A business may grow over time as the utility of its products and services is recognized. It may also grow through an inorganic process, symbolized by an instantaneous expansion in the workforce, customers, infrastructure resources and thereby an overall increase in the revenues and profits of the entity. Mergers and acquisitions are manifestations of an inorganic growth process. While mergers can be defined to mean the unification of two players into a single entity, acquisitions are situations where one player buys out the other to combine the bought entity with itself. It may be in the form of a purchase, where one business buys another or management buy out, where the management buys the business from its owners. Further, de-mergers, i.e., division of a single entity into two or more entities also require being recognized and treated on par with mergers and acquisitions regime as recommended below, and accordingly references below to mergers and acquisitions also is intended to cover de-mergers (with the law & Rules as framed duly catering to the same).
Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tools of business strategy. They are widely used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses to gain strength, expand the customer base, cut competition or enter into a new market or product segment. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entities.
Prior to the initiation of a merger, amalgamation or demerger, it is necessary to consider whether the relevant companies will meet the following conditions as of the date of the effectiveness of the amalgamation, merger or demerger of the company the value of the liabilities of the successor company does not exceed the value of its assets (the value of the liabilities does not include the value of the liabilities linked to the subordination obligation) the successor company or the company which is ceasing to exist are not in liquidation the successor company or the company which is ceasing to exist are not subject to bankruptcy (unless the bankruptcy trustee agrees with the merger, amalgamation or demerger) the successor company or the company which is ceasing to exist are not subject to a restructuring procedure or approval of a restructuring procedure the successor company or the company which is ceasing to exist are not subject to dissolution proceedings and cannot be dissolved by a court or a court decision
The process of mergers and acquisitions in India is court driven, long-drawn and hence problematic. The process may be initiated through common agreements between the two parties, but that is not sufficient to provide a legal cover to it. The sanction of the High Court is required for bringing it into effect. The Companies Act, 1956 consolidates provisions relating to mergers and acquisitions and other related issues of compromises, arrangements, and reconstructions, however other provisions of the Companies Act get attracted at different times and in each case of merger and acquisition and the procedure remains far from simple. The Central Government has a role to play in this process and it acts through an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs. The entire process has to be to the satisfaction of the Court. This sometimes results in delays.
Needless to say, in the context of increasing competitiveness in the market, speed is of the essence, especially in an expanding and vibrant economy like ours. A sign of corporate readiness, skill and stratagem is the ability to do such mergers and acquisitions with ‘digital’ speed. E-governance could provide a helpful tool in achieving the objective of speed with provisions for online registration, approvals, etc.