FINAL Mergers and Acquisitions (Law)[1]

7/28/2019 FINAL Mergers and Acquisitions (Law)[1]

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Prof. Ambdekar

Rizvi Institutes of Management Studies

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 Merger

10. Case Study on L&T Cement and L&T Demerger

11. Case Study on Mahindra and Mahindra‟s acquisition of Ssangyong

13. Conclusion



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INTRODUCTION

CORPORATE RESTRUCTURING

Corporate restructuring is a term used to denote a company's reorganisation at the top corporate

level. This can also include legal status, ownership, operational, and financial restructuring to

improve profitability and provide better organisation for the present and/or prepared for market

changes. Any of the following change would qualify as corporate restructuring:

1) By inorganic route

2) Change in capital structure not in ordinary course of business

3) Change in ownership or control over management

Corporate restructuring has come to mean reorganisation prompted by a period of unsatisfactory

performance and declining profits caused by poor management, sudden market changes, or most

recently world financial crisis. Debtors or equity holders (partners/shareholders) may force it. If

it is under debt pressure restructuring usually then includes restructuring of debt as well as

corporate reorganization.

Corporate restructuring is usually a long, drawn out process with probably the majority of the

time involved with planning rather than actually implementing the restructuring decisions. Most

importantly, restructuring a company is an often-difficult operation requiring a no nonsense

approach and a willingness to face financial realities and prioritize difficult decisions.

Corporate restructuring is the process of redesigning one or more aspects of a company. The

process of reorganizing a company may be implemented due to a number of different factors,

such as positioning the company to be more competitive, survive a currently adverse economic

climate, or poise the corporation to move in an entirely new direction.



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MERGER

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



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airline – Air Deccan merger and the Jet Airways – Air Sahara merger. The Tata Cellular – Birla

AT&T Communications merger was one big horizontal merger in the telecommunication.

Unitech Group, an Indian real estate company &Telenor Group, a telecommunications company.

Telenor owns a controlling majority stake in the company (67.25%), which has been

branded Uninor in the Indian market.

Vertical Mergers: Vertical mergers refer to the combination of two entities at different stages of

the industrial or production process. For example, the merger of a company engaged in the

construction business with a company engaged in production of brick or steel would lead to

vertical integration. Companies stand to gain on account of lower transaction costs and

synchronization of demand and supply. Moreover, vertical integration helps a company move

towards greater independence and self-sufficiency. The downside of a vertical merger involves

large investments in technology in order to compete effectively.

Examples:

Purchase of automobile dealers by manufacturers like Ford and Vauxhall are examples of

vertical mergers. Ford‟s acquisition of Hertz is an example of a vertical merger (Geddes,

2006).

The acquisition of

Tata Motors acquiring Italian design house Trilix Srl

Congeneric Mergers: These are mergers between entities engaged in the same general industry

and somewhat interrelated, but having no common customer-supplier relationship. A company

uses this type of merger in order to use the resulting ability to use the same sales and distribution

channels to reach the customers of both businesses.

Examples:

Novartis AG merged with Alcon Inc., a leader in Eye care and vision

Prudential's acquisition of Bache & Company.

RPower and RNRL

http://en.wikipedia.org/wiki/Telenor_Group

http://en.wikipedia.org/wiki/Telenor_Group



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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

http://financial-dictionary.thefreedictionary.com/Subsidiary

http://financial-dictionary.thefreedictionary.com/Subsidiary



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with an existing public company, and installs its own management and takes all the necessary

measures to maintain the public listing.

Examples:

Portable digital device-maker Handheld Entertainment did this when it purchased Vika

Corp in 2006, creating the company known as ZVUE.

In 2002 ICICI merged with ICICI bank



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ACQUISITION

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

connotations that go along with selling out.



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TAKEOVER

A corporate action where an acquiring company makes a bid for an acquire is termed as

takeover. If the target company is publicly traded, the acquiring company will make an offer for

the outstanding shares. A welcome takeover is usually referring to a favourable and friendly

takeover. Friendly takeovers generally go smoothly because both companies consider it a

positive situation. In contrast, an unwelcome or hostile takeover can get very horrible.

Takeover is a strategy of acquiring control over the management of another company – either

directly by acquiring shares carrying voting rights or by participating in the management. Where

the shares of the company are closely held by a small number of persons a takeover may be

affected by agreement within the shareholders. However, where the shares of a company are

widely held by the general public, relevant regulatory aspects, including provisions of SEBI

(Substantial Acquisition of Shares and Takeovers) Regulations 1997 need to be borne in minds.

Takeovers may be broadly classified as follows:

Friendly takeover: It is a takeover effected with the consent of the taken over company.

In this case there is an agreement between the managements of the two companies

through negotiations and the takeover bid may be with the consent of majority

shareholders of the target company. It is also known as negotiated takeover.

Examples:

On 3 February 2000, UK-based mobile phone group Vodafone Air Touch

acquired the German telecommunications and engineering group Mannesmann

AG.

Hostile takeover: When an acquirer company does not offer the target company the

proposal to acquire its undertaking but silently and unilaterally pursues efforts to gain

control against the wishes of the existing management, such acts are considered hostile

on the management and thus called hostile takeovers.



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Example:

The Arcelor Mittal deal is an example of hostile takeover, where the LN Mittal

group acquired management control of Arcelor against the wishes of the Arcelor

management.

Bail out takeover: Takeover of a financially weak or a sick company by a profit earning

company to bail out the former is known as bail out takeover. Such takeovers normally

take place in pursuance to a scheme of rehabilitation approved by the financial institution

or the scheduled bank, who have lent money to the sick company. In bail out takeovers,

the financial institution appraises the financially weak company, which is a sick industrial

company, taking into account its financial viability, the requirement of funds for revival

and draws up a rehabilitation package on the principle of protection of interests of

minority shareholders, good management, effective revival and transparency. The

rehabilitation scheme should provide the details of any change in the management and

may provide for the acquisition of shares in the financially weak company as follows:

An outright purchase of shares or

An exchange of shares or

A combination of both

Examples:

Tech Mahindra takeover of Satyam

As part of business strategy, management need to decide whether the firm should grow naturally

(commonly called organic growth) or in the form of going outwards to acquire or merge with

other businesses. This is called inorganic growth which normally takes the form of Mergers and

Acquisitions (M&A) exercise.

With increasing globalization and dispersion of technology, product life-cycles are shortening

and competition is becoming intense, where there is little room for organizations to meet their

growth aspirations through internal development or organic growth. In order to achieve speedy

growth with limited market access, technology, finance and time, corporate worldwide have

preferred to grow inorganically through the route of mergers and acquisitions (M&A).



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LEGAL ASPECTS OF MERGERS AND ACQUISITION

Merger/Demerger is a court approved process which requires compliance of provisions under

sections 391-394 of the Companies Act, 1956. Accordingly, a merger/demerger scheme is

presented to the courts in which, the registered office of the transferor and transferee companies

are situated for their approval. However in the case of listed companies such scheme before

filing with the State High Court, need to the submitted to Stock Exchange where its shares are

listed.

The Courts then require the transferor and transferee companies to comply with the provisions of

the Companies Act relating to calling for shareholders and creditors meeting for passing a

resolution of merger/ demerger and the resultant issue of shares by the transferee company. The

Courts accord their approval to the scheme provided the scheme is not prejudicial to public

interest and the interests of the creditors and stakeholders are not jeopardized.

Regulation of Mergers & Acquisition

Mergers and acquisitions are regulated under various laws in India. The objective of the laws is

to make these deals transparent and protect the interest of all shareholders. They are regulated

through the provisions of:-



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The Companies Act, 1956

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,

Track record of defaults in the past,



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Pending litigations for dues payable or otherwise

If not dispensed with the High Court, the individual companies should hold separate meetings of

their shareholders and creditors for approving the amalgamation scheme. At least 75 percent of

shareholders and creditors in separate meeting, voting in person or by proxy, must accord

their approval to the scheme (Section 391(2)).

Explanation: A shareholders‟ meeting – 500 shareholders are present and voting. One of the

shareholders is holding 45,010 shares other 499 are holding 10 shares each totalling to 4990

shares. Thus, the shareholders present and voting are 500 in number and 50,000 in value. This

means that at least 251 members representing 37,500 shares have to approve the resolution. In

other words, even if all the 499 shareholders vote in favour of the resolution but the single

shareholder holding 45,010 shares votes against, the resolution cannot be passed for the want of

requisite majority in value. Other way round, even if the single shareholder having 90% majority

votes in favour but the entire rest vote against, the resolution cannot be passed for want of

requisite majority in number. The resolution can be passed only if this largest shareholder and

250 other shareholders vote in favour.

Disclosure to the creditors and members (Section 393):-

With every notice calling the meeting, a statement needs to be sent setting forth

the details of the arrangement and explaining its effects and in particular stating

any material interests of the directors.

In case the notice is given by way of an advertisement, the advertisement has to

either include the above mentioned statement or include the name and address of

the place where such statement will be available to the creditors or members as

the case may be.

Where default is made in complying with any of the requirements of this section,

the company and every officer of the company who is in default, shall be

punishable with fine which may extend to Rs. 50,000 and for the purpose of this

sub-section any liquidator of the company and any trustee of a deed for securing

the issue of debentures of the company shall be deemed to be an officer of the



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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

prohibit the same).



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Other important provisions:

1. Section 392 empowers the Court to wind up a company if it is satisfied that the

arrangement sanctioned by it under section 391 is not likely to work.

2. Section 396 talks about the powers of the Central Government to suo moto amalgamate

the companies.

3. Section 396A stipulates that the books and papers of the amalgamating companies shall

not be destroyed or disposed off without prior approval of the Central Government.



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THE COMPETITION ACT, 2002

The Act regulates the various forms of business combinations through Competition

Commission of India. Under the Act, no person or enterprise shall enter into a combination, in

the form of an acquisition, merger or amalgamation, which causes or is likely to cause an

appreciable adverse effect on competition in the relevant market and such a combination shall be

void. All combinations do not call for scrutiny unless the resulting combination exceeds the

threshold limits in terms of assets or turnover as specified by the Competition Commission of

India. The Commission while regulating a 'combination' shall consider the following factors:-

Actual and potential competition through imports;

Degree of countervailing power in the market;

Possibility of the combination to significantly and substantially increase prices or

profits;

Extent of effective competition likely to sustain in a market;

Availability of substitutes before and after the combination;

Section 5 of the Competition Act, 2002 deals with “Combinations” which defines combination

by reference to assets and turnover

(a) exclusively in India and(b) in India and outside India.

For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian

company without prior notification and approval of the Competition Commission. On the other

hand, a foreign company with turnover outside India of more than USD 1.5 billion (or in excess

of Rs. 4500 crores) may acquire a company in India with sales just short of Rs. 1500 crores

without any notification to (or approval of) the Competition Commission being required.

Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a

combination which causes or is likely to cause an appreciable adverse effect on competition

within the relevant market in India and such a combination shall be void. Thus, the Competition

Act does not seek to eliminate combinations and only aims to eliminate their harmful effects.

http://business.gov.in/outerwin.php?id=http://www.competition-commission-india.nic.in/Act/competition_act2002.pdf


http://business.gov.in/outerwin.php?id=http://www.competition-commission-india.nic.in/Capacity_Building_Initiatives/Combinations(Mergers%20&%20Acquisitions).pdf



http://business.gov.in/outerwin.php?id=www.cci.gov.in









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SEBI TAKEOVER CODE

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.



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Making open offer by "Public announcement"

1. Acquisition of 15% or more of shares or voting right:

Acquisition of shares to get her with existing holding would entitle acquires to exercise 15% or

more of voting rights in a target company. He can acquire share after making "Public

announcement".

2. Acquisition by person already holding >15% but 55%:-

Acquisition of shares or voting rights of 5% or more by the person (acquirer/ person acting

concert) Holding more than 15% but less than 55%) of shares or voting rights in a target

company can do after making "Public announcement" This type of acquisition is called creeping

acquisition.

3. Acquisition by person already holding >55% but 75%:-

Acquisition of shares or voting rights of by the person (acquirer/ person acting concert) Holding

more than 15% but less than 55% but less than 75%o of shares or voting rights in a target

company can do after making "Public announcement" This type of acquisition is called as

consolidation of holding.

4. Acquisition of Control:-

Acquisition of control over a target company with acquisition of shares or voting Rights control

may be of right to appoint directly or indirectly majority of directors on the board of Target

Company or to control the management or policy decision. By a person or person acting

Individually or person acting in concern by virtue of their share holding or management rights or

share holder agreements.



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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

attractive and cost effective.



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2. Creeping acquisition

The Takeover Code of 1997 recognised creeping acquisition at two levels – from 15% to 55%

and from 55% to the maximum permissible limit of 75%. Acquirers holding from 15% to 55%

shares were allowed to purchase additional shares or voting rights of up to 5% per financial year

without making a public announcement of an open offer. Acquirers holding from 55% to 75%

shares were required to make such public announcement for any additional purchase of shares.

However, in the latter case, up to 5% additional shares could be purchased without making a

public announcement if the acquisition was made through open market purchase on stock

exchanges or due to buyback of shares by the listed company.

The Takeover Code of 2011 makes the position simpler. Now, any acquirer, holding more 25%

or more but less than the maximum permissible limit, can purchase additional shares or voting

rights of up to 5% every financial year, without requiring to make a public announcement for

open offer. The Takeover Code of 2011 also lays down the manner of determination of the

quantum of acquisition of such additional voting rights.

This would be beneficial for the investors as well as the promoters, and more so for the latter,

who can increase their shareholding in the company without necessarily purchasing shares from

the stock market.

3. Indirect acquisition

The Takeover Code of 2011 clearly lays down a structure to deal with indirect acquisition, an

issue which was not adequately dealt with in the earlier version of the Takeover Code.

Simplistically put, it states that any acquisition of share or control over a company that would

enable a person and persons acting in concert with him to exercise such percentage of voting

rights or control over the company which would have otherwise necessitated a public

announcement for open offer, shall be considered an indirect acquisition of voting rights or control of the company.

It also states that wherever,

a) the proportionate net asset value of the target company as a percentage of the consolidated

net asset value of the entity or business being acquired;



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b) the proportionate sales turnover of the target company as a percentage of the consolidated

sales turnover of the entity or business being acquired; or

c) the proportionate market capitalisation of the target company as a percentage of the

enterprise value for the entity or business being acquired;

is more than 80% on the basis of the latest audited annual financial statements, such indirect

acquisition shall be regarded as a direct acquisition of the target company and all the obligations

relating to timing, pricing and other compliance requirements for the open offer would be same

as that of a direct acquisition.

4. Voluntary offer

A concept of voluntary offer has been introduced in the Takeover Code of 2011, by which an

acquirer who holds more than 25% but less than the maximum permissible limit, shall be entitled

to voluntarily make a public announcement of an open offer for acquiring additional shares

subject to their aggregate shareholding after completion of the open offer not exceeding the

maximum permissible non-public shareholding. Such voluntary offer would be for acquisition of

at least such number of shares as would entitle the acquirer to exercise an additional 10% of the

total shares of the target company.

This would facilitate the substantial shareholders and promoters to consolidate their shareholding

in a company.

5. Size of the open offer

The Takeover Code of 1997 required an acquirer, obligated to make an open offer, to offer for a

minimum of 20% of the „voting capital of the target company‟ as on „expiration of 15 days after

the closure of the public offer‟. The Takeover Code of 2011 now mandates an acquirer to place

an offer for at least 26% of the „total shares of the target company‟, as on the „10th working day

from the closure of the tendering period‟.

The increase in the size of the open offer from 20% to 26%, along with increase in the initial

threshold from 15% to 25%, creates a unique situation under the Takeover Code of 2011. An

acquirer with 15% shareholding and increasing it by another 20% through an open offer would



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have only got a 35% shareholding in the target company under the Takeover Code of 1997.

However, now an acquirer with a 25% shareholding and increasing it by another 26% through

the open offer under the Takeover Code of 2011, can accrue 51% shareholding and thereby attain

simple majority in the target company.

These well thought out figures clearly shows the intention of the regulator to incentivize

investors acquiring stakes in a company by giving them an opportunity of attaining simple

majority in a company.

6. Important exemptions from the requirement of open offer

Inter-se transfer – The Takeover Code of 1997 used to recognize inter-se transfer of shares

amongst the following groups –

a) Group coming within the definition of group as defined in the Monopolies and

Restrictive Trade Practices Act, 1969

b) Relatives within the meaning of section 6 of the Companies Act, 1956

c) Qualifying Indian promoters and foreign collaborators who are shareholders, etc.

The categorisations of such groups have been amended in the Takeover Code of 2011 and

transfer between the following qualifying persons has been termed as inter-se transfer:

a) Immediate relatives

b) Promoters, as evidenced by the shareholding pattern filed by the target company not less

than 3 years prior to the proposed acquisition;

c) Acompany, its subsidiaries, its holding company, other subsidiaries of such holding

company, persons holding not less than 50% of the equity shares of such company, etc.

d) Persons acting in concert for not less than 3 years prior to the proposed acquisition, and

disclosed as such pursuant to filings under the listing agreement.

To avail exemption from the requirements of open offer under the Takeover Code of 2011, the

following conditions will have to be fulfilled with respect to an inter-se transfer:

If the shares of the target company are frequently traded – the acquisition price per share

shall not be higher by more than 25% of the volume-weighted average market price for a



Prof. Ambdekar


period of 60 trading days preceding the date of issuance of notice for such inter-se

transfer

If the shares of the target company are infrequently traded, the acquisition price shall not

be higher by more than 25% of the price determined by taking into account valuation

parameters including, book value, comparable trading multiples, etc.

Rights issue – The Takeover Code of 2011 continues to provide exemption from the requirement

of open offer to increase in shareholding due to rights issue, but subject to fulfillment of two

conditions:

a) The acquirer cannot renounce its entitlements under such rights issue; and

b) The price at which rights issue is made cannot be higher than the price of the target

company prior to such rights issue.

Scheme of arrangement – The Takeover Code of 1997 had a blanket exemption on the

requirement of making an open offer during acquisition of shares or control through a scheme of

arrangement or reconstruction. However, the Takeover Code of 2011 makes a distinction

between where the target company itself is a transferor or a transferee company in such a scheme

and where the target company itself is not a party to the scheme but is getting affected

nevertheless due to involvement of the parent shareholders of the target company. In the latter

case, exemption from the requirement of making an open offer would only be provided if

a) The cash component is 25% or less of the total consideration paid under the scheme, and

b) Post restructuring, the persons holding the entire voting rights before the scheme will

have to continue to hold 33% or more voting rights of the combined entity.

Buyback of shares – The Takeover Code of 1997 did not provide for any exemption for increase

in voting rights of a shareholder due to buybacks. The Takeover Code of 2011 however provides

for exemption for such increase.

In a situation where the acquirer‟s initial shareholding was less than 25% and exceeded the 25%

threshold, thereby necessitating an open offer, as a consequence of the buyback, The Takeover

Code of 2011 provides a period of 90 days during which the acquirer may dilute his stake below

25% without requiring an open offer.



Prof. Ambdekar


Whereas, an acquirer‟s initial shareholding was more than 25% and the increase in shareholding

due to buyback is beyond the permissible creeping acquisition limit of 5% per financial year, the

acquirer can still get an exemption from making an open offer, subject to the following:

a) Such acquirer had not voted in favour of the resolution authorising the buy-back of

securities under section 77A of the Companies Act, 1956;

b) In the case of a shareholder resolution, voting was by way of postal ballot;

c) The increase in voting rights did not result in an acquisition of control by such acquirer

over the target company

In case the above conditions are not fulfilled, the acquirer may, within 90 days from the date of

increase, dilute his stake so that his voting rights fall below the threshold which would require an

open offer.

7. Other important changes

Following are few other important amendments that have been brought about in the Takeover

Code of 2011:

Definition of ‘share’ – The Takeover Code of 1997 excluded „preference shares‟ from the

definition of „shares‟ vide an amendment of 2002. However, this exclusion has been removed in

the Takeover Code of 2011 and therefore now „shares‟ would include, without any restriction,

any security which entitles the holder to voting rights.

Non-compete fees – As per the Takeover Code of 1997, any payment made to the promoters of a

target company up to a maximum limit of 25% of the offer price was exempted from being taken

into account while calculating the offer price. However, as per the Takeover Code of 2011, price

paid for shares of a company shall include any price for the shares / voting rights / control over

the company, whether stated in the agreement or any incidental agreement, and includes „control

premium‟, „non-compete fees‟, etc.

Responsibility of the board of directors and independent directors – The general obligations

of the board of directors of a target company under the Takeover Code of 1997 had given a

discretionary option to the board to send their recommendations on the open offer to the



Prof. Ambdekar


shareholders and for the purpose the board could seek the opinion of an independent merchant

banker or a committee of independent directors.

The Takeover Code of 2011, however, makes it mandatory for the board of directors of the target

company to constitute a committee of independent directors (who are entitled to seek external

professional advice on the same) to provide written reasoned recommendations on such open

offer, which the target company is required to publish.



Prof. Ambdekar


PROCEDURE INVOLVED IN TAKEOVER

(1) Appointment of Merchant Banks (regulation-13) :-

The acquires shall have to appoint a category I merchant banker who is not associate after

member group of the acquirer or the target company, before making public announcement

(2) Public announcement (regulation-14) ;-

It is an announcement made by the acquirer through a merchant. Banker disclosing his intention

to acquire minimum of 20% of shares/voting rights of then target company from existing shares

holding by means of an open offer. Main object of public announcement is to make aware of an

exit opportunity available the shares holders of the target company.

Public announcement must be made in English and also in a vernacular language daily news

paper circulating in the state where registered office of the target company is situated and the

stock exchange where the share are most frequently traded. An appointment of merchant banker

is mandatory to carry out the process open offer.

Public announcement must contain the offer price, number of shares to be acquired from the

public, identify of acquires purpose, future plans in respect of target company, period with in

which offer would be completed.

(3) Filing letter of offer with SEBI (regulation-18):-

A letter of offer (L.O.) must be filed with SEBI within 14 days from the date of public

announcement. A hard and soft copy of public announcement along with application made in

news paper and filing fee of Rs. 50000/- By way of banks cheque or DD is to be remitted the

acquires has to furnish a due diligence certificate and registration details as per SEBI circular No.

RMB (G-1) series dated 26 June 1997 within 14 days from the public announcement acquires

shall send a copy of the draft L.O. to the target company and all the stock exchange. L.O. must

be dispatched to the shareholder within 21 days from its submission to SEBI. Submission of Lo

with SEBI for a purpose of overseeing whether the disclosures contained therein are adequate

and are in conformity with the takeover regulation. It would facilitate the shares holder to take an

informed decision with regard to the offer. SEBI does not take any responsibility as regards

correctness of any statement, financial soundness of acquirer or PAC or target.



Prof. Ambdekar


(4) Minimum offer price (regulation-20) :-

L.O must contain the minimum offer price. While determining minimum offer price, the acquirer

in consultation with merchant banker to take into consideration all parameters listed below:-

(a) Negotiated price between acquires and share holder of target company.

(b) Highest price paid by the acquirer for acquisition of shares by way of allotment in a public or

right or preferential issue during 26 weeks prior to public announcement whichever is higher.

(c) In case shares of target company are frequently traded the average weekly high and low of

the closing price of shares of the target company during 26 weeks.

(d) In case the shares of target company are not frequently traded, fundamentals such as

bookvalue, EPS, return on networth, the industry average are the other parameters needs to be

considered.

(5) Minimum public offer (regulation-21):-

The public offer made by the acquirer to the share holders of the target company shall be for a

minimum of 20% of the voting capital of the company an acquirer has to make an offer for a

minimum of 20% of shares and he cannot make on open offer for less than 20% of share.

(6) Other obligation of the acquirer (regulation-22):-The public announcement shall be made only when the acquirer is able to implement the offer.

During the offer period, the acquirer person acting in concert shall not be entitled to be appointed

on board of Target Company once he deposit 100% of consideration in the escrow account he

may be entitled to be appointed on the board of target company after 21 days of public

announcement

(7) Obligation of the board of target company/merchant banker (regulation-23 & 24):-

After public announcement of offer, the board of directors of the target company, unless

approved by the members at the general board meeting, shall not sell, transfer or dispose of

assets of the company or its subsidiaries or issue or allot any us issued securities

or enter into any material contracts. The merchant banks shall have to send a final report to SEBI

within 45 days from the date of closure of the offer.



Prof. Ambdekar


(8) Withdrawal of offer (reguIation-27):-

The Shareholder shall have the option to withdrawal acceptance given by him up to 3 working

days prior to the date of closure of the offer.

An acquirer shall have no option to withdrawal a public offer made except under the following

circumstances.

(1) Statutory approvals required have been refused.

(2) The sole acquirer being a natural person has died.

(3) Such circumstances as in the opinion of the SEBI board merits withdrawal. In the event of

withdrawal of offer the acquirer of the merchant banks shall make a public announcement in the

same news paper in which P.a. of offer was published indicating reasons for withdrawal of offer.

(9) Escrow account (regulation-28):-

The acquires must create an escrow account of 25% of consideration for offer size less than Rs.

100 crore and 10% for the excess consideration above Rs. 100 crores. The Escrow account shall

consist of cash deposited with a scheduled commercial bank.

(10) Competitive bids :-

Competitive bids are an offer made by a person other than the acquirer who has made the first

public announcement. The bid must be equal to the present and proposed share holding of first

acquires. The first acquires can revise his offer pursuant to the competitive bid within 14 days.

Both acquirers can make upward revision in the price and number of shares till 7 days. Before

the closure of the offer, the shares holder shall have option to switch his acceptance between

different offers to enable him to be in a better position to decide as to which of the subsisting

offers is better.



Prof. Ambdekar


Stock Exchange Bye – Laws

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



Prof. Ambdekar


such securities prevailing in the market prior to the suspensionof business. For each subsequent

Clearing the GoverningBoard may reduce the making-up prices as it may deem fit inthe case of

each security but in no case such reduction shallexceed 5 per cent of the previous making-up

prices. Allcontracts remaining unsettled at the end of each Clearing

CLAUSES 40A and 40B OF THE LISTING AGREEMENTS OF THE BSE and NSE

Prior to the issuance of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

1994, there was no comprehensive piece of legislation that governed the takeover bids. The first

attempt to regulate the takeovers was made by the government by incorporating clause 40 in the

listing agreements of stock exchanges. This clause provided for making a public offer to the

share holders of a company by any person who sought to acquire 25% of the voting rights of the

company. However, in the Indian context, where companies could be controlled (in the past) by

acquiring much less than 25%, the basic purpose of the clause could be and was being defeated

by acquiring shares just below the threshold limit of 25% and still acquiring control over the

company. Hence, the need to lower the limit to 10% was felt accordingly, in 1990, even before

SEBI became a statutory body, the government , in consultation with SEBI, replaced the clause

40 by clauses 40A and 40B. We refer to them as „original 40A‟ and „original 40B‟. The text of

these clauses, as they stood till they amended w.e.f. 1 May 2006 is reproduced in the appendix

15. The gist of the provisions of theses clauses was as follows:

ORIGINAL CLAUSE 40A

a) When any person acquires or agrees to acquire the shares in the company and when the

total nominal value of such shares, together with the shares already held by him exceeds

or shall exceed 5 % of the total voting capital of the company, the acquirer as also the

company should notify the stock exchange of such acquisition within two days.

b) Any person holding shares less than 10 % of the nominal value of shares in a company,

shall not acquire any shares, when together with the shares already held carry 10% or

more of the voting rights unless he notifies the stock exchange and fulfills the conditions

specified in the clause 40B.



Prof. Ambdekar


ORIGINAL CLAUSE 40B

Clause 40B mainly stipulated that in case of an acquisition of shares exceeding 10% of the

voting capital of the company as above, the person so acquiring the shares shall make open offer

to acquire at least 20% shares from the public through an open offer. It also contained various

other provisions relating to open offer.

Since these clauses have been substantially amended, we are not discussing them in detail.

There were two difficulties in using these clauses for effective regulation of substantial

acquisitions and takeover. They were

a) These clauses did not have a statutory force behind them. They were of a contractual

nature, the listing agreement being a contract between a company and a stock exchange.

Hence they could be enforced upon an acquirer only if an acquirer was a listed company.

If the acquirer was other than a listed company, the stock exchange could not do

anything. Even in case of the acquirer company, strictly speaking any breach of clauses

40A and 40B made by an acquirer company, it was not a breach of its agreement with the

stock exchange, but it was a breach of the agreement of the target company with the stock

exchange which the acquirer company was not yet a privy.

b) The only remedy for non compliance with these clauses was de-listing the shares of the

target company. However this was contrary to the very object of the investor protection

for which it was met.

Therefore after acquiring statutory powers pursuant to the enactment of the SEBI act in 1992,

SEBI came out with the SEBI regulations (Substantial Acquisition of Shares and Takeovers) in

1994.

When SEBI issued these regulations it retained the basic framework of the clauses 40A and 40B,

though it made a substantial departure from them by dropping „change in control management‟

unaccompanied by substantial acquisition of shares beyond threshold limit as a ground to trigger

an open offer (this has been restored under regulation 12 of the 1997 regulations now in force).

SEBI also incorporated in 1994 regulations number of other provisions such as negotiated and



Prof. Ambdekar


open market acquisition rules, rules relating to competitive bids, revision of offer, withdrawal of

offer, etc.

Subsequent to the issuance of the takeover regulations of 1994, the original clauses 40A and 40B

continued to exist in the listing agreements. Though the Justice Bhagwati committee rightly

recommended that they had now become redundant and hence be replaced by more appropriate

ones, it was in May 2006 that the new clauses 40A and 40B were made effective. These clauses,

which we shall call as „new 40A‟ and „new 40B‟ have been reproduced in appendix 16. The gist

of the provisions is as follows:

NEW CLAUSE 40A

A. All listed companies, other than those mentioned hereunder, will be required to ensure the

minimum level of public shareholding at 25% of the total number of issued shares of a class

or kind for the purpose of continuous listing[sub-clause(i)]:

i. Companies which, at the time of initial listing, had offered to public less than 25% but

not less than 10% of the total number of issued shares of a class or kind, in terms of rule

19(2)(b) of Securities Contract (Regulation) Rules 1957 (SCRR) or companies desiring

to list their shares by making an initial public offering(IPO) of less than 25% but at least

10% in terms of rule 19(2)(b) of SCRR.

ii. Companies which have reached or which would in future reach, irrespective of the

percentage of their shares with the public at the time of initial listing, a size of 2 crore or

more in terms of number of listed shares and Rs1000 crore or more in terms of the

market capitalization.[sub-clause (iii)].

The companies at (i) and (ii) above will be required to maintain the minimum level of public

shareholding at 10% at the total number of issued shares of a class or kind for the purpose of

continuous listing.

The term “ public shareholding” for the purpose of the continuous listing, comprises of shares

held by entities other than promoters and promoter group and shares held by custodians against

which depository receipts are issued overseas. The term „promoter‟ and „promoter group‟ shall

have the same meaning as in assigned to them under the SEBE (DIP) Guidelines, 2000.



Prof. Ambdekar


Companies exempted from minimum 10% shareholding

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

satisfying about the circumstances of the case.



Prof. Ambdekar


This could be further extended by the SSE by a period not exceeding one year, shareholding and

genuineness of the reasons submitted by the company (provision to sub-clause vii)

D) Where the public shareholding in the company, in respect of any clause or kind of shares has

reduced below the stipulated minimum, the company shall not further dilute the same except on

account of supervening extraordinary events (sub clause v)

If the public shareholding falls below 25% or 10% limit, as the case may be, the company shall

not dilute its public shareholding with the prior approval of SSE, except for supervening

extraordinary events, including, but not limited to events specified as under:

a) Issuance or transfer of shares in compliance with directions of a regulatory or statutory

authority or court or tribunal;

b) Issuance or transfer of shares in compliance with the SEBI (Substantial Acquisition of

Shares and Takeovers) Regulations, 1997;

c) Re-organization of capital by way of a scheme of arrangement; and

d) Issuance or transfer of shares under a restructuring plan approved in compliance with the

Corporate Debt Restructuring System laid down by the Reserve Bank of India.

E) A company shall not, except on account of supervening extraordinary events, issue shares to

promoters or entities belonging to the promoter group or make any offer for buy-back of its

shares or buy its shares for making sponsored issuance of the depositary receipts, etc. If it results

into reducing the public shareholding below the stipulated minimum level (sub clause vi).

F) Nothing contained in sub causes (i) to (vii) shall apply to the government companies (as

defined under section 617 of the companies act, 1956), infrastructure companies Guidelines,

2000 and referred to the Board for Industrial and Financial Reconstruction ( BIFR ).

G) The company shall, upon its public shareholding reducing below the stipulated minimum

level, immediately take steps to increase the same above the stipulated minimum by any of the

following methods:

Public issue through prospectus



Prof. Ambdekar


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



Prof. Ambdekar


their shares with public at the time of initial listing , a size of 2 crores or more in terms of

number of the listed shares and Rs 1000 crore or more in terms of the market

capitalization; will be required to ensure a minimum level of public shareholding at 25%

of the total number of issued shares of a class or kind for the purpose of continuous

listing. The clause then stipulates the rules relating to the time within which and manners

in which non-compliant companies as on May 2006, as also companies subsequently

becoming non-compliant have to become compliant.

Regulation 55A of SEBI (Depositories and Participants) Regulations, 1996

For the information of companies, Regulation 55A of SEBI (Depositories and Participants)

Regulations, 1996 states:

1. Every issuer shall submit audit report on a quarterly basis starting from September 30,

2003 to the concerned stock exchanges audited from a qualified chartered accountant or a

practicing company secretary, for the purposes of reconciliation of the total issued

capital, listed capital and capital held by depositories in dematerialized form , the details

of changes in share capital during the quarter and the in-principle approval obtained by

the issuer from all stock exchanges where it is listed in respect of such further issued

capital.

2. The audit report under sub-regulation (1) shall also give the updated status of the register

of members of the issuer and confirm that security have been dematerialized as per

requests within 21 days from the date of receipt of request from the issuer and where the

dematerialization has not been effected within the said stipulated period, the report shall

disclose the reasons for such delay.

3. The issuer shall immediately bring to the notice of depositories and the stock exchanges,

any difference observed in its issue, listed, and the capital held by depositories.



Prof. Ambdekar


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

companies cease to exist.



Prof. Ambdekar


CLASSIFICATION OF AMALGAMATIONS

Amalgamation by way of merger: In order to classify by the way of merger, the amalgamations

has to satisfy these conditions:

1) All the assets and liabilities of the transferor company must become the assets and

liabilities of the transferee company

2) Shareholders holding not less than 90% of the face value of the equity shares of the

transferor company (other than the equity shares already held therein, immediately before

the amalgamation by the transferee company or its subsidiaries or their nominees)

become the equity shareholder of the transferee company by virtue of the amalgamation.

3) The consideration for amalgamation received by those equity shareholders of the

transferor company who agree to become the shareholders of the transferee company is

discharged by the transferee company wholly by the issue of equity shares in the

transferee company, except that cash may be paid in respect of fractional shares.

4) The business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

5) No adjustments is intended to be made in the book value of the assets and liabilities of

the transferor company when they are incorporated in the financial statements of the

transferee company except to ensure the uniformity of accounting policies.

Amalgamation by way of purchase: Accordingly, an amalgamation in which any one or more

of the above condition is not satisfied, the same is considered as amalgamation by way of

purchase.

METHODS OF ACCOUNTING FOR AMALGAMATIONS

Accounting method applicable to amalgamate by way of merger is called ‘pooling of interest

method’. Under this method following norms, are required to be adhered to:



Prof. Ambdekar


1) Assets, Liabilities and reserves of the transferor company must be recorded in the

transferee company‟s books at their existing carrying amounts and in the same form as at

the time of amalgamation.

2) Even the reserves under various heads in the transferor company‟s books must be

accounted under the same heads in the transferee company‟s books.

3) The difference between the amount recorded as the share capital issued and the amount of

share capital of the transferor company must be adjusted in reserves.

Accounting method applicable to amalgamation by way of purchase is called as ‘purchase’

method.

1) Assets and liabilities of the transferor company can be accounted in the transferee

company‟s books at either their book values or at their fair values

2) With regard to the reserves of the transferor company (capital or revenue) the transferee

company should not include them in its books. Only exception to this is the statutory

reserves such as debentures redemption reserves, which have to be shown in the

transferee company‟s books under the same account heads and at the same values as

appearing in the transferors books of accounts

On the other hand any excess of the consideration over the value of the net assets of the

transferor company must be recognised in the „goodwill‟; whereas if the amount of the

consideration is lower than the value of the net assets acquired, the difference must be

treated as capital reserves.



Prof. Ambdekar


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



Prof. Ambdekar


continual pressure. Senior Management of the firm cannot ignore these pressures. Indeed they

must continually undertake activities to promote brand, decrease inventory investments, increase

customer focus and satisfaction, streamline supply chains, and manage all other drivers of value

in global business. Nevertheless, they must also look outward to build value. In contrast to the

fighting and scraping for market shares and profits in traditional domestic markets, the global

marketplace offers greater growth potential –greater “bang for the buck”. Why are the mergers

and takeover s happening at such a rapid pace” The history of the world, my sweet, is who gets

eaten and who gets to eat.”

Cross Border Mergers and Acquisition Drivers: There are a variety of drivers and motivating

factors at play in the M& A world.

1. Expansion is one of the primary reasons to cross the borders as the national limits fail to

provide growth opportunities. Becoming larger, and then reaping the benefits of size in

competition and negotiation.

2. Gaining market power and dominance i.e. to gain monopoly. The Company which has been

acquired by the acquirer is always a Company which is trembling financially but had something

to offer to the acquiring Company.

3. Achieving synergies in local/global operation and across industries and gaining access to

strategic proprietor assets are other major reasons for Cross Border merger and acquisition.

INBOUND CROSS BORDER M&AS IN INDIA AND THE FEMA LAWS

When we talk about inbound cross border M&As in India, we essentially mean foreign

investment in India. As stated earlier, foreign investment in India, i.e. investment in India by a

“person resident outside India”, (hereinafter to be interchangeably used with “non resident”) is

governed by FEMA 20.

The term “ person resident outside India” is defined as meaning “a person who is not resident in

India” under Section 2 (w) of FEMA. Therefore, for understanding the meaning of the term

“ person resident outside India” it is necessary to understand the meaning of the term „ person‟

and “ person resident in India”. „Person‟ is defined under Section 2 (u) of FEMA as:

(a) an individual,

(b) a Hindu undivided family,

(c) a company,

(d) a firm,

(e) an association of persons or a body of individuals, whether incorporated or not,

(f) every artificial juridical person, not falling within any of the preceding sub-clauses, and



Prof. Ambdekar


(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

accordance with FEMA 20;



Prof. Ambdekar


(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

as under:



Prof. Ambdekar


(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



Prof. Ambdekar


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%.



Prof. Ambdekar


Examples

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

on by the Indian company;

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Prof. Ambdekar


(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

company.



Prof. Ambdekar


(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



Prof. Ambdekar


against equity participation in the JV/WOS abroad”, and also quoting identification number, if

already allotted by RBI.

An Indian Party capitalising exports under Regulation 10 is required to submit to RBI copy/ies of

the share certificate/s or any document issued by the Joint Venture or Wholly Owned Subsidiary

outside India to the satisfaction of RBI evidencing the investment from the Indian Party together

with the duplicate of Form GR / SDF / SOFTEX through the branch of an authorised dealer

designated by it, within 6 months from the date of export, or any further time as permitted by it.

V. Transfer by way of sale of shares of a JV/WOS

No Indian party is entitled to sell any share or security held by it in a Joint Venture or Wholly

Owned Subsidiary outside India, to any person, except as otherwise provided in FEMA laws or

with the permission of RBI.

VI. Pledge of Shares of Joint Ventures and Wholly Owned Subsidiaries

Further, FEMA 19 permits an Indian party to transfer, by way of pledge, shares held in a Joint

Venture or Wholly Owned Subsidiary outside India as a security for availing of fund based or

non-fund based facilities for itself or for the Joint Venture or Wholly Owned Subsidiary from an

authorised dealer or a public financial institution in India.

VII. Obligations of the Indian Party

Under Regulation 15, an Indian party which has acquired foreign security by way of directinvestment in accordance with FEMA 19, is obliged to:

(i) Receive share certificates or any other document as an evidence of investment in the

foreign entity to the satisfaction of RBI within 6 months, or such further period as RBI

may permit, from the date of effecting remittance or the date on which the amount to be

capitalised became due to the Indian party or the date on which the amount due was

allowed to be capitalised;

(ii) Repatriate to India, all dues receivable from the foreign entity, like dividend, royalty,

technical fees etc., within 60 days of its falling due, or such further period as RBI may

permit;

(iii) Submit to RBI every year within 60 days from the date of expiry of the statutory period

as prescribed by the respective laws of the host country for finalisation of the audited accounts of

the Joint Venture/Wholly Owned Subsidiary outside India or such further period as may be

allowed by Reserve Bank, an annual performance report in Form APR in respect of each Joint

Venture or Wholly Owned Subsidiary outside India set up or acquired by the Indian party and

other reports or documents as may be stipulated by RBI



Prof. Ambdekar


Examples:

Tata Steel acquired UK based Corus for $8 billion

Tata Motors & Jaguar-Land Rover

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.

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Prof. Ambdekar


Case Study on Mahindra and Mahindra’s acquisition of Ssangyong

On November 23, 2010 Ssangyong Motor Company & Mahindra& Mahindra announced the

signing of a definitive agreement in Seoul. This was followed by “ approval of revised corporate

rehabilitation plan by creditors in January and finally the completion of acquisition in march

2011.

Total cost of acquisition of US$ 463 million with US$ 378 million in new stocks and US$ 85

million in corporate bonds

M&M have acquired a 70% controlling stake in SsangYong, the South Korean auto maker for

US $ 463 million.

The Definitive Agreement

The definitive agreement contains information related to securing outside investment, the

establishment of principal management, repayment of rehabilitation claims to protect the

interests of creditors, such as creditors and shareholders, and establishing a foothold for SYMC

normalization.

The total cost of acquisition is US$ 463 million with US$ 378 million in new stock and US$ 85

million in corporate bonds. Mahindra will acquire a 70% stake,

The definitive agreement also encapsulates terms and conditions related to the process of

acquiring new stock and corporate bonds, down payment and deposit guidelines, repayment of

rehabilitation claims, employment guarantees, and other covenants. M&M has already deposited

10 percent of the final purchasing price per terms of the definitive agreement, with the remaining

balance to be deposited three days prior to SYMC‟s stakeholder meeting. SYMC will update its

corporate rehabilitation plan to include reference to repaying liabilities with cash-in from the

deal, and will be required to receive approval from creditors and the court on the updated plan.

After completing all the acquisition procedures and the repayment of rehabilitation claims, the

corporate rehabilitation process is likely to be finished by March, 2011.



Prof. Ambdekar


About Ssang Yong

SsangYong Motor Company was a part of the SsangYong Group, a multibillion dollar

conglomerate in South Korea. The group was broken apart because of the problems during the

South East Asian Crisis of 1997.

SsangYong Motor Company initially became a part of Daewoo in 1998 and is now controlled by

the Shanghai Automotive Industry Corporation (SAIC). The group‟s product portfolio comprises

of a luxury sedan, four sport utility vehicles and a multipurpose vehicle.

Advantage Mahindra

M & M will be able to strongly utilise the strong R & D capabilities of SsangYong. The fact that

they have not been very good since 2003 in developing new models because of poor

management is a problem. The fact that Mahindra is planning to launch 3-5 models in the next

couple of years shows that they mean BUSINESS! They aim to improve on this by improving

the entire management of the organization.

One of the biggest gains for them would be the 98 countries strong dealer network of SsangYong

which would help them to market M & M as well as SsangYong models in an amazing manner.

SsangYong also has an edge in premium segment vehicles and this could help Mahindra to

expand its profile into this particular segment.

Mahindra therefore aims to combine its strength in sourcing and marketing with SsangYong‟s

strong capabilities in technology.

Performance

Mahindra has been performing fantastically over the last couple of quarters which has increased

its liquid assets massively. Therefore it would be easily able to fund the acquisition with its

internal accruals.

Even SsangYong has been making operating profits since the beginning of 2010 and has even

decreased costs as well as its workforce.



Prof. Ambdekar


CASE STUDY OF REEBOK-ADDIDAS MERGER

Introduction

On August 03, 2005, Adidas-Salomon AG (Adidas), Germany's largest sporting goods maker

announced acquisition of the US-based Reebok International Limited (Reebok) for $3.8 billion.

The share prices of both the companies recorded an increase on the day of the announcement of

the deal.

The share price of Adidas increased by 7.4% from €147.52 on August 02, 2005 to €158.45 on

August 03, 2005 on the Frankfurt stock exchange, while Reebok's share price at the New York

Stock Exchange rose to $57.14 on August 03, 2005, an increase of 30% over the August 02,

2005 share price of $43.95. The deal would result in the union of two cutthroat competitors

through a "friendly takeover".

Adidas and Reebok claimed that the merger was decided upon because of the realization that

their individual (company) goals would be best accomplished by joining instead of competing.

Nike International Inc. (Nike) was the common competitor for both Reebok and Adidas.

Analysts said that the merging companies were alike in many ways. Both the companies had a

reputation of using cutting-edge technologies to produce innovative products and both had

eminent brand ambassadors from the sports and entertainment worlds.

Thus, the merger would help spreading the global appeal of the brands in places where they had

not made a mark as individual brands. However, some analysts had doubts about the success of

the merger of the companies.

They cited that the merger would not generate much synergy because the individual brand

identities would be maintained even after the merger.

Analysts also doubted the effectiveness of the merger, as a strategy to beat Nike. They felt that

the combined entity would have to work really hard to further expand its market share in the US

market and globally.



Prof. Ambdekar


The story of Adidas dates back to the year 1920 when Adolf Dassler (Adi) produced a handmade

shoe fitted with black spikes. On July 01, 1924, Adi and his brother Rudolf Dassler (Rudolf)

started a company under the name "Dassler Brothers OHG".

In the year 1927, the company enhanced its capacity by taking on a new factory on lease. The

company's shoes made their debut at the 1928 Olympics in Amsterdam. In 1930, the brothers

purchased the factory and named it "Dassler Brothers Sports Shoe Factory." The company

introduced tennis shoes in 1931. In the year 1935, the turnover of the company exceeded 400,000

Reichsmark .3 In 1938, a second production facility was bought in Herzogenaurach, Germany. In

1948, the brothers decided to part ways. By August 18, 1949, Adidas was registered as a

company -'Adi' from Adolf and 'Das' from Dassler. Adi registered the "Three Stripes"4 as his

official logo. Rudolf set up another sporting goods company named Puma.

In 1956, Adi's son Horst Dassler (Horst) promoted Adidas strongly during the Olympic Games at

Melbourne. He also signed a licensing agreement with the Norwegian Shoe factory, located in

Gjovik, Norway.

In 1959, Horst was assigned the job of establishing production facilities in France. A factory in

Schweinfeld, Germany was started in the same year. In 1960, Adidas was the dominant brand at

the Olympic Games held in Rome; 75% of the track and field athletes used Adidas shoes. Adidas

stepped into the production of apparel and balls (soccer balls, basketball balls) in 1961and started

manufacturing track suits in 1962.

The company launched its first jogging shoe called, "Achille" in 1968. The "Trefoil Logo" was

introduced in 1972. The essential feature of the logo was three leaves representing the Olympic

spirit, joining the three continental plates...

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Prof. Ambdekar


The Sporting Goods Industry

Mergers and Acquisitions (M&As) had become quite common in the sporting goods industry

during the late 1990s and the early 2000s. Adidas acquired the Salomon Group for $1.4 billion in

1997. Nike acquired Converse in 2003 for $305 million, while Reebok acquired The Hockey

Company in 2004 for $330 million. These mergers were prompted by the increasing competition

and growth in the industry.

The US market is the largest market for sporting goods. Experts estimate that the US sporting

goods market will grow at a rate of approximately 8.9% between 2004 and 2008 to reach a value

of $51 billion, forming 47.6% of the world market. It is estimated that 33% of the athletic

footwear purchased by the US consumers is used for sports and fitness activities and bought on

the basis of price, comfortability and fashion. In 2004, 40% of the consumers of sports apparel

lay in the age group 12-24. T-shirts and running shoes were considered as the top selected

categories. In 2004, sports apparel retail sales in the US were worth $38.8 billion - compared

with $37 billion in 2003. Athletic footwear retail sales were $16.4 billion in 2004, compared with

$15.9 billion in 2003...

The Merger

According to the merger deal, Adidas would buy all the outstanding shares of Reebok at $59 per

share in cash. This price represented a premium of 34.2%, as per the closing share price of

$43.95 on August 02, 2005. Adidas proposed to fund the purchase through an arrangement of

debt and equity. The deal price was equal to the latest twelve month sales of Reebok and 11.7

times its EBITDA . Some analysts felt that the deal was priced too high. As Uwe Weinrich, an

analyst at HVB Group remarked, "The price Adidas will pay for Reebok is ambitious." He added

that acquisitions in the sporting goods industry rarely brought in good returns...

The Synergies

Both the companies claimed that their missions were complementary. As Fireman remarked,

"Adidas is a perfect partner for Reebok.



Prof. Ambdekar


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...



Prof. Ambdekar


CASE STUDY ON DEMERGER OF L&T Cement from L&T

A Bitter Corporate Feud

In October 2002, Larsen & Toubro Ltd. (L&T), a leading Indian business group, announced

plans to spin off (demerge) its cement unit into a separate company. According to L&T sources,

the company had been considering the demerger since late-2000. There was sufficient reason for

demerger because though the cement division generated 26% of the group's revenues, it

consumed over 75% of its total investments.

As per the demerger plan, called the Structural Demerger, it was ruled that L&T along with

financial institutions (FIs) would hold 76% in the new cement company, while the remaining

24% would be distributed among the existing shareholders of L&T. L&T would later sell 6% of

its share to the FIs, retain the control in the company for the following 4 or 5 years and

subsequently, sell half of the 70% stake to a strategic partner. However, the reason for the

demerger was not as simple as it was stated. Analysts had a different version of the L&T

demerger story. According to them, though L&T had been seriously considering the demerger

plan for years, the reason behind this sudden rush to do so was something else.

L&T reportedly was trying to protect itself from a possible takeover by Grasim Industries Ltd.

(Grasim), flagship company of the Aditya Birla Group,3 a leading Indian business conglomerate.

Since late-2001, Grasim had acquired over 15% stake in L&T and had also made an open offer

to L&T shareholders to further increase its stake.

Grasim's stake in the cement business would come down to 3.75%, if L&T's demerger plan went

through. Since Grasim had spent over Rs 10 billion4 in acquiring its L&T stake, it was not ready

to let go off the latter's cement business (one of its own core businesses).

Grasim charged that L&T, through the demerger plan, was trying to retain control of the business

division with itself, without focusing on overall shareholders' interests. Grasim claimed that

under L&T's demerger plan, L&T shareholders would only get a 24% stake in the new cement

company, as a result of which individual shareholders would not have much control over the new

cement company.

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Prof. Ambdekar


Hence, Grasim proposed a vertical demerger plan for L&T in November 2002. Under this plan,

all L&T shareholders were to get a stake in the new cement company, in the existing proportion

of their respective stakes. In addition, it proposed that the cement company be listed on various

stock exchanges.

Grasim also obtained a court stay over L&T's demerger plans. At the same time, Grasim began

negotiating with the FIs to attain their support for its vertical demerger plan. Obviously L&T did

not agree to this plan which further aggravated the situation. The dispute, which dated back to

September 2001 when Grasim first bought a stake in L&T, soon became one of the most bitterly

fought battles in India's corporate history. Media reports extensively covered the frequent

allegations and counter-allegations made by both the parties. The vertical demerger issue

generated much interest, as most disputes always do. Market watchers and analysts expected the

drama to intensify further in the near future.

Background Note

GRASIM

The Aditya Birla Group, well established in the manufacture of man-made fibers, was

incorporated in August 1947 (Grasim was formerly known as Grasim Rayon). Since then, the

company had been operating in viscose staple fiber 5(VSF), cement, sponge iron, chemicals and

textile businesses.

Beginning of the War: Exit Reliance, Enter Grasim

Grasim reportedly had ambitious intentions of becoming India's largest cement company and

getting a stake in L&T was perhaps one of the easiest ways it could move closer to this goal

(Refer Exhibit I for a comparative look at the two companies).

This seemed possible for, in the intensely competitive Indian cement industry, consolidation (in

the form of mergers and acquisitions) had become a norm. According to industry observers,

Grasim realized that by building up a stake in L&T, it stood gain substantially. Thus, when an

opportunity came its way in November 2001, Grasim was more than eager to grab it.

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Prof. Ambdekar


The Reliance Group (Reliance), which held 3.92% in L&T in September 2001, had increased its

stake to 10.05% by November 2001, by acquiring over 15.8 million shares from the market.

Reliance sold this entire stake to Grasim at Rs 306.60 per share, at a premium of 47% over the

prevailing market price of Rs 208.50...

The Open Offer

Meanwhile in May 2002, Grasim further acquired a stake of 2.84% in L&T from the open

market, taking its overall holding to 12.89%. These shares were purchased at prices ranging

between Rs 175 to Rs 180.

Justifying the above move, Grasim's President and Chief Financial Officer, D D Rathi, said that

since the company had surplus cash with no immediate investment plans, increasing the stake in

L&T seemed to be a good opportunity.

He added that the decline in the value of L&T stock since September 2001 had also induced

Grasim into buying L&T shares. Industry observers however commented that there was a lot

more behind Grasim's move than the strategic investment angle.

They alleged that Grasim was trying to make a 'backdoor entry' to take control in L&T...

A Tug of War

Grasim came out with an alternate vertical demerger plan in November 2002. According to this

plan, the cement unit was to be demerged into a separate entity which would be listed on the

stock exchanges.

All L&T shareholders including the Aditya Birla Group would get shares in the new company.

However, L&T, as a company, would not hold anything. Reportedly, the relationship between

the board members of Grasim and L&T also became increasingly hostile. L&T and Grasim

nominees on the L&T board were resorting to 'mutual fault finding.'

While other directors blamed Grasim for insider trading, Grasim nominees blamed the other

board members for the 'below par performance of L&T in 2002 (the company had reported a

profit of Rs 188.9 million for the quarter ended June 2002, as compared to Rs 651 million for the



Prof. Ambdekar


same period in 2001)...

A Twist in the Tale - CDC Steps in

In December 2002, L&T announced that it was considering the proposal made by

Commonwealth Development Corporation (CDC), a UK based company, to invest in its cement

business.

Under this proposal, CDC was to subscribe to optionally convertible debentures of L&T's

demerged cement business and with an option to convert the debentures into 6.8% equity stake

by December 2004. If CDC decided to hold on to the debentures, it could redeem them in three

equal installments between 2004 and 2007. According to a clause in CDC's proposal, CDC

would convert the debentures into equity only when the share price of the demerged cement

company reached a specific price, called the strike price. The strike price was fixed as Rs 158 per

share. Another clause in CDC's proposal stated that L&T required the approval of CDC if it

wanted to come out with an initial public offering (IPO) for the cement business...



Prof. Ambdekar


REASONS FOR FAILURE OF MERGERS AND ACQUISITIONS

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



Prof. Ambdekar


misunderstanding, confusion and conflict. Cultural due diligence involve steps like determining

the importance of culture, assessing the culture of both target and acquirer. It is useful to know

the target management behavior with respect to dimensions such as centralized versus

decentralized decision making, speed in decision making, time horizon for decisions, level of

team work, management of conflict, risk orientation, openness to change, etc. It is necessary to

assess the cultural fit between the acquirer and target based on cultural profile. Potential sources

of clash must be managed. It is necessary to identify the impact of cultural gap, and develop and

execute strategies to use the information in the cultural profile to assess the impact that the

differences have.

4. Poor Organization Fit

Organizational fit is described as "the match between administrative practices, cultural practices

and personnel characteristics of the target and acquirer. It influences the ease with which two

organizations can be integrated during implementation. Mismatch of organation fit leads to

failure of mergers.

5. Poor Strategic Fit

A Merger will yield the desired result only if there is strategic fit between the merging

companies. Mergers with strategic fit can improve profitability through reduction in overheads,

effective utilization of facilities, the ability to raise funds at a lower cost, and deployment of

surplus cash for expanding business with higher returns. But many a time lack of strategic fit

between two merging companies especially lack of synergies results in merger failure. Strategic

fit can also include the business philosophies of the two entities (return on investment v/s market

share), the time frame for achieving these goals (short-term v/s long term) and the way in which

assets are utilized. For example, P&G – Gillette merger in consumer goods industry is a unique

case of acquisition by an innovative company to expand its product line by acquiring another

innovative company, which was, described analysts as a perfect merger.

6. Faulty evaluation

At times acquirers do not carry out the detailed diligence of the target company. They make a

wrong assessment of the benefits from the acquisition and land up paying a higher price.



Prof. Ambdekar


7. Ego Clash

Ego clash between the top management and subsequently lack of coordination may lead to

collapse of company after merger. The problem is more prominent in cases of mergers between

equals.

8. Limited Focus

If merging companies have entirely different products, markets systems and cultures, the merger

is doomed to failure. Added to that as core competencies are weakened and the focus gets

blurred the fallout on bourses can be dangerous. Purely financially motivated mergers such as tax

driven mergers on the advice of accountant can be hit by adverse business consequences. The

Tatas for example, sold their soaps business to Hindustan Lever.

9. Failure to Get an Objective Evaluation of the Target Company' Condition

Risk of failure will be minimized if there is a detailed evaluation of the target company's

business conditions carried out by the professionals in the line of business. Detailed examination

of the manufacturing facilities, product design features, rejection rates, and distribution systems,

profile of key people and productivity of the workers is done. Acquirer should not be carried

away by the state of the art physical facilities like a good head quarters building, guest house on

a beach, plenty of land for expansion, etc.



Prof. Ambdekar


CONCLUSION

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

integration.

Thank you



Prof. Ambdekar

Documents

FINAL Mergers and Acquisitions (Law)[1]