnel’s. It has to aim at suitable combination where it could have
opportunities to supplement its funds by issuance of securities, secure
additional financial facilities, eliminate competition and strengthen its
market position.

(7) Strategic purpose:

The Acquirer Company view the merger to achieve strategic objectives

through alternative type of combinations which may be horizontal,
vertical, product expansion, market extensional or other specified
unrelated objectives depending upon the corporate strategies. Thus,
various types of combinations distinct with each other in nature are
adopted to pursue this objective like vertical or horizontal combination.

(8) Corporate friendliness:

Although it is rare but it is true that business houses exhibit degrees of

cooperative spirit despite competitiveness in providing rescues to each
other from hostile takeovers and cultivate situations of collaborations
sharing goodwill of each other to achieve performance heights through
business combinations. The combining corporates aim at circular
combinations by pursuing this objective.

(9) Desired level of integration:

 Mergers and acquisition are pursued to obtain the desired level of
integration between the two combining business houses. Such
integration could be operational or financial. This gives birth to
conglomerate combinations. The purpose and the requirements of the
offeror company go a long way in selecting a suitable partner for
merger or acquisition in business combinations.

Types of mergers

Merger or acquisition depends upon the purpose of the offeror

company it wants to achieve. Based on the offerors’ objectives profile,
combinations could be vertical, horizontal, circular and conglomeratic as
precisely described below with reference to the purpose in view of the offeror
company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger

with that company to expand espousing backward integration to
assimilate the resources of supply and forward integration towards
market outlets. The acquiring company through merger of another unit
attempts on reduction of inventories of raw material and finished goods,
implements its production plans as per the objectives and economizes on
working capital investments. In other words, in vertical combinations, the
 merging undertaking would be either a supplier or a buyer using its
product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the
acquirer company i.e.

(1)it gains a strong position because of imperfect market of the

intermediary products, scarcity of resources and purchased products;
(2)has control over products specifications.

(B) Horizontal combination :

It is a merger of two competing firms which are at the same stage of

industrial process. The acquiring firm belongs to the same industry as the
target company. The mail purpose of such mergers is to obtain economies
of scale in production by eliminating duplication of facilities and the
operations and broadening the product line, reduction in investment in
working capital, elimination in competition concentration in product,
reduction in advertising costs, increase in market segments and exercise
better control on market.

(C) Circular combination:

Companies producing distinct products seek amalgamation to share

common distribution and research facilities to obtain economies by
elimination of cost on duplication and promoting market enlargement.
The acquiring company obtains benefits in the form of economies of
resource sharing and diversification.
(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like

DCM and Modi Industries. The basic purpose of such amalgamations
remains utilization of financial resources and enlarges debt capacity
through re-organizing their financial structure so as to service the
shareholders by increased leveraging and EPS, lowering average cost of
capital and thereby raising present worth of the outstanding shares.
Merger enhances the overall stability of the acquirer company and
creates balance in the company’s total portfolio of diverse products and
production processes.

Advantages of mergers and takeovers

Mergers and takeovers are permanent form of combinations which

vest in management complete control and provide centralized administration
which are not available in combinations of holding company and its partly
owned subsidiary. Shareholders in the selling company gain from the merger
and takeovers as the premium offered to induce acceptance of the merger or
takeover offers much more price than the book value of shares. Shareholders
in the buying company gain in the long run with the growth of the company
not only due to synergy but also due to “boots trapping earnings”.

Motivations for mergers and acquisitions

Mergers and acquisitions are caused with the support of shareholders,
manager’s ad promoters of the combing companies. The factors, which
motivate the shareholders and managers to lend support to these
combinations and the resultant consequences they have to bear, are briefly
noted below based on the research work by various scholars globally.
(1) From the standpoint of shareholders
Investment made by shareholders in the companies subject to merger
should enhance in value. The sale of shares from one company’s
shareholders to another and holding investment in shares should give rise to
greater values i.e. the opportunity gains in alternative investments.
Shareholders may gain from merger in different ways viz. from the gains and
achievements of the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available
otherwise;
(e) better investment opportunity in combinations.

One or more features would generally be available in each merger

where shareholders may have attraction and favour merger.

(2) From the standpoint of managers

Managers are concerned with improving operations of the company,
managing the affairs of the company effectively for all round gains and
growth of the company which will provide them better deals in raising their
status, perks and fringe benefits. Mergers where all these things are the
guaranteed outcome get support from the managers. At the same time,
where managers have fear of displacement at the hands of new
management in amalgamated company and also resultant depreciation from
the merger then support from them becomes difficult.

(3) Promoter’s gains

Mergers do offer to company promoters the advantage of increasing
the size of their company and the financial structure and strength. They
 can convert a closely held and private limited company into a public
company without contributing much wealth and without losing control.

(4) Benefits to general public

Impact of mergers on general public could be viewed as aspect of
benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or
consumer or the worker in the companies under merger plan.
(a) Consumers
The economic gains realized from mergers are passed on to
consumers in the form of lower prices and better quality of the
product which directly raise their standard of living and quality of
life. The balance of benefits in favour of consumers will depend
upon the fact whether or not the mergers increase or decrease
competitive economic and productive activity which directly
affects the degree of welfare of the consumers through changes
in price level, quality of products, after sales service, etc.

(b) Workers community

The merger or acquisition of a company by a conglomerate or
other acquiring company may have the effect on both the sides
of increasing the welfare in the form of purchasing power and
other miseries of life. Two sides of the impact as discussed by
the researchers and academicians are: firstly, mergers with
cash payment to shareholders provide opportunities for them to
invest this money in other companies which will generate further
employment and growth to uplift of the economy in general.
Secondly, any restrictions placed on such mergers will decrease
the growth and investment activity with corresponding decrease
in employment. Both workers and communities will suffer on
lessening job opportunities, preventing the distribution of
benefits resulting from diversification of production activity.

(c) General public

Mergers result into centralized concentration of power. Economic
power is to be understood as the ability to control prices and
industries output as monopolists. Such monopolists affect social
and political environment to tilt everything in their favour to
maintain their power ad expand their business empire. These
 advances result into economic exploitation. But in a free
economy a monopolist does not stay for a longer period as other
companies enter into the field to reap the benefits of higher
prices set in by the monopolist. This enforces competition in the
market as consumers are free to substitute the alternative
products. Therefore, it is difficult to generalize that mergers
affect the welfare of general public adversely or favorably. Every
merger of two or more companies has to be viewed from
different angles in the business practices which protects the
interest of the shareholders in the merging company and also
serves the national purpose to add to the welfare of the
employees, consumers and does not create hindrance in
administration of the Government polices.

Consideration of Merger and Takeover

Mergers and takeovers are two different approaches to business

combinations. Mergers are pursued under the Companies Act, 1956 vide
sections 391/394 thereof or may be envisaged under the provisions of
Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial
Companies Act, 1985 whereas, takeovers fall solely under the regulatory
framework of the SEBI Regulations, 1997.

Minority shareholders rights

SEBI regulations do not provide insight in the event of minority

shareholders not agreeing to the takeover offer. However section 395 of the
Companies Act, 1956 provides for the acquisition of shares of the
shareholders. According to section 395 of the Companies Act, if the offerer
has acquired at least 90% in value of those shares may give notice to the
non-accepting shareholders of the intention of buying their shares. The 90%
acceptance level shall not include the share held by the offerer or it’s
associates. The procedure laid down in this section is briefly noted below.

1. In order to buy the shares of non-accepting shareholders the offerer

must have reached the 90% acceptance level within 4 months of the
date of the offer, and notice must have been served on those
shareholders within 2 months of reaching the 90% level.
2. The notice to the non-accepting shareholders must be in a prescribed
manner. A copy of a notice and a statutory declaration by the offerer
(or, if the offerer is a company, by a director) in the prescribed form
confirming that the conditions for giving the notice have been satisfied
must be sent to the target.
3. Once the notice has been given, the offerer is entitled and bound to
acquire the outstanding shares on the terms of the offer.
4. If the terms of the offer give the shareholders a choice of
consideration, the notice must give particulars of options available and
inform the shareholders that he has six weeks from the date of the
notice to indicate his choice of consideration in writing.
5. At the end of the six weeks from the date of the notice to the non-
accepting shareholders the offerer must immediately send a copy of
notice to the target and pay or transfer to the target the consideration
for all the shares to which the notice relates. Stock transfer forms
executed on behalf of the non-accepting shareholders by a person
appointed by the offerer must also be sent. Once the company has
received stock transfer forms it must register the offerer as the holder
of the shares.
6. The consideration money, which is received by the target, should be
held on trust for the person entitled to shares in respect of which the
sum was received.
 7. Alternatively, if the offerer does not wish to buy the non-accepting
shareholder’s shares, it must still within one month of company
reaching the 90% acceptance level give such shareholders notice in
the prescribed manner of the rights that are exercisable by them to
require the offerer to acquire their shares. The notice must state that
the offer is still open for acceptance and specify a date after which the
right may not be exercised, which may not be less than 3 months from
the end of the time within which the offer can be accepted. If the
offerer fails to send such notice it (and it’s officers who are in default)
are liable to a fine unless it or they took all reasonable steps to secure
compliance.
8. If the shareholder exercises his rights to require the offerer to
purchase his shares the offerer is entitled and bound to do so on the
terms of the offer or on such other terms as may be agreed. If a choice
of consideration was originally offered, the shareholder may indicate
his choice when requiring the offerer to acquire his shares. The notice
given to shareholder will specify the choice of consideration and which
consideration should apply in default of an election.
9. On application made by an happy shareholder within six weeks from
the date on which the original notice was given, the court may make
an order preventing the offerer from acquiring the shares or an order
specifying terms of acquisition differing from those of the offer or make
an order setting out the terms on which the shares must be acquired.

In certain circumstances, where the takeover offer has not been

accepted by the required 90% in value of the share to which offer relates the
court may, on application of the offerer, make an order authorizing it to give
notice under the Companies Act, 1985, section 429. It will do this if it is
satisfied that:
 a. the offerer has after reasonable enquiry been unable to trace one or
more shareholders to whom the offer relates;
b. the shares which the offerer has acquired or contracted to acquire by
virtue of acceptance of the offerer, together with the shares held by
untraceable shareholders, amount to not less than 90% in value of the
shares subject to the offer; and
c. the consideration offered is fair and reasonable.
The court will not make such an order unless it considers that it is just
and equitable to do so, having regard, in particular, to the number of
shareholder who has been traced who did accept the offer.

Alternative modes of acquisition

The terms used in business combinations carry generally synonymous

connotations and can be used interchangeably. All the different terms carry
one single meaning of “merger” but each term cannot be given equal
treatment in the discussion because law has created a dividing line between
‘take-over’ and acquisitions by way of merger, amalgamation or
reconstruction. Particularly the takeover Regulations for substantial
acquisition of shares and takeovers known as SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997 vide section 3 excludes any
attempt of merger done by way of any one or more of the following modes:

(a) by allotment in pursuant of an application made by the

shareholders for right issue and under a public issue;

(b)preferential allotment made in pursuance of a resolution passed

under section 81(1A) of the Companies Act, 1956;

(c) allotment to the underwriters pursuant to underwriters agreements;

(d)inter-se-transfer of shares amongst group, companies, relatives,
Indian promoters and Foreign collaborators who are
shareholders/promoters;

(e) acquisition of shares in the ordinary course of business, by

registered stock brokers, public financial institutions and banks on
own account or as pledges;

(f) acquisition of shares by way of transmission on succession or

inheritance;

(g)acquisition of shares by government companies and statutory

corporations;

(h)transfer of shares from state level financial institutions to co-

promoters in pursuance to agreements between them;

(i) acquisition of shares in pursuance to rehabilitation schemes under

Sick Industrial Companies (Special Provisions) Act, 1985 or schemes
of arrangements, mergers, amalgamation, De-merger, etc. under
the Companies Act, 1956 or any other law or regulation, Indian or
Foreign;

(j) acquisition of shares of company whose shares are not listed on any
stock exchange. However, this exemption in not available if the said
acquisition results into control of a listed company;

(k) such other cases as may be exempted from the applicability of

Chapter III of SEBI regulations by SEBI.
 The basic logic behind substantial disclosure of takeover of a company
through acquisition of shares is that the common investors and shareholders
should be made aware of the larger financial stake in the company of the
person who is acquiring such company’s shares. The main objective of these
Regulations is to provide greater transparency in the acquisition of shares
and the takeovers of companies through a system of disclosure of
information.

Escrow account

To ensure that the acquirer shall pay the shareholders the agreed
amount in redemption of his promise to acquire their shares, it is a
mandatory requirement to open escrow account and deposit therein the
required amount, which will serve as security for performance of obligation.

The Escrow amount shall be calculated as per the manner laid down in
regulation 28(2). Accordingly:

For offers which are subject to a minimum level of acceptance, and the
acquirer does want to acquire a minimum of 20%, then 50% of the
consideration payable under the public offer in cash shall be deposited in the
Escrow account.

Payment of consideration

Consideration may be payable in cash or by exchange of securities.

Where it is payable in cash the acquirer is required to pay the amount of
consideration within 21 days from the date of closure of the offer. For this
purpose he is required to open special account with the bankers to an issue
(registered with SEBI) and deposit therein 90% of the amount lying in the
Escrow Account, if any. He should make the entire amount due and payable
to shareholders as consideration. He can transfer the funds from Escrow
account for such payment. Where the consideration is payable in exchange
of securities, the acquirer shall ensure that securities are actually issued and
dispatched to shareholders in terms of regulation 29 of SEBI Takeover
Regulations.
Reverse Merger

Generally, a company with the track record should have a less profit
earning or loss making but viable company amalgamated with it to have
benefits of economies of scale of production and marketing network, etc. As
a consequence of this merger the profit earning company survives and the
loss making company extinguishes its existence. But in many cases, the sick
company’s survival becomes more important for many strategic reasons and
to conserve community interest. The law provides encouragement through
tax relief for the companies that are profitable but get merged with the loss
making companies. Infact this type of merger is not a normal or a routine
merger. It is, therefore, called as a Reverse Merger.

The allurement for such mergers is the tax savings under the Income-
tax Act, 1961. Section 72A of the Act ensures the tax relief which becomes
attractive for amalgamations of sick company with a healthy and profitable
company to take the advantage of carry forward losses. Taking advantage of
the provisions of section 72A through merger or amalgamation is known as
reverse merger, which gives survival to the sick unit by merging it with the
healthy unit. The healthy unit extincts loosing its name and the surviving sick
company retains its name. Companies to take advantage of the section
follow this route but after a year or so change their names to the one of the
healthy company as were done amongst others by Kirloskar Pneumatics Ltd.
The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost
its name but after one year it changed its name as was prior to merger.
Reverse Merger under Tax Laws

Section 72A of the Income-tax Act, 1961 is meant to facilitate

rejuvenation of sick industrial undertaking by merging with healthier
industrial companies having incentive in the form of tax savings designed
with the sole intention to benefit the general public through continued
productive activity, increased employment avenues and generation of
revenue.

(1) Background

Under the existing provisions of the Income-tax Act, so much of the

business loss of a year as cannot be set off by him against the profits of the
following year from any business carried on by him. If the loss cannot be so
wholly set off, the amount not so set off can be carried forward to the next
following year and so on, up to a maximum of eight assessment years
immediately succeeding the assessment year for which the loss was first
computed. The benefit of carry forward and set off of business loss is,
however, not available unless the business in which the loss was originally
sustained is continued to be carried on by the assessee. Further, only the
assessee who incurred the loss by his predecessor. Similarly, if a business
carried on one assessee is taken over by another, the unabsorbed
depreciation allowance due to the predecessor in business and set off
against his profits in subsequent years. In view of these provisions, the
accumulated business loss and unabsorbed depreciation allowance of a
company which merges with another company under a scheme of
amalgamation cannot be carried forward and set off by the latter company
against its profits.

The very purpose of section 72A is to revive the business of an

undertaking, which is financially non-viable and to bring it back to health.
Sickness among industrial undertakings is a matter of grave national
concern. Experience has shown that taking over of such units by
Government is not always the most satisfactory or the most economical
solution. The more effective course suggested was to facilitate the
amalgamation of sick industrial units with sound ones by providing
incentives and removing impediments in the way of such amalgamation. To
save the Government from social costs in terms of loss of production and
employment and to relieve the Government of the uneconomical burden of
taking over and running sick industrial units is one of the motivating factors
in introducing section 72A. To achieve this objective so as to facilitate the
merger of sick industrial units with sound one, the general rule of carry
forward and set off of accumulated losses and unabsorbed depreciation
allowance of amalgamating company by the amalgamated company was
statutorily related. By a deeming fiction, the accumulated loss or the
unabsorbed depreciation of the amalgamating is treated to be the loss or, as
the case may be, allowance for depreciation of the amalgamated company
for the previous year in which amalgamation was effected.

There are three statutory conditions which are to be fulfilled under

section 72A(1) for the benefits prescribed therein to be available to the
amalgamated company, namely –
(i) The amalgamating company was, immediately before such
amalgamation, financially non-viable by reason of its liabilities, losses
and other relevant factors;
(ii) The amalgamation is in the public interest;
(iii) Such other conditions as the Central Government may by notification
in the Official Gazette, specify, to ensure that the benefit under this
section is restricted to amalgamation, which would facilitate the
rehabilitation or revival of the business of amalgamating company.

(2) Reverse merger

 As it can be now understood, a reverse merger is a method adopted to
avoid the stringent provisions of Section 72A but still be able to claim all the
losses of the sick unit. For doing so, in case of a reverse merger, instead of a
healthy unit taking over a sick unit, the sick unit takes over/ amalgamates
with the healthy unit.

High Court discussed 3 tests for reverse merger:

a. assets of transferor company being greater than transferee

company;
b. equity capital to be issued by the transferee company pursuant
to the acquisition exceeding its original issued capital, and
c. the change of control in the transferee company clearly indicated
that the present arrangement was an arrangement, which was a
typical illustration of takeover by reverse bid.

Court held that prime facie the scheme of merging a prosperous unit
with a sick unit could not be said to be offending the provisions of section
72A of the Income Tax Act, 1961 since the object underlying this provision
was to facilitate the merger of sick industrial unit with a sound one.

(3) Salient features of reverse merger under section 72A

1. Amalgamation should be between companies and

none of them should be a firm of partners or sole-proprietor. In other
words, partnership firm or sole-proprietary concerns cannot get the
benefit of tax relief under section 72A merger.
2. The companies entering into amalgamation should
be engaged in either industrial activity or shipping business. In other
words, the tax relief under section 72A would not be made available
to companies engaged in trading activities or services.

3. After amalgamation the “sick” or “financially

unviable company” shall survive and other income generating
company shall extinct. In other words essential condition to be
fulfilled is that the acquiring company will be able to revive or
rehabilitate having consumed the healthy company.

4. One of the merger partner should be financially

unviable and have accumulated losses to qualify for the merger and
the other merger partner should be profit earning so that tax relief to
the maximum extent could be had. In other words the company
which is financially unviable should be technically sound and feasible,
commercially and economically viable but financially weak because
of financial stringency or lack of financial recourses or its liabilities
have exceeded its assets and is on the brink of insolvency. The
second requisite qualification associated with financial unavailability
is the accumulation of losses for past few years.

5. Amalgamation should be in the public interest i.e. it

should not be against public policy, should not defeat basic tenets of
law, and must safeguard the interest of employees, consumers,
creditors, customers and shareholders apart from promoters of
company through the revival of the company.
6. The merger must result into following benefit to the
amalgamated company i.e. (a) carry forward of accumulated
business loses of the amalgamated company; (b) carry forward of
unabsorbed depreciation of the amalgamating company and (c)
accumulated loss would be allowed to be carried forward set of for
eight subsequent years.

7. Accumulated loss should arise from “Profits and

Gains from business or profession” and not be loss under the head
“Capital Gains” or “Speculation”.

8. For qualifying carry forward loss, the provisions of

section 72 should have not been contravened.

9. Similarly for carry forward of unabsorbed

depreciation the conditions of section 32 should not have been
violated.

10. Specified authority has to be satisfied of the

eligibility of the company for the relief under section 72 of the
Income Tax Act. It is only on the recommendations of the specified
authority that Central Government may allow the relief.

11. The company should make an application to a

“specified authority” for requisite recommendation of the case to the
Central Government for granting or allowing the relief.
 12. Procedure for merger or amalgamation to be
followed in such cases is same as in any other cases. Specified
Authority makes recommendation after taking into consideration the
court’s direction on scheme of amalgamation.

Procedure for Takeover and Acquisition

Public announcement:

To make a public announcement an acquirer shall follow the following

procedure:

1. Appointment of merchant banker:

The acquirer shall appoint a merchant banker registered as category –
I with SEBI to advise him on the acquisition and to make a public
announcement of offer on his behalf.

2. Use of media for announcement:

Public announcement shall be made at least in one national English
daily one Hindi daily and one regional language daily newspaper of that
place where the shares of that company are listed and traded.

3. Timings of announcement:
 Public announcement should be made within four days of finalization of
negotiations or entering into any agreement or memorandum of
understanding to acquire the shares or the voting rights.

4. Contents of announcement:
Public announcement of offer is mandatory as required under the SEBI
Regulations. Therefore, it is required that it should be prepared showing
therein the following information:

(1) paid up share capital of the target company, the number of

fully paid up and partially paid up shares.

(2) Total number and percentage of shares proposed to be

acquired from public subject to minimum as specified in the
sub-regulation (1) of Regulation 21 that is:
a) The public offer of minimum 20% of voting capital of the
company to the shareholders;
b) The public offer by a raider shall not be less than 10% but
more than 51% of shares of voting rights. Additional
shares can be had @ 2% of voting rights in any year.
(3) The minimum offer price for each fully paid up or partly paid
up share;
(4) Mode of payment of consideration;
(5) The identity of the acquirer and in case the acquirer is a
company, the identity of the promoters and, or the persons
having control over such company and the group, if any, to
which the company belong;
(6) The existing holding, if any, of the acquirer in the shares of
the target company, including holding of persons acting in
concert with him;
(7) Salient features of the agreement, if any, such as the date,
the name of the seller, the price at which the shares are
being acquired, the manner of payment of the consideration
and the number and percentage of shares in respect of which
the acquirer has entered into the agreement to acquirer the
shares or the consideration, monetary or otherwise, for the
acquisition of control over the target company, as the case
may be;
(8) The highest and the average paid by the acquirer or persons
acting in concert with him for acquisition, if any, of shares of
the target company made by him during the twelve month
period prior to the date of the public announcement;

(9) Objects and purpose of the acquisition of the shares and the
future plans of the acquirer for the target company, including
disclosers whether the acquirer proposes to dispose of or
otherwise encumber any assets of the target company:
Provided that where the future plans are set out, the public
announcement shall also set out how the acquirers propose
to implement such future plans;

(10) The ‘specified date’ as mentioned in regulation 19;

(11) The date by which individual letters of offer would be posted
to each of the shareholders;
(12) The date of opening and closure of the offer and the manner
in which and the date by which the acceptance or rejection of
the offer would be communicated to the share holders;
(13) The date by which the payment of consideration would be
made for the shares in respect of which the offer has been
accepted;
 (14) Disclosure to the effect that firm arrangement for financial
resources required to implement the offer is already in place,
including the details regarding the sources of the funds
whether domestic i.e. from banks, financial institutions, or
otherwise or foreign i.e. from Non-resident Indians or
otherwise;
(15) Provision for acceptance of the offer by person who own the
shares but are not the registered holders of such shares;
(16) Statutory approvals required to obtained for the purpose of
acquiring the shares under the Companies Act, 1956, the
Monopolies and Restrictive Trade Practices Act, 1973, and/or
any other applicable laws;

(17) Approvals of banks or financial institutions required, if any;

(18) Whether the offer is subject to a minimum level of
acceptances from the shareholders; and
(19) Such other information as is essential fort the shareholders to
make an informed design in regard to the offer.

Why Mergers fail?

Revenue deserves more attention in mergers; indeed, a failure to focus on

this important factor may explain why so many mergers don’t pay off. Too
many companies lose their revenue momentum as they concentrate on cost
synergies or fail to focus on post merger growth in a systematic manner. Yet
in the end, halted growth hurts the market performance of a company far
more than does a failure to nail costs.

Case Study - Merger of ICICI and Bank of Rajasthan