project on icici and bor merger and acquistions

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

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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:

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:

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

company.

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.

Takeover:

A takeover is acquisition and both the terms are used

interchangeably.


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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

product;

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

materials.

(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

distribution;

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

company;

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

company.

(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

otherwise;

(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

compliance.

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

shareholders/promoters;

(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

inheritance;

(g)acquisition of shares by government companies and statutory

corporations;

(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

Foreign;

(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

information.

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

Regulations.


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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

revenue.

(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

company;

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

violated.

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

procedure:

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

accepted;


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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

otherwise;

(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

project on icici and bor merger and acquistions

Documents