Prof. Ambdekar Rizvi Institutes of Management Studies 1 INDEX SR. No. Topic Page No. 1. Introduction to Corporate Restructuring and Mergers and Acquisition 2. Legal Aspects of Mergers & Acquisition 3. Section 391-396 as per Companies Act 1956 4. Competition Act, 2002 5. SEBI Takeover Code 6. Stock Exchange Bye-laws 7 Accounting Policies 8. Cross Border Acquisition(CBA) with reference to RBI and FEMA 9. Case Study on Addidas –Reebok Merger10. Case Study on L&T Cement and L&T Demerger11. Case Study on Mahindra and Mahindra‟s acquisition of Ssangyong 13. Conclusion
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The combining of two or more companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange for the surrender of their stock.
Basically, it is referred when two companies become one. This decision is usually mutual
between both firms. The entire merger process is usually kept secret from the general public, and
often from the majority of the employees at the involved companies. Since the majority of
merger attempts do not succeed, and most are kept secret, it is difficult to estimate how many
potential mergers occur in a given year. It is likely that the number is very high, however, given
the amount of successful mergers and the desirability of mergers for many companies.
Examples:
1) Tata Chemicals bought British Salt; a UK based white salt producing company for about
US $ 13 billion. The acquisition gives Tata access to very strong brine supplies and also
access to British Salt‟s facilities as it produces about 800,000 tons of pure white salt
every year.
2) Ranbaxy's sale to Japan's Daiichi for $4.5 billion. Sing brothers sold the company to
Daiichi and since then there is no real good news coming out of Ranbaxy...
Mergers may be of several types, depending on the requirements of the merging entities:
Horizontal Mergers: Also referred to as a „horizontal integration‟, this kind of merger takes
place between entities engaged in competing businesses which are at the same stage of the
industrial process. A horizontal merger takes a company a step closer towards monopoly by
eliminating a competitor and establishing stronger presence in the market. The other benefits of
this form of merger are the advantages of economies of scale and economies of scope.
Example:
Recent cases of horizontal mergers in the international market are those of the European airlines.
The Lufthansa-Swiss International link up and the Air France-KLM merger are cases of horizontal mergers. Horizontal mergers have been the most important and prevalent form of
merger in India. Various studies like those of Been, 1998 and Das, 2000 have revealed that post
1991 or post liberalisation more than 60% of mergers have been of the horizontal type. Recently
there have been many big mergers of this type in India like Birla – L&T merger in the cement
sector. The aviation sector has also space witnessed quite a few such mergers like the Kingfisher
Conglomerate Mergers: A conglomerate merger is a merger between two entities in unrelated
industries. The principal reason for a conglomerate merger is utilization of financial resources,
enlargement of debt capacity, and increase in the value of outstanding shares by increased
leverage and earnings per share, and by lowering the average cost of capital. A merger with a
diverse business also helps the company to foray into varied businesses without having to incur
large start-up costs normally associated with a new business.
Examples:
In 2005 Procter & Gamble, a consumer goods company, engaged in a merger with Gillette,
which was involved in men personal care market
Cash Merger: In a typical merger, the merged entity combines the assets of the two companies
and grants the shareholders of each original company shares in the new company based on the
relative valuations of the two original companies. However, in the case of a „cash merger‟, also
known as a „cash-out merger‟, the shareholders of one entity receives cash in place of shares in
the merged entity. This is a common practice in cases where the shareholders of one of the
merging entities do not want to be a part of the merged entity.
Examples:
Triangular Merger: A triangular merger is often resorted to for regulatory and tax reasons. As
the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be
forward (when the target merges into the subsidiary and the subsidiary survives), or reverse
(when the subsidiary merges into the target and the target survives).
Examples:
A merger where an independent company combines with the subsidiary of another
country. For example, a forward triangular merger may occur when Company A merges
with Subsidiary B of Company C. In this forward triangular merger, Company A
becomes a subsidiary of Company C.
Reverse merger: A reverse merger - also called a reverse acquisition or reverse takeover which
allows a private company to go public while avoiding the high costs and lengthy regulations
associated with an initial public offering. To do this, a private company purchases or merges
A corporate action in which a company buys most, if not all, of the target company's ownership
stakes in order to assume control of the target firm. Acquisitions are often made as part of a
company's growth strategy whereby it is more beneficial to take over an existing firm's
operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the
acquiring company's stock or a combination of both.
Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target firm
expresses its agreement to be acquired, whereas hostile acquisitions don't have the same
agreement from the target firm and the acquiring firm needs to actively purchase large stakes of
the target company in order to have a majority stake.
In either case, the acquiring company often offers a premium on the market price of the target
company's shares in order to entice shareholders to sell. For example, News Corp.'s bid to
acquire Dow Jones was equal to a 65% premium over the stock's market price.
.
Mergers vs. Acquisitions
These terms are commonly used interchangeably but in reality, they have slightly differentmeanings. An acquisition refers to the act of one company taking over another company and
clearly becoming the new owner. From a legal point of view, the target company, the company
that is bought, no longer exists. A merger is a joining of two companies that are usually of about
the same size and agree to meld into one large company. In the case of a merger, both company‟s
stocks cease to be traded as the new company chooses a new name and a new stock is issued in
place of the two separate company‟s stock. This view of a merger is unrealistic by real world
standards as it is often the case that one company is actually bought by another while the terms
of the deal that is struck between the two allows for the company that is bought to publicize that
a merger has occurred while the company that is doing the buying backs up this claim. This is
done in order to allow the company that is bought to save face and avoid the negative
The Act lays down the legal procedures for mergers or acquisitions:-
Permission for merger: - Two or more companies can amalgamate only when theamalgamation is permitted under their memorandum of association. Also, the acquiring company
should have the permission in its object clause to carry on the business of the acquired company.
In the absence of these provisions in the memorandum of association, it is necessary to seek the
permission of the shareholders, board of directors and the Company Law Board before affecting
the merger.
Information to the stock exchange: - The acquiring and the acquired companies should inform
the stock exchanges (where they are listed) about the merger. The SEBI does not have any
powers to approve or disapprove an amalgamation or a demerger. This power rests only with the
High Court.
Approval of board of directors: - The board of directors of the individual companies should
approve the draft proposal for amalgamation and authorise the managements of the companies to
further pursue the proposal.
Application in the High Court (Section 391):- An application for approving the draft
amalgamation proposal duly approved by the board of directors of the individual companies
should be made to the High Court.
Shareholders' and creditors' meetings (Section 391(1)):- Upon receipt of the application for
amalgamation or demerger, the High Court may direct both the companies to hold meetings of its
creditors and members in a prescribed manner. However, holding of creditors‟ meetings can be
dispensed with by making a suitable application to the High Court. The High Court will take a
decision on this depending upon:
Reputation of the company,
Reputation of their management or promoters and their financial position,
company. Provided that a person shall not be punishable under this sub-section, if
he shows that the default was due to the refusal of any other person, being a
director, managing director, manager or trustee for debenture holders, to supply
the necessary particulars as to his material interests.
Any director, managing director, manager or trustee of debenture holders shall
give notice to the company of matters relating to himself which the company has
to disclose in the statement, if he unable to do so, he is punishable with fine up to
Rs.5,000.
Sanction by the High Court:- After the approval of the shareholders and creditors, on the
petitions of the companies, the High Court will pass an order, sanctioning the amalgamation
scheme after it is satisfied that the scheme is fair and reasonable and all the material facts have been disclosed. The date of the court's hearing will be published in two newspapers, and also, the
regional director of the Company Law Board will be intimated.
Filing of the Court order: - After the Court order, its certified true copies will be filed with the
Registrar of Companies.
Transfer of assets and liabilities: - The assets and liabilities of the acquired company will be
transferred to the acquiring company in accordance with the approved scheme, with effect fromthe specified date.
Payment by cash or securities: - As per the proposal, the acquiring company will exchange
shares and debentures and/or cash for the shares and debentures of the acquired company. These
securities will be listed on the stock exchange.
Cross Border amalgamations and demergers:
One cannot amalgamate or demerge an Indian company into a foreign company but can do vice
versa (provided the law of that country where the transferor company is registered does not
In order to promote fairness in the capital market and to protect the Interest of small investors,
SEBI has framed regulation, providing for Acquisition of shares and takeover of listed
companies commonly known as “Takeover code".
Takeover of companies is a very popular and well-established strategy for corporate growth. A
takeover Bid implies that an acquirer acquires substantial quantity of shares carrying voting
rights in excess of the limits specified in the SEBI (Substantial acquisition of Shares) Regulation,
1997 in a target listed company either in a direct or indirect manner with a view to gain control
over the management of such a company. Any Individual including the person acting in concert
or company or other legal entity acquiring the shares or voting power or control over a target
company is known as "acquirer" 'person acting in concert' Means Individual or companies or other legal entities acting together for a common purpose of substantial acquisition of shares or
voting rights or gaining control over a target company in pursuance of understanding or
agreement.
Target Company is a listed company whose shares or voting rights are acquired/ being acquired
by an acquirer or whose control is taken over or being taken over by an acquirer.
Based on the limits, the acquirer has to comply with disclosure requirements. He may acquire
shares from the public after making public announcements.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
The Securities and Exchange Board of India (“SEBI”) had been mulling over reviewing and
amending the existing SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997 (“Takeover Code of 1997”) for quite some time now. A Takeover Regulations AdvisoryCommittee was constituted under the chairmanship of Mr. C. Achuthan (“Achuthan
Committee”) in September 2009 to review the Takeover Code of 1997 and give its suggestions.
The Achuthan Committee provided its suggestions in its report which was submitted to SEBI in
July 2010. After taking into account the suggestions of the Achuthan Committee and feedback
from the interest groups and general public on such suggestions, the SEBI finally notified the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code of
2011”) on 23 September 2011. The Takeover Code of 2011 will be effective f rom 22 October
2011.
The Takeover Code of 2011 adheres to the framework and principles of the Takeover Code of
1997 but the changes it brings about are significant. Some of the most important amendments are
discussed below:
1. Initial threshold limit for triggering of an open offer
Under the Takeover Code of 1997, an acquirer was mandated to make an open offer if he, alone
or through persons acting in concert, were acquiring 15% or more of voting right in the target
company. This threshold of 15% has been increased to 25% under the Takeover Code of 2011.
Therefore, now the strategic investors, including private equity funds and minority foreign
investors, will be able to increase their shareholding in listed companies up to 24.99% and will
have greater say in the management of the company. An acquirer holding 24.99% shares will
have a better chance to block any decision of the company which requires a special resolution to
be passed. The promoters of listed companies with low shareholding will undoubtedly be
concerned about any acquirer misutilising it.
However, at the same time, this will help the listed companies to get more investments without
triggering the open offer requirement as early as 15%, therefore making the process more
Provided that when information regarding prohibition of short sellingor fixing of minimum
prices or closure of the market or prohibition offurther dealings is so conveyed as to reach the
Central Governmentin the normal course within twenty-four hours the Governing Board
may prohibit short selling or fix minimum prices or close the market orprohibit further dealings
as aforesaid for any period exceeding threedays without the approval of the Central Government
till such timeas the decision of the Central Government is communicated to the
exchange.
Suspension of Selling-out
(b) If the due dates of delivery and payment fall within a period duringwhich further dealings are
prohibited in any security or securities orthe market continues to be closed in whole or in part as
provided insub-clause (a) the Governing Board shall suspend selling-out inrespect of all existing
contracts in the security or securities inquestion till the market reopens. However the buyer shall
beentitled to enforce delivery. In the event of the security or securities
in question being on the Cleared Securities List the followingadditional provisions shall take
effect namely:
(i) The Governing Board shall during the suspension of selling-outextend the time for payment
from Clearing to Clearing tillsuch time as the market reopens and the liabilities of intermediariesshall continue during the suspension of sellingout.The buying member shall be entitled to
enforce deliveryin any of such Clearings and for that purpose the process of tickets as prescribed
in these Bye-laws and Regulations orsuch other process as the Governing Board may prescribe
shall apply. If the buying member after calling for deliveryfails to take up and pay for such
securities on the due datehe shall be liable to pay a penalty of 2 per cent irrespectiveof any other
liability.
(ii) The Governing Board shall fix the making-up prices for suchsecurity or securities in each
Clearing and the contango forcarrying-over such security or securities from Clearing to
Clearing on the basis of the ruling market rate of interest andthe contango of the previous
Clearing. For the first Clearingthe making-up prices shall be slightly higher than the prices of
Minimum level of maintaining 10% of public shareholding is not applicable to:
(a) Government Company as defined u/s 617 of the Companies Act;
(b) Company in respect of which reference is or has been made to the BIFR and such reference is
pending;
(c) Company in respect of which any rehabilitation scheme is sanctioned by the BIFR/NCL and
is pending full implementation or any appeal is pending regarding such reference or scheme
before the Appellate Authority for Industrial and Financial Reconstruction or National Company
Law Appellate Tribunal;
(d ) Infrastructure company as defined in clause 1.2.1( xv) of the SEBI (DIP) Guidelines, 2000
B) Those companies which are non-complaint with the aforesaid clause, as on 1st may, 2006, will
have to become complaint by increasing the public shareholding to 25% or 10% as the case may
be within a period, not exceeding one year, as granted by Specified Stock Exchange (SSE).
However, the SSE may, after shareholding and genuineness of the reasons submitted by the
company, grant extension of time for a period not exceeding two years from the said date. [sub-
clause (iv)]
Specified Stock Exchange may, on an application made by the company and after satisfying
itself about the adequacy of steps taken by the company to increase its public shareholding and
genuineness of the reasons submitted by the company for not reaching the minimum level of
public shareholding and after recording reasons in writing, extend the time for compliance with
the requirement of minimum level of public shareholding by a further period not exceeding one
year.)
C) Similarly, in respect of those companies which may subsequently become non-compliant on
account of supervening extraordinary events such as compliance with directions of court,tribunal regulatory or statutory authority, compliance with the SEBI ( Substantial Acquisition
and takeover) Regulations, 1997, reorganization of capital by way of scheme of agreement, etc.,
the SSE may grant a period of not exceeding one year, to become complaint, after examining and
Offer for sale of shares held by the promoters through prospectus
Sale of the shares held by the promoters in the secondary market
Any other method without adversely affecting the interest of the minority shareholders.
H) If a company fails to comply with Clause 40A, its shares shall be liable to be delisted in terms
of the Delisting Guidelines/Regulations, prescribed by SEBI and the company shall be liable for
penal actions under the Securities Contracts (Regulation) Act, 1956 and the Securities and
Exchange Board of India Act, 1992.
New Clause 40B: (Takeover Offer):
New clause 40B simply says that it is a condition for a continued listing that whenever a
takeover offer is made or if there is a change in the management of the company, the person who
secures the control of the management and of the company whose shares have been acquired
shall comply with the relevant provisions of the SEBI (Substantial Acquisition of Shares and
Takeover) Regulations, 1997.
Summary of Above:
1. The first attempt to regulate the takeover was made by the government by incorporating
clause 40 in the listing agreements of the stock exchanges. Thereafter in 1990 even
before SEBI became the statutory body, the government in consultation with SEBI,
replaced the clause 40 by clause 40A and 40B.
2. The old clauses 40A stipulated that any person holding shares less than 10% of the
nominal value shares already held shall carry 10% or more of the voting rights unless he
has notified the stock exchange and full fills the conditions specified in Clause 40B.
3. The old clause 40B mainly stipulated that in case of an acquisition of shares exceeding
10% of the voting capital of any company as above, the person so acquiring the sharesshall make an open offer to acquire atleast 20% shares from the public. It also contained
various other provisions relating to open offer.
4. The new clause 40A stipulates that all listed companies other than those which (i) at the
time of the initial listing, had offered to public less than 25 but not less than 10% of the
total issued shares or (ii) have reached or in future reach, irrespective of the percentage of
ACCOUNTING POLICIES When a company just acquires another company but does not amalgamate that company with
itself, the shares purchased from the promoters and other shareholders are known as „investment‟
in the acquirer company‟s books and are accounted at the cost at which they were acquired. In
the target company‟s books no adjustment is required at all. However, in case of an
amalgamation, the books of accounts and balance sheets of two (or more) companies are
required to be combined. Similarly, in case of a demerger, books of account and balance sheet of
the demerged company are required to e split into two or more. This complicates the matter.
Hence with regard to amalgamations, the Institute of Chartered Accountants of India (ICAI) has
issued Accounting Standards 14 (AS 14) which classifies different types of amalgamations and
stipulates different accounting methods applicable to these respective types of amalgamations.
With regards to Demergers, the ICAI has not prescribed any Accounting Standards as yet. But
ironically, the accounting norms for (tax neutral) demergers are stipulated in the Income tax Act,
1961.
ACCOUNTING STANDARD 14
Accounting Standard 14 issued by ICAI came into effect in respect of accounting periods
commencing on or after 1
st
April 1995. This is a mandatory standard required to be followed by all the companies. This standard however does not deal with those cases where a company
merely acquires the shares of the target company, either for cash or by the issue of the acquirers
company‟s shares or partly for both. The reason for this is that in such an acquisit ion the target
company continues to exist whereas AS14 deals with those cases where the amalgamating
CROSS BORDER MERGERS & ACQUISTIONS WITH REFERENCE TO FERA
& FEMA
The corporate sector all over the world is restructuring its operations through different types of
consolidation strategies like mergers and acquisitions in order to face challenges posed by the
new pattern of globalisation, which has led to the greater integration of national and international
markets. One of the striking features of the present wave of mergers and acquisitions is the
presence of a large number of cross-border deals. Earlier, foreign firms were satisfying their
market expansion strategy through the setting up of wholly owned subsidiaries in overseas
markets till 2005, which has now become a „second best option‟ since it involves much time and
effort that may not suit to the changed global scenario, where the watchword i s „plaction‟, that is
plan and action together1. Thus getting into cross-border mergers and acquisitions became the
„first- best option‟ to the leaders and others depended on the „follow-the-leader‟ strategy.
It is important to note that the most crucial reason for the rapid growth of M&As has been that of increasing competition and advanced technology, it has become difficult for companies and other
businesses to go forward and it has compelled them to join hands with other parties. In such
circumstances, cross border transactions have emerged as good strategy. Cross border M&As are
one of the fastest ways of investing abroad and gaining access to companies that are acquired
abroad by way of market share.
The concept of M&As gained popularity in India, after the government introduced the new
economic policy in 1991, thereby paving the way for economic reforms and opening up a whole
lot of challenges both in the domestic and international spheres.
Having said that, it is stated that the Indian legal system regulates and governs various aspects of
a cross border M&A transaction by a set of laws, most importantly the Companies Act, 1956; the
Foreign Investment Policy of the government of India along with press notes and clarificatory
circulars issued by the Department of Investment Policy and Promotion; Foreign Exchange
Management Act, 1999 (“FEMA”) and regulations made there under, including circulars and
notifications issued by the RBI from time to time (hereinafter together referred to as the “ FEMA
laws”); the Securities and Exchange Board of India Act, 1992 and regulations made thereunder
(hereinafter together referred to as “SEBI laws”); the Income Tax Act, 1961 and the
Competition Act, 2002 etc.
The Driving Force: Shareholder Value Creation
What is the true motivation for cross-border mergers and acquisitions? The answer is the
traditional one: to build shareholder value.
In many of the developed country markets today the growth potential for earnings in the
traditional business lines of the firm is limited. Competition is fierce, margins are under
(g) any agency, office or branch owned or controlled by such person.”
Section 2 (v) of FEMA defines “ person resident in India” as meaning:
“(i) a person residing in India for more than 182 days during the course of the preceding
financial year but does not include -
(A) a person who has gone out of India or who stays outside India, in either case -
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside
India for anuncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than -
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in Indiafor anuncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India.”
. i.e. Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000.
Under FEMA 20, general permission has been granted to any non-resident to purchase shares or convertible debentures of an Indian company under Foreign Direct Investment Scheme, subject
to the terms and conditions specified in Schedule 1 thereto. However citizens of Bangladesh,
Pakistan or Sri Lanka resident outside India and entities in Bangladesh or Pakistan are not
permitted to purchase shares or debentures issued by Indian companies or any other Indian
security without the prior approval of the RBI.
Further, persons resident outside India are permitted to purchase shares or convertible debentures
offered on a rights basis by an Indian company which satisfies the conditions restated
hereinbelow:
(i) The offer on right basis does not result in increase in the percentage of foreign equity
already approved, or permissible under the Foreign Direct Investment Scheme in terms of
FEMA 20;
(ii) The existing shares or debentures against which shares or debentures are issued by the
company on right basis were acquired and are held by the person resident outside India in
(iii) The offer on right basis to the persons resident outside India is at a price which is not
lower than that at which the offer is made to resident shareholders;
The rights shares so acquired shall be subject to the same conditions regarding repatriation as
applicable to original shares. Further, under FEMA 20, an Indian company has been permitted to
issue shares to its employees or employees of its joint venture / subsidiary abroad, who are non-
resident, either directly or through a trust.
Under Regulation 7 of FEMA 20, once a scheme of merger, demerger or amalgamation has been
approved by the court, the transferee company (whether the survivor or a new company) is
permitted to issue shares to the shareholders of the transferor company who are persons resident
outside India, subject to the condition that the percentage of non-resident holdings in the
company does not exceed the limits for which approval has been granted by the RBI or the
prescribed sectorial ceiling under the foreign direct investment policy set under the FEMA laws.
If the new share allotment exceeds such limits, the company will have to obtain the prior approval of the FIPB and the RBI before issuing shares to the non-residents]
General permission has also been granted for transfer of shares / convertible debentures by a
non-resident as follows:
(i) Non-residents other than non-resident Indians (“NRIs”) or Overseas Corporate Bodies
(“OCBs”) may transfer shares / convertible debentures to any non-resident, provided that
the transferee should have obtained permission of the Central Government, if he had any
previous venture or tie-up in India through investment in any manner or a technical
collaboration or trademark agreement in the same or allied field in which the Indian
company whose shares are being transferred is engaged;(ii) NRIs or OCBs are permitted to transfer by way of sale, any shares or convertible
debentures of Indian companies to other NRIs or OCBs only;
(iii) Non-residents are permitted to transfer shares / debentures of any Indian company to a
resident by way of gift.
FEMA 20 further stipulates that any transfer of security by a resident to a non-resident would
require the prior approval of the RBI. For the transfer of existing shares/convertible debentures
of an Indian company by a resident to a non- resident by way of sale, the transferor will have to
obtain the approval of the Central Government before applying to the RBI. In such cases, the
RBI may permit the transfer subject to such terms and conditions, including the price at which
the sale may be made.
For the purpose of FEMA 20, investment in India by a non-resident has been divided into the
following 5 categories and the regulations applicable have been specified in respective schedules
(i) Investment under the Foreign Direct Investment Scheme (“the FDI Scheme”).
(ii) Investment by Foreign Institutional Investors (“FIIs”) under the Portfolio Investment
Scheme (“the Portfolio Investment Scheme”).
(iii) Investment by NRIs/OCBs under the Portfolio Investment Scheme.
(iv) Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.
(v) Purchase and sale of securities other than shares or convertible debentures of an Indian
company by non-residents.
The following are the prominent features of the schemes listed above:
I. FDI Scheme
Under the FDI Scheme, a non resident or a foreign entity, whether incorporated or not, may
purchase shares or convertible debentures of an Indian company. Any Indian company which is
not engaged in the activity of manufacture of items listed in Annexure A to the FDI Scheme has been permitted to issue shares to a non resident up to the extent specified in Annexure B to the
FDI Scheme, on a repatriation basis, provided that:
(i) The issuer company does not require an industrial licence;
(ii) The shares are not being issued for acquiring existing shares of another Indian company;
(iii) If the non resident to whom the shares are being issued proposes to be a collaborator, he
should have obtained the Central Government‟s approval if he had any previous
investment/collaboration/tie-up in India in the same or allied field in which the Indian
company issuing the shares is engaged.
Further, a trading company incorporated in India may issue shares or convertible debentures tothe extent of 51% of its capital, to persons resident outside India subject to the condition that
remittance of dividend to the shareholders outside India is made only after the company has
secured registration as an export/trading/star trading /super trading house from the Directorate
General of Foreign Trade, Ministry of Commerce, Government of India, New Delhi.
It also prescribes a ceiling of 10% of the total paid-up equity capital or 10% of the paid-up value
of each series of convertible debentures, and provides that the total holdings of all FIIs/sub-
accounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid up value of
each series of convertible debentures. A registered FII is also permitted to purchase
shares/convertible debentures of an Indian company through private placement/arrangement,
subject to the prescribed ceilings.
RBI may also permit a domestic asset management company or a portfolio manager registered
with SEBI as FIIs for managing the sub-account to make investment under the Portfolio
Investment Scheme on behalf of non-residents who are foreign citizens and bodies corporate
registered outside India, provided such investment is made out of funds raised or collected or
brought from outside India through normal banking channel. Such investment is restricted to 5%
of the equity capital or 5% of the paid-up value of each series of convertible debentures within
the overall ceiling of 24% or 40% as applicable for FIIs for the purpose of the Portfolio
Investment Scheme.
The designated branch of an authorised dealer is authorised to allow remittance of net sale
proceeds (after payment of taxes) or to credit the net amount of sale proceeds of shares /
convertible debentures to the foreign currency account or a non-resident rupee account of the
registered FII concerned.
III. Investment by NRIs/OCBs under the Portfolio Scheme
Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or convertible debentures
of an Indian company, through a registered broker on a recognised stock exchange, subject to the
following conditions:
(i) The NRI/OCB designates a branch of an authorised dealer for routing his/its transactions
relating to purchase and sale of shares/ convertible debentures under the Portfolio
Investment Scheme, and routes all such transactions only through the branch so
designated;
(ii) The paid-up value of shares of an Indian company, purchased by each NRI/OCB both on
repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value of
shares issued by the company concerned;
(iii) The paid-up value of each series of convertible debentures purchased by each NRI/OCB
both on repatriation and non-repatriation basis does not exceed 5% of the paid-up value
of each series of convertible debentures issued by the company concerned;(iv) The aggregate paid-up value of shares of any company purchased by all NRIs and OCBs
does not exceed 10% of the paid up capital of the company and in the case of purchase of
convertible debentures the aggregate paid-up value of each series of debentures
purchased by all NRIs and OCBs does not exceed 10% of the paid-up value of each series
of convertible debentures;
(v) The NRI/OCB takes delivery of the shares purchased and gives delivery of shares sold;
(vi) Payment for purchase of shares and/or debentures is made by inward remittance in
foreign exchange through normal banking channels or out of funds held in NRE/FCNR
account maintained in India if the shares are purchased on repatriation basis and by
inward remittance or out of funds held in NRE/FCNR/NRO/NRNR/NRSR account of the
NRI/OCB concerned maintained in India where the shares/debentures are purchased on
non-repatriation basis;
(vi) The OCB informs the designated branch of the authorised dealer immediately on the
holding/interest of NRIs in the OCB becoming less than 60%.
Daiichi Sankyo Co. Ltd. bought a 64% stake in India's largest pharmaceutical company, Ranbaxy Laboratories
Ltd., for $4 billion
Paris food services giant Sodexo SA closed on its $100 million acquisition of Radhakrishna Hospitality Services
Pvt. Ltd., based in Bangalore
NTT DoCoMo Inc. acquired a 26% stake in mobile operator Tata Teleservices Ltd. for $2.66 billion from the Tata Group
REGULATION OF OUTBOUND CROSS BORDER M&A TRANSACTIONS UNDER
FEMA LAWS
As stated, any outbound cross border M&A involving an Indian company, i.e. foreign investment
by an Indian company in a foreign company is governed by FEMA and FEMA 19. There are
only certain special circumstances under which an Indian company is permitted to make aninvestment in a foreign company. An Indian party is not permitted to make any direct investment
in a foreign entity engaged in real estate business or banking business without the prior approval
of RBI.
There are several routes available to an Indian company which intends to invest in a foreign
company, some of which are described herein below:
I. Direct Investment in a Joint Venture/Wholly Owned Subsidiary
RBI has been continuously relaxing the provisions relating to direct investment in a joint venture
or a wholly owned subsidiary. Owing to these relaxations the percentage of investment by Indian
companies in joint ventures and wholly owned subsidiaries abroad has been continuously rising.
General conditions to be fulfilled for making an investment
An Indian company is permitted to make a direct investment in a joint venture or a wholly
owned subsidiary outside India, without seeking the prior approval of RBI subject to the
following conditions being fulfilled:
(i) The total financial commitment of the Indian party will be capped at USD 50 Million or its
equivalent in a block of 3 financial years including the year in which the investment is
made, except investment in a Joint Venture/Wholly Owned Subsidiary in Nepal andBhutan.
(ii) In respect of direct investment in Nepal or Bhutan, in Indian rupees the total financial
commitment shall not exceed Indian Rupees 1,200 Million in a block of 3 financial years
including the year in which the investment is made;
(iii) The direct investment is made in a foreign entity engaged in the same core activity carried
(iv) The Indian company is not on the RBI‟s caution list or under investigation by the
Enforcement Directorate.
(v) The Indian company routes all the transactions relating to the investment in the joint
venture or the wholly owned subsidiary through only one branch of an authorized dealer
to be designated by it. However the Indian company is permitted to designate different
branches of authorized dealer for onward transmission to the RBI.
(vi) The Indian company files the prescribed Form ODA to the designated branch of the
authorised dealer for onward transmission to the RBI.
Sources for investment
The Regulations also prescribe that any direct investment (as discussed above) must be made
only from the following sources like EFFC account, Drawal of foreign exchange and ADR/GDR
proceeds etc
An Indian Party is also eligible to extend a loan or a guarantee to or on behalf of the JointVenture/ Wholly Owned Subsidiary abroad, within the permissible financial commitment, if the
Indian Party has made investment by way of contribution to the equity capital of the Joint
Venture.
Under Regulation 10, RBI is required to allot a unique identification number for each Joint
Venture/Wholly Owned Subsidiary outside India and the Indian party is in turn required to quote
such number in all its communications and reports to the Reserve Bank and the authorised
dealer.
II. Investment in a foreign company by ADR/GDR share swap or exchangeAn Indian company can also invest in a foreign company which is engaged in the same core
activity in exchange of ADRs/GDRs issued to the foreign company in accordance with the
ADR/GDR Scheme for the shares so acquired provided that the following conditions are
satisfied:
(i) The Indian company has already made an ADR/GDR issue and that such ADRs/GDRs are
currently listed on a stock exchange outside India.
(ii) The investment by the Indian company does not exceed the higher of an amount equivalent
to USD 100 Million or an amount equivalent to 10 times the export earnings of the Indian
company during the preceding financial year.
(iii) At least 80% of the average turnover of the Indian Party in the previous 3 financial years is
from the activities/sectors included in Schedule or the Indian Party has an annual average
export earnings of at least Indian Rupees1,000 Million in the previous 3 financial years
from the activities/sectors included in Schedule 1 to FEMA 19;
(iv) The ADR/GDR issue is backed by a fresh issue of underlying equity shares by the Indian
(v) The total holding in the Indian company by non-resident holders does not exceed the
prescribed sectoral cap.
(vi) The valuation of the shares of the foreign company is done in the following manner:
a. If the shares of the foreign company are not listed, then as per the
recommendation of an investment banker, or
b. If the shares of the foreign company are listed then as per the formula prescribed
therein.
Within 30 days from the date of issue of ADRs/GDRs in exchange of acquisition of shares of the
foreign company, the Indian company is required to submit a report in Form ODG with RBI.
III. RBI approval in special cases
In the event that the Indian company does not satisfy the eligibility conditions under Regulations
6, 7 and 8, as stated hereinabove, it may make an application to RBI for special approval. Such
application for direct investment in Joint Venture/Wholly Owned Subsidiary outside India, or byway of exchange for shares of a foreign company, is to be made in Form ODI, or in Form ODB,
respectively. In considering the application, the RBI may take into account the following factors:
(i) Prima facie viability of the joint venture/wholly owned subsidiary abroad.
(ii) Contribution to external trade and other related benefits.
(iii) Financial position and business track record of the Indian company and the foreign
company; and
(iv) Expertise and experience of the foreign company in the same or related line of activity of
the joint venture or the wholly owned subsidiary abroad.
IV. Direct investment by capitalization: As per Regulation 11, an Indian Party is also entitled to make direct investment outside India by
way of capitalisation in full or part of the amount due to the Indian Party from the foreign entity
as follows:-
(i) Payment for export of plant, machinery, equipment and other goods/software to the
foreign entity;
(ii) Fees, royalties, commissions or other entitlements of the Indian party due from the
foreign entity for the supply of technical know-how, consultancy, managerial or other
services, however where the export proceeds have remained unrealised beyond a period
of 6 months from the date of export, such proceeds cannot be capitalised without the prior
permission of RBI.
An Indian Party exporting goods/software/plant and machinery from India towards equity
contribution in a Joint Venture or Wholly Owned Subsidiary outside India is required to declare
it on Form GR or SDF or SOFTEX, as the case may be, by super scribing the same as “ Exports
M&M have acquired a 70% controlling stake in SsangYong, the South Korean auto maker for
US $ 463 million in 2011
Trend of M&A deals in India
No. of deals Amount (USD million)
Deals April-September2009
April-September2010
April-September2009
April-September2010
Inbound 23 14 9129.30 8116.78
Outbound 27 59 527.81 20769.88
Domestic 36 68 2175.24 23786.66Source: Assocham Research Bureau
As per the sector wise the major mergers and acquisitions occurred in telecom, metal & mining and
energy sector. During the first six months of FY ‘11, telecom sector topped the list with 31.51 per cent
share of the total valuation of M&A deals that took place in India, followed by metal & mining sector
accounted for 24.08 per cent, energy sector accounted for 23.59 per cent while pharmaceutical and
BFSI sector accounted for 7.11 per cent and 5.28 per cent respectively.
There were 8 inbound, outbound and domestic M&A deals took place in telecom sector during April-September 2010, valuing to USD 16.60 billion, representing 31.51 per cent share in total valuation of the M&A deals that occurred during the period.
Other sectors like IT & ITES, steel, consumer non durable, cement, real estate, hospitality, media & entertainment, consumer durable and healthcare and aviation witnessed 92 M&A deals for an amounttotaling to USD 4.44 billion, contributing only 8.43 per cent share in total M&A deals.
Among the major outbound deals during April-September 2010 was India’s telecom major Bharti Airtelcompleted a deal to buy Kuwait-based Zain Telecom's African business for USD 10,700 million.
The other major outbound M&A deal occurred in the BFSI sector, India’s Hinduja Group acquired
Luxembourg-based KBL European Private Bankers SA for USD 1690 million (USD 1.69 billion) toexpand its wealth-management business in Europe.
In other outbound deal took in metal & mining sector Adani Enterprises, India’s largest importer of
coal, bought coal mine assets in Queensland from Australia's coal-to-liquids company Linc Energy forUSD 2720 million. India’s Vedanta Resources Plc's acquired London based Anglo American Zinc forUSD 1338 million.
The next major merger and acquisition outbound deal recorded in energy sector, India’s RelianceIndustries Ltd (RIL) picked up a 45 per cent stake in Texas, US-based Pioneer Natural Resources Co.for USD 1320 million.
Reebok's mission is to enroll global youth inclining towards the music-and-lifestyle image that it
promotes through sports, music and technology.
This complements Adidas's mission to be the leading sports brand in the world, with a focus on
performance and international presence"...
Integration Issues
Adidas said the companies would grow as a combined entity but would retain separate
management. The companies also ruled out any workforce reductions.
The new entity would continue to have separate headquarters and their individual sales forces.
The companies would also keep most of the distribution centers independent and would have
separate advertising programs for their brands. Hainer said, "The brands will be kept separate
because each brand has a lot of value and it would be stupid to bring them together.
The companies would continue selling products under respective brand names and labels."
Adidas declared that the deal would involve investment in both Adidas and Reebok. These
investments would guide the companies towards effective consolidation.
The Track Ahead
Analysts had varied opinions about the deal. Some analysts felt that Adidas could beat Nike to
become the industry leader. Al Ries said that, "The biggest benefit is that it removes a
competitor. Now, all they need to do is to focus all their efforts on competing with Nike."
However, a few analysts opined that it was impossible to dislodge Nike from its No. 1 position.
Nike was a preferred brand because of its fashion status, colors, and combinations. Although
Adidas was perceived to have good quality products that offered comfort and Reebok was perceived as a 'cool' brand, Nike was perceived as having both 'hipness' and quality...
Though the M&As basically aim at enhancing the shareholders value or wealth, the results of
several empirical studies reveal that M&As consistently benefit the target company's
shareholders but not the acquirer company shareholders. A majority of corporate mergers fail.
Failure occurs on average, in every sense, acquiring firm stock prices likely to reduce when
mergers are announced; many acquired companies sold off; and profitability of the acquired
company is lower after the merger relative to comparable non-merged firms. Consulting firms
have also estimated that from one half to two thirds of M&As do not come up to the expectations
of those transacting them, and many resulted in divestitures. Statistics show that roughly half of
acquisitions are not successful. M&As fails quite often and fails to create value or wealth for
shareholders of the acquirers. A definite answer as to why mergers fail to generate value for acquiring shareholders cannot be provided because mergers fail for a host of reasons. Some of
the important reasons for failures of mergers are discussed below:
1. Excessive premium
In a competitive bidding situation, a company may tend to pay more. Often highest bidder is one
who overestimates value out of ignorance. Though he emerges as the winner, he happens to be in
a way the unfortunate winner. This is called winners curse hypothesis. When the acquirer fails to
achieve the synergies required compensating the price, the M&As fails. More you pay for a
company, the harder you will have to work to make it worthwhile for your shareholders. When
the price paid is too much, how well the deal may be executed, the deal may not create value.
2. Size Issues
A mismatch in the size between acquirer and target has been found to lead to poor acquisition
performance. Many acquisitions fail either because of 'acquisition indigestion' through buying
too big targets or failed to give the smaller acquisitions the time and attention it required.
3. Poor Cultural Fits
Cultural fit between an acquirer and a target is one of the most neglected areas of analysis prior
to the closing of a deal. However, cultural due diligence is every bit as important as careful
financial analysis. Without it, the chances are great that M&As will quickly amount to
M&As have become very popular over the years especially during the last two decades owing to
rapid changes that have taken place in the business environment. Business firms now have to
face increased competition not only from firms within the country but also from international
business giants thanks to globalization, liberalization, technological changes, etc. Generally the
objective of M&As is wealth maximization of shareholders by seeking gains in terms of synergy,
economies of scale, better financial and marketing advantages, diversification and reduced
earnings volatility, improved inventory management, increase in domestic market share and also
to capture fast growing international markets abroad. But astonishingly, though the number and
value of M&As are growing rapidly, the results of the studies on the impact of mergers on the
performance from the acquirers' shareholders perspective have been highly disappointing. In this paper an attempt has been made to draw the results of only some of the earlier studies while
analyzing the causes of failure of majority of the mergers. Making the mergers work successfully
is not that easy as here we are not only just putting the two organizations together but also
integrating people of two organizations with different cultures, attitudes and mindsets.
Meticulous pre-merger planning including conducting proper due diligence, effective
communication during the integration, committed and competent leadership, speed with which
the integration plan is integrated all this pave for the success of M&As. While making the
merger deals, it is necessary not only to make analysis of the financial aspects of the acquiring
firm but also the cultural and people issues of both the concerns for proper post-acquisition