This article has been written by Priyanshu Verma pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Currently, we are living in an era where advanced technology and global competition drive the growth of a business. Mergers have emerged as a strategic tool for companies that are seeking rapid profit and growth in their businesses, particularly for a country like India, which has tremendous development opportunities in various sectors like energy, pharmaceutical, telecommunication, and banking. India already has a huge market base but increasing competition in the domestic as well as international markets has made the majority of corporations adopt mergers for the smooth running of businesses rather than starting from scratch in specific areas. Furthermore, mergers not only help in achieving economies of scale but also in acquiring new technologies, expanding customer bases, and enhancing overall market presence. This article aims to provide an in-depth understanding of mergers in India and various other classifications of them.

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Understanding merger

In India, the term merger is not defined. However, Section 2(1B) of the Income Tax Act defines the synonymous term “amalgamation” of companies as the merger of one or more companies with another company or the merger of two or more companies to form one company. A merger, in simple words, involves the consolidation of two or more companies into one company. Mergers are usually structured as mutual agreements where both entities combine their strengths and resources, not like acquisitions where one company takes the other company under it. The primary reason why mergers are done is to form a joint entity with enhanced performance and value than when they were working individually. Mergers are most commonly done to gain market share, reduce operational costs, expand to new territories, unite common products, grow revenues, and increase profits. Additionally, they allow companies to leverage shared expertise and innovation, creating a more competitive and resilient business.

Types of mergers

There are various types of mergers; some of the most common types are as follows:

Horizontal merger

Horizontal mergers are a type of merger where companies operating in the same industry or are direct competitors combine their operations. The primary objectives of such mergers are to reduce competition, increase market share, and leverage combined resources to enhance efficiency and profitability.

Horizontal mergers can result in the creation of larger and more dominant players in a particular industry. By combining their operations, the merged entities can achieve economies of scale, streamline production processes, reduce costs, and increase pricing power. This can lead to a more concentrated market with fewer competitors, potentially reducing consumer choice and driving up prices.

Some notable examples of horizontal mergers include:

  • Vodafone India and Idea Cellular (2018): This merger created Vodafone Idea Limited, the largest telecom operator in India. The merger aimed to strengthen Vodafone’s position in the highly competitive Indian telecom market and compete more effectively with Reliance Jio, which had disrupted the industry with its low-cost offerings.
  • Exxon and Mobil (1999): This merger resulted in the formation of Exxon Mobil, the world’s largest oil company. The merger aimed to combine the strengths of both companies in exploration, production, refining, and marketing to gain a competitive edge in the global oil industry.

Horizontal mergers can have significant implications for consumers, competitors, and the overall industry landscape. They can lead to increased market power, reduced innovation, and higher prices. Therefore, such mergers are often subject to regulatory scrutiny to ensure they do not harm competition and ultimately disadvantage consumers.

Vertical merger

Vertical mergers occur when companies operating in the same industry but at different levels of the supply chain combine to form a single entity. The primary objective of such mergers is to optimize the supply chain and enhance efficiency at various stages of production.

One of the key advantages of vertical mergers is the ability to streamline operations and reduce costs. By combining different stages of the production process under one roof, companies can eliminate inefficiencies and minimise waste. This can lead to economies of scale, as the merged entity can leverage its size and resources to negotiate better deals with suppliers and distributors.

Moreover, vertical mergers can enhance quality control and consistency. By controlling the entire supply chain, companies can ensure that raw materials and ingredients meet their standards and specifications. This can result in improved product quality and increased customer satisfaction.

Another benefit of vertical mergers is the potential for increased market share and competitive advantage. By consolidating their operations, companies can gain a larger portion of the market and become more competitive against rivals. Additionally, vertical mergers can help companies expand into new markets and reach a wider customer base.

However, vertical mergers also come with potential challenges and risks. One concern is the increased concentration of power in the hands of a few large companies, which could lead to reduced competition and higher prices for consumers. Additionally, vertical mergers can make it more difficult for smaller businesses to compete, as they may not have the resources to match the scale and efficiency of the merged entity.

To address these concerns, regulatory authorities often scrutinize vertical mergers to ensure that they do not harm competition or create monopolies. Factors such as market concentration, potential barriers to entry, and the impact on consumers are carefully considered before approving or denying a vertical merger.

Overall, vertical mergers can be beneficial in many ways, as they can improve efficiency, enhance quality, and increase market share. However, it is important to carefully evaluate the potential risks and benefits before proceeding with such a merger to ensure that it benefits all stakeholders involved.

Conglomerate merger

Conglomerate mergers are those types of mergers where companies that come together neither work in the same industry nor in the same production cycle. They belong to totally different industries with no overlapping businesses. The main objective of such a merger is to find new growth opportunities and diversification. An example of a conglomerate merger is Reliance Industries Limited (RIL) and Hamleys (2019). RIL is primarily known for its petrochemical and telecom industry; in this merger, RIL acquired Hamleys, a British toy company. This diversified the business of RIL in retail. 

Market extension merger

Market extension mergers are those types of mergers where companies sell similar kinds of products but in different markets combine their operations. The main objectives of such a merger are market expansion for the new entity, targeting a new audience, and enhancing brand recognition on a global scale. An example of a market extension merger is Tata Motors and Jaguar Land Rover (2008). This merger opened the gate for Tata Motors to enter the global luxury car market.

Product extension merger

Product extension mergers are those types of mergers where companies provide different products and services in the same geographical market and tie up with each other. The reason behind such mergers is to use each other’s resources for cost reduction and improve the synergies in the entity. Furthermore, it also establishes great market reach and other financial benefits. An example of a product extension merger is Pepsico and Quaker Oats (2001). This helped Pepsico try new market strategies with its existing products.

Legal and regulatory framework

After the period of LPG (liberalisation, privatisation, and globalization), Indian markets have skyrocketed as India is now presenting and competing with global giants. Due to this, many businesses have merged to stay alive in the dynamic market. So for fair play and to maintain transparency in the market, various bodies and acts were made, including SEBI (Securities and Exchange Board of India), CCI (Competition Commission of India), the Companies Act 2013, the Competition Act 2002, and SEBI (Securities and Exchange Board of India) regulations, among others. They collectively form the regulatory environment and comprehensive structure for outlining the procedure, execution, and approval for seamless mergers in India. Let’s discuss these in detail.

The Competition Act, 2002

The Competition Commission of India (CCI) plays a pivotal role in regulating mergers to ensure that they do not adversely affect market competition. Established under the Competition Act, 2002, the CCI’s primary objective is to maintain fair competition in the market by preventing actions that could lead to the creation of dominance or restrict competitiveness in the market. Following are some of the important and cornerstone functions of the Competition Act:

Prohibition of anti-competitive agreements

The Act restricts agreements, contracts, or arrangements that have an appreciable adverse effect on competition within India. These include regulation or manipulation of prices, control supply of goods and services, bid-rigging, and other collusive practices.

Prevention of abuse of dominant position

The Act prohibits enterprises from abusing their dominant position in the market. This includes practices like putting prices for a product unrealistically high or low for elimination of competition, also called “predatory pricing,” imposing unfair conditions on sales, and leveraging dominance in one market to enter another.

Regulation of combinations

The Competition Act governs mergers, acquisitions, and combinations that can affect competition in the market. The CCI evaluates whether a proposed merger or acquisition may have an adverse impact on competition in the market. And if suitable conditions are fulfilled, CCI approves the amalgamation, or it may prohibit it if it finds that it would have an appreciable adverse effect on competition in the market.

The Companies Act, 2013

The Companies Act is the primary legislation in India that regulates the incorporation, management, and operation of companies. This act sets out the procedure for the consolidation of companies, including the approval of shareholders and regulatory authorities, following are its functions:

Protection of shareholders’ rights

The Act provides mechanisms for protecting shareholders’ rights, including provisions for shareholder voting rights and the right to receive dividends.

Role of regulatory authorities

The Act outlines the procedures for mergers, acquisitions, and amalgamations, including the requirement for approval from the National Company Law Tribunal (NCLT), Competition Commission of India (CCI), and Securities and Exchange Board of India (SEBI).

Investor protection

The Act includes steps and provisions to prevent fraud, protect minority shareholders, and ensure practices that don’t affect the securities market.

SEBI regulations

The Securities and Exchange Board of India (SEBI) Act, 1992, and its associated rules and regulations play a crucial role in regulating the securities markets in India. These regulations aim to protect investors and ensure fair and transparent trading practices.

One of the primary functions of SEBI is to ensure that all participants in the securities market, including listed companies, brokers, and other intermediaries, adhere to prescribed standards and practices. This includes ensuring that companies provide accurate and timely financial information to investors and that brokers and other intermediaries act in the best interests of their clients.

SEBI also has the responsibility to prevent market manipulation and other forms of misconduct that could undermine the integrity of the securities market. This includes taking action against individuals or entities engaging in insider trading, price manipulation, or other illegal activities.

To maintain the proper conduct of intermediaries, SEBI sets forth specific guidelines and regulations that these entities must follow. These guidelines cover areas such as registration requirements, capital adequacy, and ethical standards. SEBI also conducts regular inspections and audits of intermediaries to ensure compliance with these regulations.

In addition, SEBI plays a role in regulating mergers and acquisitions involving enterprises listed on stock exchanges in India. The board’s approval is required for such transactions, and it reviews the proposals to ensure they are in the best interests of investors and the market as a whole.

Overall, SEBI’s regulations and enforcement actions help to maintain the integrity and efficiency of India’s securities markets, fostering investor confidence and promoting economic growth. Some of the primary regulations that allow SEBI to perform its functions properly are:

Conclusion

In conclusion, amalgamation is a common strategy used by companies to achieve growth and uplift their existing position. Mergers and acquisitions can sometimes create a hectic procedure till completion so they are to be pre-organised and done with proper legality. Strategic fit, dynamic management, communication, and leadership are some crucial things that determine the outcome of a merger. Saying that it’s very important that companies should seriously evaluate the benefits and requirements of merger and acquisition. While they can offer significant opportunities for expansion and competitive advantage, if not handled properly, they can create difficulties and challenges. Certainly, merger and acquisition success lies in the objective of the companies that are being merged. If they share similar goals and ideas for creating the best outcome for the shareholders, then it’s halfway reached. Moreover, rules and regulations regarding all types of consolidations are very complex in India. Therefore, parties involved in such transactions need to have legal advice and ensure compliance with the relevant laws and regulations. By performing such actions, the parties can avoid the consequences of non-compliance and ensure a smooth and successful transaction.

References

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