Mergers and acquisitions are business strategies where companies either join together (merger) or one buys the other (acquisition). For example, a merger might see two companies unite to form a stronger single entity like when two banks combine to offer more services. An acquisition could involve a big company buying a smaller one to expand its products or market reach. In India, these deals are common as businesses aim to grow quickly or compete globally. This article explains the key aspects of mergers and acquisitions under Indian laws in a simple way, suitable for anyone curious about how these deals work.
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What are Mergers and Acquisitions?
Mergers and acquisitions are strategic business decisions aimed at fostering growth and innovation. A merger occurs when two or more companies combine in order to form a single entity, often to pool resources or expand market reach. An acquisition on the other hand, involves one company buying another, either by purchasing its shares or assets. Mergers and acquisitions have become increasingly popular, driven by economic growth, technological advancements and the need for businesses to stay competitive in a globalized market. High-profile deals like the merger of HDFC Bank with HDFC Ltd. also highlights the transformative impact of M&A on the corporate landscape of India.
Legal Framework Governing Mergers and Acquisitions
The legal framework for mergers and acquisitions in India is huge as it involves multiple laws and regulatory bodies to ensure fairness and compliance. The key legislations include
Companies Act, 2013: This is the primary law governing corporate restructuring, including mergers, amalgamations and demergers. Sections 230-232 outline the process for schemes of arrangement, which are commonly used for M&A.
Competition Act, 2002: This regulates combinations (including mergers and acquisitions) that could significantly impact competition in India. Transactions exceeding certain financial thresholds require approval from the Competition Commission of India (CCI).
Foreign Exchange Management Act (FEMA), 1999: FEMA governs cross-border M&A, ensuring compliance with foreign exchange regulations, particularly for deals involving foreign entities.
Income Tax Act, 1961: This addresses tax implications, offering tax neutrality for certain mergers and demergers while imposing capital gains tax on acquisitions.
Securities and Exchange Board of India (SEBI) Act, 1992: SEBI regulates M&A involving publicly listed companies, ensuring investor protection and market transparency.
Regulatory bodies play a critical role in overseeing M&A transactions
National Company Law Tribunal (NCLT): Sanctions schemes of arrangement for mergers and demergers.
Competition Commission of India (CCI): Reviews large transactions to prevent anti-competitive outcomes.
Reserve Bank of India (RBI): Approves cross-border M&A under FEMA regulations.
Securities and Exchange Board of India (SEBI): Oversees deals involving listed companies.
Additionally, sector-specific laws, such as the Banking Regulation Act, 1949, or the Insurance Act, 1938, may apply, requiring approvals from regulators like the RBI or the Insurance Regulatory and Development Authority of India (IRDAI).
Also, check out the difference between merger and amalgamation.
Types of M&A Transactions
Mergers and acquisitions in India can take various forms like mergers and Amalgamations, acquisitions, demergers and cross border M&A, each with distinct legal and procedural requirements
Mergers and Amalgamations
A merger combines two or more companies into one along with assets and liabilities vesting in the amalgamated company. Merger is governed by Sections 230-232 of the Companies Act, 2013 and it requires the approval of NCLT for its functioning.
Fast-track mergers are available for small companies or mergers between a holding company and its wholly-owned subsidiary, bypassing NCLT with central government approval.
Acquisitions
Share Purchases: The acquiring company buys shares from the target company’s shareholders and gains the control. This can be through agreements or open market purchases.
Asset Purchases: The acquiring company buys specific assets or business units, which is often through Business Transfer Agreements (BTAs).
Demergers
A demerger splits a company into two or more independent entities, often to focus on core businesses or unlock shareholder value. Demerger also require NCLT approval for functioning and it is defined under Section 2(19AA) of the Income Tax Act.
Cross-Border Mergers and Acquisitions
These involve transactions between Indian and foreign companies, governed by FEMA and the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018. RBI approval is mandatory and valuation must comply with recognized standards.
Transaction Type | Key Features | Primary Regulation |
Mergers/Amalgamations | Combines companies into one entity | Companies Act, 2013 (Sections 230-232) |
Acquisitions (Share Purchase) | Buying shares to gain control | Companies Act, SEBI Act |
Acquisitions (Asset Purchase) | Buying specific assets/business units | |
Demergers | Splitting a company into multiple entities | Companies Act, Income Tax Act |
Cross-Border M&A | Involves foreign entities | FEMA, 1999; RBI Regulations |
Know about various merger examples in India.
Process and Approvals
The process for mergers and acquisitions in India involves several steps and regulatory approvals. Following are these steps explained in detail
Scheme of Arrangement (for Mergers and Demergers)
Companies prepare a scheme outlining the terms of the merger or demerger. The scheme requires approval from the boards of directors, shareholders (via a special resolution with 75% majority) and creditors. The scheme is filed with the NCLT, which conducts hearings to ensure fairness to stakeholders, including minority shareholders and creditors. The process involves two motions: the first for directions on meetings and notices and the second for final approval.
CCI Approval
Large transactions (combinations) exceeding financial thresholds under the Competition Act must be notified to the CCI. The CCI reviews the deal within 150 days (reduced from 210 days in 2023) to ensure it does not harm competition. Most deals (80-85%) are approved within 30-60 days but complex cases may take longer.
Sector-Specific Approvals
Sectors like banking, insurance and telecommunications require approvals from regulators like the RBI, IRDAI, or Telecom Regulatory Authority of India (TRAI).
Fast-Track Mergers
Available for certain categories, these require central government approval instead of NCLT, with a deemed approval if no action is taken within 60 days.
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Tax Implications in Mergers and Acquisition
Tax implications play a significant role in structuring transactions in M&A. Following is an explanation of the tax considerations such as tax neutrality, capital gains tax and stamp duty. Let's find out the meaning of these implications:
Tax Neutrality
Mergers and demergers are generally tax-neutral under Section 47 of Income Tax Act, 1961 meaning no capital gains tax is levied if conditions like getting approval from NCLT and meeting shareholder continuity. Carry-forward losses may be available under Section 72A of the Act for certain schemes.
Capital Gains Tax
Acquisitions, such as share or asset purchases, are subject to capital gains tax. Long-term capital gains (holdings over 24 months for unlisted shares or 12 months for listed shares) are taxed at 10% (plus surcharge and cess), while short-term gains follow individual tax slab rates.
Stamp Duty
Payable on transaction documents like share purchase agreements or deeds of conveyance. Rates vary by state, with some states including NCLT orders in the definition of “conveyance” for stamp duty purposes.
Tax Aspect | Details | Applicable Law |
Tax Neutrality | Mergers/demergers exempt from capital gains tax | Income Tax Act, Section 47 |
Capital Gains Tax | Applies to share/asset purchases; rates vary by holding period | Income Tax Act, Sections 45, 50B |
Stamp Duty | Varies by state; applies to transaction documents | State Stamp Acts |
Summary
Mergers and acquisitions are very important for India's business growth and economic growth. The legal framework, which includes the Competition Act, the Companies Act, FEMA and other laws, makes sure that these deals are open and fair. Regulatory bodies like the NCLT and CCI keep an eye on the process to protect stakeholders and keep competition high. India's economy is expected to reach $5 trillion by 2025 which means that a lot of mergers and acquisitions will happen. This is especially true in the technology, finance and infrastructure sectors. Businesses and people who are doing mergers and acquisitions need to know the legal details and get professional help in order to be successful.
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Mergers and Acquisitions: FAQs
Q1. What is meant by mergers and acquisitions?
Mergers combine two companies into one while acquisitions involve one company buying another to gain control.
Q2. Is M&A a good career?
M&A can be a rewarding career with high pay and growth but involves long hours and high pressure.
Q3. What is an example of a merger and acquisition?
Merger: Vodafone and Idea merged to form Vi; Acquisition: Tata Group acquired Air India.
Q4. What are the 5 types of mergers?
The five types are horizontal, vertical, conglomerate, market-extension and product-extension mergers.
Q5. What are the three major types of mergers?
The three major types are horizontal (same industry), vertical (supply chain) and conglomerate (unrelated industries).
