Mergers and Acquisitions have played important role in the transformation of the industrial sector of India since the Second World War period. It does not mean that there were no mergers and acquisitions during controlled regime. But, Mergers and Acquisitions were more popular during the era of Licensing. In this era, government has made it compulsory to have licenses for undertaking any kind of business. During the licensing era, every company's capacity was restricted due to the Licensing and therefore they came up with an alternative of Mergers and Acquisitions. According to study by Prahalad and others (1977), Indian Enterprises in both the private and public sector are much diversified. This diversification led to Mergers and Acquisitions. Some of the examples of mergers and acquisitions during this era are The Hindujas with Ashok Layland, Dunlop India and Falcon Tyers, etc.
The major acquisitions and mergers were took place in 1990s when India come up with Free Trade Policy and Globalisation. Globalisation, Liberalisation and Financial reforms increases competition, it motivates imports. Lack of economies of scale, lack of over-creation of capacities, unwanted diversification, funds constrains had become some of the new-found areas of concerns. This is created a need of restructuring which will ultimately drew importance on Mergers and Acquisitions. According to one well known researcher Mani (1995), "….the reforms have the potential of altering the structure of Indian Industry, subjecting them to competition from both internal and external sources and thereby making them more efficient."
Another major factor which motivated mergers or acquisition is the amendments in MRTP i.e. Monopolies and Restricted Trade Practices Act. The change in MRTP Act increased competition which will ultimately bring the growth. It paved the way for large business groups and foreign companies to resort to the mergers and acquisitions route for growth. Even SEBI i.e. Securities and Exchange Board of India made the notification regarding mergers and acquisitions.
The year 2005 is referred as year of mergers and acquisitions. According to one researcher, in 2005 the deal in Mergers and Acquisition exceeded to $13 billion where as it was $ 4.5 billion in 2004. According to the Securities and Exchange Board of India (SEBI), working paper titled 'Impact of Takeover Code Regulation on Corporate Sector in India - A Critical Appraisal', the major users of the acquisition mechanisms were Indian companies, which accounted for 85% of the total takeovers. [2] Mergers and acquisitions were mostly Horizontal mergers and acquisitions which were mainly for the purpose of concentration of economic power.
In this decade, the number of open offers grew from two to ninety eight. Many Mergers and Acquisitions deals were in the form of cash. Finance and Information Technology were the major industries in which mergers and acquisitions had been taken place. But, on the basis of amount spent, the electronic and electrical industries were on first position followed by metals, cement and construction.
As there are very low entry barriers in new economy, it's easy for a new company to enter into any industry. If they are unable to sustain, big company acquires these small company to eliminate competition and for their own inorganic growth. This is the major reason for increasing rate of acquisitions and mergers. Mergers and acquisitions are also useful to consolidate the market position. It's easy for the company to acquire or merge with another company rather than to set up a new company. Many times government also motivates companies to merge with another as they are weak unit and its essentials for survival of these companies. This is mainly true with the Banks as failure of one may ends with huge losses to the country. Today, many cross border mergers and acquisitions are happening to make a global presence. Good example for it is, TATA Steel and US giant Corus.
2.5.1 Mergers, Acquisitions and Indian Law
According to many researchers, mergers and acquisitions should be utilised to gain advantage to the stakeholders of that particular company. Also government has to safeguard the interest of society, the consumers, the investor on one hand and the shareholders, creditor, employees and workers on the other. Every country has its own rules and regulations regarding mergers and acquisitions. Rules and Regulation in every state differ from another. Merger and Acquisition control requirements in India are currently governed by the provisions of the Companies Act, 1956 and Securities and Exchange Board of India.
Mergers and Acquisitions take place as a result of 'reconstructing', 'compromise', or 'arrangement' as envisaged by Section 391 to 394 of Companies Act, 1956 or acquisition under Section 395 or 'amalgamation' under Section 396 of Companies Act, 1956 and 'reconstruction' of sick industrial company envisaged of Sick Industries (Special Provision) Act, 1985 or 'revival' of financially unviable companies as envisaged by section 72A of Income Tax Act, 1961. However, all such mergers and acquisitions have to be governed or controlled by relevant provisions of the Foreign Exchange Management Act 2000, Income Tax Act, 1961, Industrial (Development and Regulation) Act, 1973; the registration imposed by other relevant Acts including SEBI Act, 1992 as case may be. [3]
According to Companies Act 1956, two companies can merge with one another only if it is permitted under its Memorandum of Association. Also, acquiring company or merging company should have permission in its object clause to carry on a business of the acquired company. In case of absence of permission in Memorandum of Association, the permission from existing shareholders and board of directors is to be required. It is also necessary to get permission from High Court in case of acquisitions and mergers.
2.5.2 Tax concessions to the Amalgamated and Amalgamating Company
The Income Tax Act, 1961, section 2(1A) defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of amalgamated companies and shareholders not less than nine-tenth in value of shares in amalgamating company or companies become shareholders of amalgamated company.
If the amalgamating company has incurred any expenditure eligible for deduction under sections 35(5), 35A(6),35AB(3), 35ABB, 35D, 35DD, 35DDA, 35E and/or 36(1)(ix), prior to its amalgamation with the amalgamated company as per section 2(1B) of the Act and if the amalgamated company is Indian Company, then the benefit of the aforesaid sections shall be available to the amalgamated company, in the manner it would be available to the amalgamating company had there been no amalgamation. [4] Also if company fulfilled certain conditions, under section 72A of the Act, the amalgamated company is entitled to carry forward the unabsorbed depreciation and unabsorbed accumulated business losses of the amalgamating company. However, now the benefits of this section are applicable to manufacturing sector only.
In the scheme of amalgamation, capital gain tax is not to be charged to the amalgamating company because any transfer of capital assets, by an amalgamating company to Indian amalgamated company is not treated as transfer under section 47(vi) of the Act.
When the shareholder of an amalgamating company transfers shares held by him in the amalgamating company in consideration of allotment of shares in amalgamated company in the scheme of amalgamation, then such transfer of shares is not considered as transfer under section 47(vii) of the Act and consequently no capital gain is attracted in the hands of the shareholder of amalgamating company. [5] .
2.5.3 Mergers, acquisition and Indian Accounting Standard
To resolve all accounting related issues relating to mergers, acquisitions, amalgamation, takeover, etc. Accounting Standard 14 named 'Accounting for Amalgamations' is to be referred by law. This Accounting Standard came into effect in respect of accounting periods commencing on or after April 1, 1995 is mandatory. Accounting Standard 14 issued by the Institute of Chartered Accounts of India deals with accounting of amalgamations and treatment of any resultant goodwill or reserves.
According to Standard, there are two methods of accounting for amalgamations namely (a) the pooling interest method and (b) the purchase method. The pooling interest method is restricted to circumstances which meet the criteria referred in the definition of the amalgamation in the nature of merger. In case of purchase method the accounting for those mergers is maintained in the same manner as it is been maintained when there is purchase of any asset. Under the purchase method, the transferee company account for amalgamations either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair value at the date of amalgamation. [6]
According to Standard, it is also necessary that, at the time of amalgamation, the transferor and the transferee companies should adopt a uniform accounting policy, rather than conflicting policy of both the individuals.
2.6 Researches in India:
In India, in earlier studies, that is studies before liberalisation, includes one of the important research of Rao and Rao (1987). In this study they examined 94 mergers and acquisitions orders passed during 1970 to 1986 by MRTP Act 1969.
Beena (1998) and Roy (1999) in their studies observed that acquiring companies are not benefited from mergers and acquisitions. They were having better profitability ratios before mergers than after merger or acquisitions. Even when they studied the pre-merger revenue and compare the same with post-merger revenue, they find pre-merger revenue was higher than the post-merger.
Das in 2000 studied 14 companies in India. When he compared the pre and post merger performance, he found that performance get deteriorated after merger. According to him, 14 out of 8 companies showed decline after merger. Before mergers companies showed higher profitability than after merger.
Saple supports Das conclusion. In the same year i.e. in 2000, he observed several acquisitions and mergers. Further he observed, target firm who had outperformed industry average before merge are now, i.e. after acquisition, has lower profitability than industry average. When he measured returns over net assets i.e. profitability, it was found that there was no improvements on acquirer's performance after acquisition
Pawaskar (2001) concluded the same thing that mergers didn't lead extra profit but rather it is showed downward trend in the financial performance after merger. He considered the sample size of 36 companies who has gone through an acquisition or merger in between 1992 and 1995. He used 'operating cash flow returns on total asset' ratio for the analysis. He studied the ratio for three years before merger and three years after merger in his analysis and on that basis he put forward his conclusion.
Mantravedi and Reddy in 2008 has studied the various acquisitions and mergers. They concluded that, the gain from the acquisitions is depends on the industry, economic conditions, sector, etc. Therefore, the observations from various researchers cannot be generalised.
Kumar in 2009 concluded that the gain or the profit from the acquisitions is very small or negligible. There is no difference in the previous earning of the firm and earning of the firm after acquisition or merger.
In the research paper named 'Mergers and Acquisitions in India: A Strategic Impact Analysis for the Corporate Enterprises in the Post Liberalisation Period' by Rabi Narayan Kar and Amit Soni, it is been observed that most of the acquisitions and mergers have happened in the period of 1996-97 to 2000-01, when they studied the acquisitions and mergers during 1990 to 2000. In this period that is period between year 1996-97 to 2000-01, mergers and acquisitions are turned out to be beneficial. According to them due to mergers and acquisitions, Indian companies grew in size and attain better market share. However, it is also been seen that there is no impact on company's return on net worth after merger or acquisition. They have studied fifteen listed companies from different sectors for the detailed analysis.
Another researcher, Mr Manoj Kumar has made research on 'Efficiency Gain from Mergers and Acquisitions of Indian Bank'. He has studied the bank mergers since 1969. He has chosen a sample size of fifteen companies. In his analysis ten mergers showed positive result, three showed negative result and two of them showed unsteady trends. Therefore, he concluded that bank mergers in India have showed, at large, positive trend in mergers and acquisitions.
In 2002, Surjit has done the research on methodology that can be used in mergers and acquisitions. He has done an analysis for 20 merging companies to compare the pre and post merger performance. He used the accounting method for the analysis and in that he compared the eight ratios of the company before and after merger. He found that this is the best tool for analysing. With the analysis, he found that the post merger performance declines rather than increasing.
Swaminathan in his study generalised that after merger, company's financial performance showed up word trend. According to its study which is done in 2002, financial performance is improved. He has analysed five companies and out of which four companies has shown better performance after merger than before merger.
