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  • 8/7/2019 Project on ICICI and BOR Merger and Acquistions


    Introduction to Mergers and Acquisition

    We have been learning about the companies coming together to from

    another company and companies taking over the existing companies to

    expand their business.

    With recession taking toll of many Indian businesses and the feeling of

    insecurity surging over our businessmen, it is not surprising when we hear

    about the immense numbers of corporate restructurings taking place,

    especially in the last couple of years. Several companies have been takenover and several have undergone internal restructuring, whereas certain

    companies in the same field of business have found it beneficial to merge

    together into one company.

    In this context, it would be essential for us to understand what

    corporate restructuring and mergers and acquisitions are all about.

    All our daily newspapers are filled with cases of mergers, acquisitions,

    spin-offs, tender offers, & other forms of corporate restructuring. Thus

    important issues both for business decision and public policy formulation

    have been raised. No firm is regarded safe from a takeover possibility. On

    the more positive side Mergers & Acquisitions may be critical for the healthy

    expansion and growth of the firm. Successful entry into new product and

    geographical markets may require Mergers & Acquisitions at some stage in

    the firm's development. Successful competition in international markets may

    depend on capabilities obtained in a timely and efficient fashion through

    Mergers & Acquisition's. Many have argued that mergers increase value and

    efficiency and move resources to their highest and best uses, thereby

    increasing shareholder value. .

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    To opt for a merger or not is a complex affair, especially in terms of the

    technicalities involved. We have discussed almost all factors that the

    management may have to look into before going for merger. Considerable

    amount of brainstorming would be required by the managements to reach a

    conclusion. e.g. a due diligence report would clearly identify the status of the

    company in respect of the financial position along with the networth and

    pending legal matters and details about various contingent liabilities.

    Decision has to be taken after having discussed the pros & cons of the

    proposed merger & the impact of the same on the business, administrative

    costs benefits, addition to shareholders' value, tax implications including

    stamp duty and last but not the least also on the employees of the

    Transferor or Transferee Company.


    Merger is defined as combination of two or more companies into a

    single company where one survives and the others lose their corporate

    existence. The survivor acquires all the assets as well as liabilities of the

    merged company or companies. Generally, the surviving company is the

    buyer, which retains its identity, and the extinguished company is the seller.

    Merger is also defined as amalgamation. Merger is the fusion of two or

    more existing companies. All assets, liabilities and the stock of one company

    stand transferred to transferee company in consideration of payment in the

    form of:

    Equity shares in the transferee company,

    Debentures in the transferee company,

    Cash, or

    A mix of the above modes.

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    Acquisition in general sense is acquiring the ownership in the property.

    In the context of business combinations, an acquisition is the purchase by

    one company of a controlling interest in the share capital of another existing


    Methods of Acquisition:

    An acquisition may be affected by

    (a)agreement with the persons holding majority interest in the company

    management like members of the board or major shareholders

    commanding majority of voting power;

    (b)purchase of shares in open market;(c) to make takeover offer to the general body of shareholders;

    (d)purchase of new shares by private treaty;

    (e)Acquisition of share capital through the following forms of

    considerations viz. means of cash, issuance of loan capital, or

    insurance of share capital.


    A takeover is acquisition and both the terms are used


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    Takeover differs from merger in approach to business combinations i.e.

    the process of takeover, transaction involved in takeover, determination of

    share exchange or cash price and the fulfillment of goals of combination all

    are different in takeovers than in mergers. For example, process of takeover

    is unilateral and the offeror company decides about the maximum price.

    Time taken in completion of transaction is less in takeover than in mergers,

    top management of the offeree company being more co-operative.

    De-merger or corporate splits or division:

    De-merger or split or divisions of a company are the synonymous

    terms signifying a movement in the company.

    What will it take to succeed?

    Funds are an obvious requirement for would-be buyers. Raising them

    may not be a problem for multinationals able to tap resources at home, but

    for local companies, finance is likely to be the single biggest obstacle to anacquisition. Financial institution in some Asian markets are banned from

    leading for takeovers, and debt markets are small and illiquid, deterring

    investors who fear that they might not be able to sell their holdings at a later

    date. The credit squeezes and the depressed state of many Asian equity

    markets have only made an already difficult situation worse. Funds apart, a

    successful Mergers & Acquisition growth strategy must be supported by

    three capabilities: deep local networks, the abilities to manage uncertainty,

    and the skill to distinguish worthwhile targets. Companies that rush in

    without them are likely to be stumble.

    Assess target quality:

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    To say that a company should be worth the price a buyer pays is to

    state the obvious. But assessing companies in Asia can be fraught with

    problems, and several deals have gone badly wrong because buyers failed to

    dig deeply enough. The attraction of knockdown price tag may tempt

    companies to skip crucial checks. Concealed high debt levels and deferred

    contingent liabilities have resulted in large deals destroying value. But in

    other cases, where buyers have undertaken detailed due diligence, they

    have been able to negotiate prices as low as half of the initial figure.

    Due diligence can be difficult because disclosure practices are poor

    and companies often lack the information buyer need. Moreover, most Asian

    conglomerates still do not present consolidated financial statements, leavingthe possibilities that the sales and the profit figures might be bloated by

    transactions between affiliated companies. The financial records that are

    available are often unreliable, with different projections made by different

    departments within the same company, and different projections made for

    different audiences. Banks and investors, naturally, are likely to be shown

    optimistic forecasts.

    Purpose of Mergers and Acquisition

    The purpose for an offeror company for acquiring another company

    shall be reflected in the corporate objectives. It has to decide the specific

    objectives to be achieved through acquisition. The basic purpose of merger

    or business combination is to achieve faster growth of the corporate

    business. Faster growth may be had through product improvement and

    competitive position.

    Other possible purposes for acquisition are short listed below: -

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    (1)Procurement of supplies:

    1. to safeguard the source of supplies of raw materials or intermediary


    2. to obtain economies of purchase in the form of discount, savings in

    transportation costs, overhead costs in buying department, etc.;

    3. to share the benefits of suppliers economies by standardizing the


    (2)Revamping production facilities:

    1. to achieve economies of scale by amalgamating production

    facilities through more intensive utilization of plant and resources;

    2. to standardize product specifications, improvement of quality of

    product, expanding

    3. market and aiming at consumers satisfaction through

    strengthening after sale

    4. services;

    5. to obtain improved production technology and know-how from

    the offeree company

    6. to reduce cost, improve quality and produce competitive

    products to retain and

    7. improve market share.

    (3) Market expansion and strategy:

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    1. to eliminate competition and protect existing market;

    2. to obtain a new market outlets in possession of the offeree;

    3. to obtain new product for diversification or substitution of existing

    products and to enhance the product range;

    4. strengthening retain outlets and sale the goods to rationalize


    5. to reduce advertising cost and improve public image of the offeree


    6. strategic control of patents and copyrights.

    (4) Financial strength:

    1. to improve liquidity and have direct access to cash resource;

    2. to dispose of surplus and outdated assets for cash out of

    combined enterprise;

    3. to enhance gearing capacity, borrow on better strength and the

    greater assets backing;

    4. to avail tax benefits;

    5. to improve EPS (Earning Per Share).

    (5) General gains:

    1. to improve its own image and attract superior managerial talents to

    manage its affairs;

    2. to offer better satisfaction to consumers or users of the product.

    (6) Own developmental plans:

    The purpose of acquisition is backed by the offeror companys own

    developmental plans.

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    A company thinks in terms of acquiring the other company only when

    it has arrived at its own development plan to expand its operation

    having examined its own internal strength where it might not have any

    problem of taxation, accounting, valuation, etc. but might feel resource

    constraints with limitations of funds and lack of skill managerial

    personnels. It has to aim at suitable combination where it could have

    opportunities to supplement its funds by issuance of securities, secure

    additional financial facilities, eliminate competition and strengthen its

    market position.

    (7) Strategic purpose:

    The Acquirer Company view the merger to achieve strategic objectives

    through alternative type of combinations which may be horizontal,

    vertical, product expansion, market extensional or other specified

    unrelated objectives depending upon the corporate strategies. Thus,

    various types of combinations distinct with each other in nature are

    adopted to pursue this objective like vertical or horizontal combination.

    (8) Corporate friendliness:

    Although it is rare but it is true that business houses exhibit degrees of

    cooperative spirit despite competitiveness in providing rescues to each

    other from hostile takeovers and cultivate situations of collaborations

    sharing goodwill of each other to achieve performance heights through

    business combinations. The combining corporates aim at circular

    combinations by pursuing this objective.

    (9) Desired level of integration:

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    Mergers and acquisition are pursued to obtain the desired level of

    integration between the two combining business houses. Such

    integration could be operational or financial. This gives birth to

    conglomerate combinations. The purpose and the requirements of the

    offeror company go a long way in selecting a suitable partner for

    merger or acquisition in business combinations.

    Types of mergers

    Merger or acquisition depends upon the purpose of the offeror

    company it wants to achieve. Based on the offerors objectives profile,

    combinations could be vertical, horizontal, circular and conglomeratic as

    precisely described below with reference to the purpose in view of the offeror


    (A) Vertical combination:

    A company would like to takeover another company or seek its merger

    with that company to expand espousing backward integration to

    assimilate the resources of supply and forward integration towards

    market outlets. The acquiring company through merger of another unit

    attempts on reduction of inventories of raw material and finished goods,

    implements its production plans as per the objectives and economizes on

    working capital investments. In other words, in vertical combinations, the

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    merging undertaking would be either a supplier or a buyer using its

    product as intermediary material for final production.

    The following main benefits accrue from the vertical combination to the

    acquirer company i.e.

    (1)it gains a strong position because of imperfect market of the

    intermediary products, scarcity of resources and purchased products;

    (2)has control over products specifications.

    (B) Horizontal combination :

    It is a merger of two competing firms which are at the same stage of

    industrial process. The acquiring firm belongs to the same industry as the

    target company. The mail purpose of such mergers is to obtain economies

    of scale in production by eliminating duplication of facilities and the

    operations and broadening the product line, reduction in investment in

    working capital, elimination in competition concentration in product,

    reduction in advertising costs, increase in market segments and exercise

    better control on market.

    (C) Circular combination:

    Companies producing distinct products seek amalgamation to share

    common distribution and research facilities to obtain economies by

    elimination of cost on duplication and promoting market enlargement.

    The acquiring company obtains benefits in the form of economies of

    resource sharing and diversification.

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    (D) Conglomerate combination:

    It is amalgamation of two companies engaged in unrelated industries like

    DCM and Modi Industries. The basic purpose of such amalgamations

    remains utilization of financial resources and enlarges debt capacity

    through re-organizing their financial structure so as to service the

    shareholders by increased leveraging and EPS, lowering average cost of

    capital and thereby raising present worth of the outstanding shares.

    Merger enhances the overall stability of the acquirer company and

    creates balance in the companys total portfolio of diverse products and

    production processes.

    Advantages of mergers and takeovers

    Mergers and takeovers are permanent form of combinations which

    vest in management complete control and provide centralized administration

    which are not available in combinations of holding company and its partly

    owned subsidiary. Shareholders in the selling company gain from the merger

    and takeovers as the premium offered to induce acceptance of the merger or

    takeover offers much more price than the book value of shares. Shareholders

    in the buying company gain in the long run with the growth of the company

    not only due to synergy but also due to boots trapping earnings.

    Motivations for mergers and acquisitions

    Mergers and acquisitions are caused with the support of shareholders,

    managers ad promoters of the combing companies. The factors, which

    motivate the shareholders and managers to lend support to these

    combinations and the resultant consequences they have to bear, are briefly

    noted below based on the research work by various scholars globally.

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    (1) From the standpoint of shareholders

    Investment made by shareholders in the companies subject to merger

    should enhance in value. The sale of shares from one companys

    shareholders to another and holding investment in shares should give rise to

    greater values i.e. the opportunity gains in alternative investments.

    Shareholders may gain from merger in different ways viz. from the gains and

    achievements of the company i.e. through

    (a) realization of monopoly profits;

    (b) economies of scales;

    (c) diversification of product line;

    (d) acquisition of human assets and other resources not available


    (e) better investment opportunity in combinations.

    One or more features would generally be available in each merger

    where shareholders may have attraction and favour merger.

    (2) From the standpoint of managers

    Managers are concerned with improving operations of the company,

    managing the affairs of the company effectively for all round gains and

    growth of the company which will provide them better deals in raising their

    status, perks and fringe benefits. Mergers where all these things are the

    guaranteed outcome get support from the managers. At the same time,

    where managers have fear of displacement at the hands of new

    management in amalgamated company and also resultant depreciation from

    the merger then support from them becomes difficult.

    (3) Promoters gains

    Mergers do offer to company promoters the advantage of increasing

    the size of their company and the financial structure and strength. They

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    can convert a closely held and private limited company into a public

    company without contributing much wealth and without losing control.

    (4) Benefits to general public

    Impact of mergers on general public could be viewed as aspect of

    benefits and costs to:

    (a) Consumer of the product or services;

    (b) Workers of the companies under combination;

    (c) General public affected in general having not been user or

    consumer or the worker in the companies under merger plan.

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    (a) Consumers

    The economic gains realized from mergers are passed on to

    consumers in the form of lower prices and better quality of the

    product which directly raise their standard of living and quality of

    life. The balance of benefits in favour of consumers will depend

    upon the fact whether or not the mergers increase or decrease

    competitive economic and productive activity which directly

    affects the degree of welfare of the consumers through changes

    in price level, quality of products, after sales service, etc.

    (b) Workers community

    The merger or acquisition of a company by a conglomerate or

    other acquiring company may have the effect on both the sides

    of increasing the welfare in the form of purchasing power and

    other miseries of life. Two sides of the impact as discussed by

    the researchers and academicians are: firstly, mergers with

    cash payment to shareholders provide opportunities for them to

    invest this money in other companies which will generate further

    employment and growth to uplift of the economy in general.

    Secondly, any restrictions placed on such mergers will decrease

    the growth and investment activity with corresponding decrease

    in employment. Both workers and communities will suffer on

    lessening job opportunities, preventing the distribution of

    benefits resulting from diversification of production activity.

    (c) General public

    Mergers result into centralized concentration of power. Economic

    power is to be understood as the ability to control prices and

    industries output as monopolists. Such monopolists affect social

    and political environment to tilt everything in their favour to

    maintain their power ad expand their business empire. These

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    advances result into economic exploitation. But in a free

    economy a monopolist does not stay for a longer period as other

    companies enter into the field to reap the benefits of higher

    prices set in by the monopolist. This enforces competition in the

    market as consumers are free to substitute the alternative

    products. Therefore, it is difficult to generalize that mergers

    affect the welfare of general public adversely or favorably. Every

    merger of two or more companies has to be viewed from

    different angles in the business practices which protects the

    interest of the shareholders in the merging company and also

    serves the national purpose to add to the welfare of the

    employees, consumers and does not create hindrance in

    administration of the Government polices.

    Consideration of Merger and Takeover

    Mergers and takeovers are two different approaches to business

    combinations. Mergers are pursued under the Companies Act, 1956 vide

    sections 391/394 thereof or may be envisaged under the provisions of

    Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial

    Companies Act, 1985 whereas, takeovers fall solely under the regulatory

    framework of the SEBI Regulations, 1997.

    Minority shareholders rights

    SEBI regulations do not provide insight in the event of minority

    shareholders not agreeing to the takeover offer. However section 395 of the

    Companies Act, 1956 provides for the acquisition of shares of the

    shareholders. According to section 395 of the Companies Act, if the offerer

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    has acquired at least 90% in value of those shares may give notice to the

    non-accepting shareholders of the intention of buying their shares. The 90%

    acceptance level shall not include the share held by the offerer or its

    associates. The procedure laid down in this section is briefly noted below.

    1. In order to buy the shares of non-accepting shareholders the offerer

    must have reached the 90% acceptance level within 4 months of the

    date of the offer, and notice must have been served on those

    shareholders within 2 months of reaching the 90% level.

    2. The notice to the non-accepting shareholders must be in a prescribed

    manner. A copy of a notice and a statutory declaration by the offerer

    (or, if the offerer is a company, by a director) in the prescribed formconfirming that the conditions for giving the notice have been satisfied

    must be sent to the target.

    3. Once the notice has been given, the offerer is entitled and bound to

    acquire the outstanding shares on the terms of the offer.

    4. If the terms of the offer give the shareholders a choice of

    consideration, the notice must give particulars of options available and

    inform the shareholders that he has six weeks from the date of the

    notice to indicate his choice of consideration in writing.

    5. At the end of the six weeks from the date of the notice to the non-

    accepting shareholders the offerer must immediately send a copy of

    notice to the target and pay or transfer to the target the consideration

    for all the shares to which the notice relates. Stock transfer forms

    executed on behalf of the non-accepting shareholders by a person

    appointed by the offerer must also be sent. Once the company has

    received stock transfer forms it must register the offerer as the holder

    of the shares.

    6. The consideration money, which is received by the target, should be

    held on trust for the person entitled to shares in respect of which the

    sum was received.

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    7. Alternatively, if the offerer does not wish to buy the non-accepting

    shareholders shares, it must still within one month of company

    reaching the 90% acceptance level give such shareholders notice in

    the prescribed manner of the rights that are exercisable by them to

    require the offerer to acquire their shares. The notice must state that

    the offer is still open for acceptance and specify a date after which the

    right may not be exercised, which may not be less than 3 months from

    the end of the time within which the offer can be accepted. If the

    offerer fails to send such notice it (and its officers who are in default)

    are liable to a fine unless it or they took all reasonable steps to secure


    8. If the shareholder exercises his rights to require the offerer to

    purchase his shares the offerer is entitled and bound to do so on the

    terms of the offer or on such other terms as may be agreed. If a choice

    of consideration was originally offered, the shareholder may indicate

    his choice when requiring the offerer to acquire his shares. The notice

    given to shareholder will specify the choice of consideration and which

    consideration should apply in default of an election.

    9. On application made by an happy shareholder within six weeks from

    the date on which the original notice was given, the court may make

    an order preventing the offerer from acquiring the shares or an order

    specifying terms of acquisition differing from those of the offer or make

    an order setting out the terms on which the shares must be acquired.

    In certain circumstances, where the takeover offer has not been

    accepted by the required 90% in value of the share to which offer relates the

    court may, on application of the offerer, make an order authorizing it to give

    notice under the Companies Act, 1985, section 429. It will do this if it is

    satisfied that:

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    a. the offerer has after reasonable enquiry been unable to trace one or

    more shareholders to whom the offer relates;

    b. the shares which the offerer has acquired or contracted to acquire by

    virtue of acceptance of the offerer, together with the shares held by

    untraceable shareholders, amount to not less than 90% in value of the

    shares subject to the offer; and

    c. the consideration offered is fair and reasonable.

    The court will not make such an order unless it considers that it is just

    and equitable to do so, having regard, in particular, to the number of

    shareholder who has been traced who did accept the offer.

    Alternative modes of acquisition

    The terms used in business combinations carry generally synonymous

    connotations and can be used interchangeably. All the different terms carry

    one single meaning of merger but each term cannot be given equal

    treatment in the discussion because law has created a dividing line between

    take-over and acquisitions by way of merger, amalgamation or

    reconstruction. Particularly the takeover Regulations for substantial

    acquisition of shares and takeovers known as SEBI (Substantial Acquisition of

    Shares and Takeovers) Regulations, 1997 vide section 3 excludes any

    attempt of merger done by way of any one or more of the following modes:

    (a)by allotment in pursuant of an application made by the

    shareholders for right issue and under a public issue;

    (b)preferential allotment made in pursuance of a resolution passed

    under section 81(1A) of the Companies Act, 1956;

    (c) allotment to the underwriters pursuant to underwriters agreements;

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    (d)inter-se-transfer of shares amongst group, companies, relatives,

    Indian promoters and Foreign collaborators who are


    (e)acquisition of shares in the ordinary course of business, by

    registered stock brokers, public financial institutions and banks on

    own account or as pledges;

    (f) acquisition of shares by way of transmission on succession or


    (g)acquisition of shares by government companies and statutory


    (h)transfer of shares from state level financial institutions to co-

    promoters in pursuance to agreements between them;

    (i) acquisition of shares in pursuance to rehabilitation schemes under

    Sick Industrial Companies (Special Provisions) Act, 1985 or schemes

    of arrangements, mergers, amalgamation, De-merger, etc. under

    the Companies Act, 1956 or any other law or regulation, Indian or


    (j) acquisition of shares of company whose shares are not listed on any

    stock exchange. However, this exemption in not available if the said

    acquisition results into control of a listed company;

    (k)such other cases as may be exempted from the applicability of

    Chapter III of SEBI regulations by SEBI.

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    The basic logic behind substantial disclosure of takeover of a company

    through acquisition of shares is that the common investors and shareholders

    should be made aware of the larger financial stake in the company of the

    person who is acquiring such companys shares. The main objective of these

    Regulations is to provide greater transparency in the acquisition of shares

    and the takeovers of companies through a system of disclosure of


    Escrow account

    To ensure that the acquirer shall pay the shareholders the agreedamount in redemption of his promise to acquire their shares, it is a

    mandatory requirement to open escrow account and deposit therein the

    required amount, which will serve as security for performance of obligation.

    The Escrow amount shall be calculated as per the manner laid down in

    regulation 28(2). Accordingly:

    For offers which are subject to a minimum level of acceptance, and the

    acquirer does want to acquire a minimum of 20%, then 50% of the

    consideration payable under the public offer in cash shall be deposited in the

    Escrow account.

    Payment of consideration

    Consideration may be payable in cash or by exchange of securities.

    Where it is payable in cash the acquirer is required to pay the amount of

    consideration within 21 days from the date of closure of the offer. For this

    purpose he is required to open special account with the bankers to an issue

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    (registered with SEBI) and deposit therein 90% of the amount lying in the

    Escrow Account, if any. He should make the entire amount due and payable

    to shareholders as consideration. He can transfer the funds from Escrow

    account for such payment. Where the consideration is payable in exchange

    of securities, the acquirer shall ensure that securities are actually issued and

    dispatched to shareholders in terms of regulation 29 of SEBI Takeover


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    Reverse Merger

    Generally, a company with the track record should have a less profit

    earning or loss making but viable company amalgamated with it to have

    benefits of economies of scale of production and marketing network, etc. As

    a consequence of this merger the profit earning company survives and the

    loss making company extinguishes its existence. But in many cases, the sick

    companys survival becomes more important for many strategic reasons andto conserve community interest. The law provides encouragement through

    tax relief for the companies that are profitable but get merged with the loss

    making companies. Infact this type of merger is not a normal or a routine

    merger. It is, therefore, called as a Reverse Merger.

    The allurement for such mergers is the tax savings under the Income-

    tax Act, 1961. Section 72A of the Act ensures the tax relief which becomes

    attractive for amalgamations of sick company with a healthy and profitable

    company to take the advantage of carry forward losses. Taking advantage of

    the provisions of section 72A through merger or amalgamation is known as

    reverse merger, which gives survival to the sick unit by merging it with the

    healthy unit. The healthy unit extincts loosing its name and the surviving sick

    company retains its name. Companies to take advantage of the section

    follow this route but after a year or so change their names to the one of the

    healthy company as were done amongst others by Kirloskar Pneumatics Ltd.

    The company merged with Kirloskar Tractors Ltd, a sick unit and initially lost

    its name but after one year it changed its name as was prior to merger.

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    Reverse Merger under Tax Laws

    Section 72A of the Income-tax Act, 1961 is meant to facilitate

    rejuvenation of sick industrial undertaking by merging with healthier

    industrial companies having incentive in the form of tax savings designed

    with the sole intention to benefit the general public through continued

    productive activity, increased employment avenues and generation of


    (1) Background

    Under the existing provisions of the Income-tax Act, so much of the

    business loss of a year as cannot be set off by him against the profits of the

    following year from any business carried on by him. If the loss cannot be so

    wholly set off, the amount not so set off can be carried forward to the next

    following year and so on, up to a maximum of eight assessment years

    immediately succeeding the assessment year for which the loss was first

    computed. The benefit of carry forward and set off of business loss is,

    however, not available unless the business in which the loss was originally

    sustained is continued to be carried on by the assessee. Further, only the

    assessee who incurred the loss by his predecessor. Similarly, if a business

    carried on one assessee is taken over by another, the unabsorbed

    depreciation allowance due to the predecessor in business and set off

    against his profits in subsequent years. In view of these provisions, the

    accumulated business loss and unabsorbed depreciation allowance of a

    company which merges with another company under a scheme of

    amalgamation cannot be carried forward and set off by the latter company

    against its profits.

    The very purpose of section 72A is to revive the business of an

    undertaking, which is financially non-viable and to bring it back to health.

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    Sickness among industrial undertakings is a matter of grave national

    concern. Experience has shown that taking over of such units by

    Government is not always the most satisfactory or the most economical

    solution. The more effective course suggested was to facilitate the

    amalgamation of sick industrial units with sound ones by providing

    incentives and removing impediments in the way of such amalgamation. To

    save the Government from social costs in terms of loss of production and

    employment and to relieve the Government of the uneconomical burden of

    taking over and running sick industrial units is one of the motivating factors

    in introducing section 72A. To achieve this objective so as to facilitate the

    merger of sick industrial units with sound one, the general rule of carry

    forward and set off of accumulated losses and unabsorbed depreciation

    allowance of amalgamating company by the amalgamated company was

    statutorily related. By a deeming fiction, the accumulated loss or the

    unabsorbed depreciation of the amalgamating is treated to be the loss or, as

    the case may be, allowance for depreciation of the amalgamated company

    for the previous year in which amalgamation was effected.

    There are three statutory conditions which are to be fulfilled under

    section 72A(1) for the benefits prescribed therein to be available to the

    amalgamated company, namely

    (i) The amalgamating company was, immediately before such

    amalgamation, financially non-viable by reason of its liabilities, losses

    and other relevant factors;

    (ii) The amalgamation is in the public interest;

    (iii) Such other conditions as the Central Government may by notification

    in the Official Gazette, specify, to ensure that the benefit under this

    section is restricted to amalgamation, which would facilitate the

    rehabilitation or revival of the business of amalgamating company.

    (2) Reverse merger

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    As it can be now understood, a reverse merger is a method adopted to

    avoid the stringent provisions of Section 72A but still be able to claim all the

    losses of the sick unit. For doing so, in case of a reverse merger, instead of a

    healthy unit taking over a sick unit, the sick unit takes over/ amalgamates

    with the healthy unit.

    High Court discussed 3 tests for reverse merger:

    a. assets of transferor company being greater than transferee


    b. equity capital to be issued by the transferee company pursuant

    to the acquisition exceeding its original issued capital, and

    c. the change of control in the transferee company clearly indicated

    that the present arrangement was an arrangement, which was a

    typical illustration of takeover by reverse bid.

    Court held that prime facie the scheme of merging a prosperous unit

    with a sick unit could not be said to be offending the provisions of section

    72A of the Income Tax Act, 1961 since the object underlying this provision

    was to facilitate the merger of sick industrial unit with a sound one.

    (3) Salient features of reverse merger under section 72A

    1. Amalgamation should be between companies and

    none of them should be a firm of partners or sole-proprietor. In other

    words, partnership firm or sole-proprietary concerns cannot get the

    benefit of tax relief under section 72A merger.

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    2. The companies entering into amalgamation should

    be engaged in either industrial activity or shipping business. In other

    words, the tax relief under section 72A would not be made available

    to companies engaged in trading activities or services.

    3. After amalgamation the sick or financially

    unviable company shall survive and other income generating

    company shall extinct. In other words essential condition to be

    fulfilled is that the acquiring company will be able to revive or

    rehabilitate having consumed the healthy company.

    4. One of the merger partner should be financially

    unviable and have accumulated losses to qualify for the merger and

    the other merger partner should be profit earning so that tax relief to

    the maximum extent could be had. In other words the company

    which is financially unviable should be technically sound and feasible,

    commercially and economically viable but financially weak because

    of financial stringency or lack of financial recourses or its liabilitieshave exceeded its assets and is on the brink of insolvency. The

    second requisite qualification associated with financial unavailability

    is the accumulation of losses for past few years.

    5. Amalgamation should be in the public interest i.e. it

    should not be against public policy, should not defeat basic tenets of

    law, and must safeguard the interest of employees, consumers,

    creditors, customers and shareholders apart from promoters of

    company through the revival of the company.

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    6. The merger must result into following benefit to the

    amalgamated company i.e. (a) carry forward of accumulated

    business loses of the amalgamated company; (b) carry forward of

    unabsorbed depreciation of the amalgamating company and (c)

    accumulated loss would be allowed to be carried forward set of for

    eight subsequent years.

    7. Accumulated loss should arise from Profits and

    Gains from business or profession and not be loss under the head

    Capital Gains or Speculation.

    8. For qualifying carry forward loss, the provisions of

    section 72 should have not been contravened.

    9. Similarly for carry forward of unabsorbed

    depreciation the conditions of section 32 should not have been


    10. Specified authority has to be satisfied of the

    eligibility of the company for the relief under section 72 of the

    Income Tax Act. It is only on the recommendations of the specified

    authority that Central Government may allow the relief.

    11. The company should make an application to a

    specified authority for requisite recommendation of the case to the

    Central Government for granting or allowing the relief.

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    12. Procedure for merger or amalgamation to be

    followed in such cases is same as in any other cases. Specified

    Authority makes recommendation after taking into consideration the

    courts direction on scheme of amalgamation.

    Procedure for Takeover and Acquisition

    Public announcement:

    To make a public announcement an acquirer shall follow the following


    1. Appointment of merchant banker:

    The acquirer shall appoint a merchant banker registered as category

    I with SEBI to advise him on the acquisition and to make a publicannouncement of offer on his behalf.

    2. Use of media for announcement:

    Public announcement shall be made at least in one national English

    daily one Hindi daily and one regional language daily newspaper of that

    place where the shares of that company are listed and traded.

    3. Timings of announcement:

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    Public announcement should be made within four days of finalization of

    negotiations or entering into any agreement or memorandum of

    understanding to acquire the shares or the voting rights.

    4. Contents of announcement:

    Public announcement of offer is mandatory as required under the SEBI

    Regulations. Therefore, it is required that it should be prepared showing

    therein the following information:

    (1) paid up share capital of the target company, the number of

    fully paid up and partially paid up shares.

    (2) Total number and percentage of shares proposed to be

    acquired from public subject to minimum as specified in the

    sub-regulation (1) of Regulation 21 that is:

    a) The public offer of minimum 20% of voting capital of the

    company to the shareholders;

    b) The public offer by a raider shall not be less than 10% but

    more than 51% of shares of voting rights. Additional

    shares can be had @ 2% of voting rights in any year.

    (3) The minimum offer price for each fully paid up or partly paid

    up share;

    (4) Mode of payment of consideration;

    (5) The identity of the acquirer and in case the acquirer is a

    company, the identity of the promoters and, or the persons

    having control over such company and the group, if any, towhich the company belong;

    (6) The existing holding, if any, of the acquirer in the shares of

    the target company, including holding of persons acting in

    concert with him;

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    (7) Salient features of the agreement, if any, such as the date,

    the name of the seller, the price at which the shares are

    being acquired, the manner of payment of the consideration

    and the number and percentage of shares in respect of which

    the acquirer has entered into the agreement to acquirer the

    shares or the consideration, monetary or otherwise, for the

    acquisition of control over the target company, as the case

    may be;

    (8) The highest and the average paid by the acquirer or persons

    acting in concert with him for acquisition, if any, of shares of

    the target company made by him during the twelve month

    period prior to the date of the public announcement;

    (9) Objects and purpose of the acquisition of the shares and the

    future plans of the acquirer for the target company, including

    disclosers whether the acquirer proposes to dispose of or

    otherwise encumber any assets of the target company:

    Provided that where the future plans are set out, the public

    announcement shall also set out how the acquirers propose

    to implement such future plans;

    (10) The specified date as mentioned in regulation 19;

    (11) The date by which individual letters of offer would be posted

    to each of the shareholders;

    (12) The date of opening and closure of the offer and the manner

    in which and the date by which the acceptance or rejection of

    the offer would be communicated to the share holders;

    (13) The date by which the payment of consideration would be

    made for the shares in respect of which the offer has been


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    (14) Disclosure to the effect that firm arrangement for financial

    resources required to implement the offer is already in place,

    including the details regarding the sources of the funds

    whether domestic i.e. from banks, financial institutions, or

    otherwise or foreign i.e. from Non-resident Indians or


    (15) Provision for acceptance of the offer by person who own the

    shares but are not the registered holders of such shares;

    (16) Statutory approvals required to obtained for the purpose of

    acquiring the shares under the Companies Act, 1956, the

    Monopolies and Restrictive Trade Practices Act, 1973, and/or

    any other applicable laws;

    (17) Approvals of banks or financial institutions required, if any;

    (18) Whether the offer is subject to a minimum level of

    acceptances from the shareholders; and

    (19) Such other information as is essential fort the shareholders to

    make an informed design in regard to the offer.

    Why Mergers fail?

    Revenue deserves more attention in mergers; indeed, a failure to focus on

    this important factor may explain why so many mergers dont pay off. Too

    many companies lose their revenue momentum as they concentrate on cost

    synergies or fail to focus on post merger growth in a systematic manner. Yet

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    in the end, halted growth hurts the market performance of a company far

    more than does a failure to nail costs.

    Case Study - Merger of ICICI and Bank of Rajasthan