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Mergers & acquisitions in India.

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Mergers & acquisitions in India

Companies consider mergers and acquisitions (M&As) a successful plan for expanding their business globally and promoting business growth. There are several motivations that have been driving M&A activity in India, and due to new technologies, policy liberalisation, reforms on FDI and privatisation, the number of M&A deals in India has grown. In this guide, we look at the benefits of M&As, explain the different types and delve into recent policies to boost M&As in India.

Key takeaways

  • Benefits of M&As include increasing market access, economies of scale, creating synergies and lowering manufacturing costs.
  • There are several types of mergers, such as horizontal mergers, vertical mergers, market-expansion mergers, product-expansion mergers, conglomerate mergers and congeneric mergers.
  • Acquisitions can be in the forms of business sales, share acquisitions, purchasing shares from existing and asset transfers.
  • The Companies Act also allows reverse mergers, cross-border mergers and fast-track mergers if conditions are met.
  • The Indian government has introduced several reforms to boost M&As in India.

Benefits of mergers and acquisitions

Consolidation is a profitable and attractive option for businesses due to the benefits of M&As, which range from expanding market access and eliminating competition to enhancing performance and lowering manufacturing costs.

Other benefits of M&As include:

Acquiring new technology or expertise

Companies may merge or acquire other companies which provide them with modern technologies and knowledge.

Create synergies

Creating synergies that make the merged firm more valuable than the two companies separately is a common justification for M&As. While revenue synergies are frequently produced through cross-selling, gaining market share or raising prices, cost synergies are produced as a result of economies of scale.

Economies of scale

When two companies are involved in an M&A deal, the companies are more productive and efficient, and they can benefit from improved bargaining power with distributors, access to financing and lower costs from high production volume.

Increase market share

M&As ensure that when two businesses conducting the same activities merge or acquire another company, their market share will increase.

Reduce tax liabilities

Merged or acquired companies can receive tax benefits if the targeted company is in a strategic industry or country with a favourable tax regime. Additionally, several governments provide tax reductions once the M&A is complete.

Risk diversification

M&A allows companies to have more revenue streams, and businesses may spread risk across revenue streams instead of having it focus on one stream.

Types of mergers and acquisitions in India

Mergers

Bringing two companies together is known as a merger, and a merger can be done to expand a company’s reach and market share, cut costs and boost long-term profitability.

There are several types of mergers, and are classified into the following types:

a. Horizontal merger

A horizontal merger is when two or more companies that compete in the same industry and produce similar products merge. The purpose of these mergers, which typically are industries with fewer companies as there is a higher level of competition, is to expand the business to gain a larger market share and economies of scale. A horizontal merger can have either a significant impact or little to no impact on the market.

b. Vertical merger

A vertical merger is when two companies operating at different stages of production within the same industry combine their operations. Merging two or more supply companies are carried out to create synergies through cost reduction.

An example of a vertical merger is Dish TV India Limited, a distribution platform and Zee Entertainment Enterprises Limited Ltd. (ZEEL), a broadcaster, as they are both in the same industry but at different production stages.

c. Congeneric merger

The congeneric merger is also known as a Product Extension Merger, and it is when two or more companies operate in the same sector but have different products or markets. Companies involved in a congeneric merger may share similar distribution channels, technology, research and development (R&D), production processes and marketing.

d. Conglomerate merger

A conglomerate merger is when two or more firms that are unrelated, in different industries or in different locations merge.

There are two types of a conglomerate mergers: 

  • Pure conglomerate merger involves companies that do not have anything in common.
  • Mixed conglomerate merger involves companies that are seeking to expand their product lines or markets.

e. Market-extension merger

A market-extension merger occurs between companies that sell the same products but compete in different markets. Companies that engage in a market-extension merger seek to gain a larger market and a larger client base.

f. Product-extension merger

The product-extension merger is when companies sell related products, but not the same, in the same market. The benefit of this merger is that the merging companies can bundle their products together to access a larger group of consumers and earn more profit.

Fast-track merger

According to the Companies Act, companies can merge through a fast-track merger. A fast-track merger requires the approval of shareholders, creditors and the Registrar of Companies (ROC) and can be entered into by the following companies:

  • Two or more small companies (private companies with paid-up capital of less than INR five million and turnover of less than INR 20 million as of their most recent audited financial statements)
  • A holding company with its wholly owned subsidiary
  • Two or more start-up companies (private companies incorporated under the Companies Act and recognized as such in accordance with notification number GSR 127 (E), 19 February 2019)
  • One or more start-up companies with one or more small companies
  • Other classes of companies that may be prescribed

Reverse merger

A reverse merger refers to when a smaller listed or public company is acquired by a bigger unlisted/private company. The reverse merger is a streamlined, fast-track method that enables a private company to become a public company without having to go through the process of going public.

Cross-border merger

Under the Companies Act, Indian and foreign companies are allowed to merge, however, the merger must be approved by the Reserve Bank of India (RBI). A foreign company refers to a company incorporated outside of India but conducts business activities in India.

A cross-border merger requires:

  • The foreign company is established in a recognised jurisdiction and satisfies certain conditions.
  • The transferee company ensures that a valuation is performed in accordance with internationally accepted accounting and valuation principles by a recognised professional body in its jurisdiction.

Acquisitions

Acquisitions occur when one company purchases the majority or all of the shares of another company to take over that business. If the acquirer company purchases more than 50% of the acquired company’s shares, the acquirer can make decisions regarding the acquired assets without the approval of the company’s shareholders.

An acquisition can be organized in the following ways listed below:

  • Asset transfers
  • Business sales
  • Share acquisitions
  • Share purchase from existing shareholders
  • Subscription of fresh shares

Government reforms to promote M&A in India

The Indian government has implemented a number of reforms to boost the growth of M&A. These include:

  • Issuing shares with differential voting rights prescribed by the Securities and Exchange Board of India (SEBI) to exercise greater control.
  • To encourage M&As in the start-up sector, the registered start-ups will receive tax benefits and exemptions.
  • The increase in M&A was accelerated by the implementation of lower corporate tax rates (from 30% to 22%).
  • Numerous multinational companies have acquired or merged with Indian companies as a result of India’s increased privatisation.
  • The rate of M&As in India also grew from the allowance of 100% FDI in the automatic route. Various policy reforms were put out by the government in industries such as defence manufacturing, civil aviation, coal and mining.
  • Foreign investments have been boosted by the Self-Reliant India Movement (Atma Nirbhar Bharat), primarily in the manufacturing sector. The start of this initiative resulted in successful M&A in India.
  • Fast-track mergers
  • Merger of listed companies with unlisted companies
  • Cross-border merger

How Acclime can help

M&As are one of the most effective ways to grow your business, and there are numerous benefits of merging with or acquiring other companies. The Indian government has implemented several reforms to encourage M&As, such as the fast-track merger and the cross-border merger.

If you need any advice on M&As, our M&A support teams can help you to grow your business rapidly without taking a toll on operations, marketing, or sales strategy.


About Acclime.

Acclime helps established multinational companies and startups start and operate their business in India and beyond. By seamlessly navigating our clients through the complexities of the local regulatory systems, we maximise opportunities while ensuring compliance and good governance.

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