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Chapter -1 INTRODUCTION

Chapter -1 INTRODUCTION 1.1. Statement of Problem This research work is basically focused to examine the Merger and Amalgamation of Companies in India. Nowadays Merger and Amalgamation have become a common phenomenon and it can be considered as an important mechanism of corporate growth. The formation of WTO which has an impact on the national laws of all the developing countries and also has effected the provisions relating to Merger and Amalgamation and the Companies Act, 1956 in India. India has, in the pursuit of globalization, responded to opening up its economy, removing controls and resorting to liberalization. As a natural consequence of this the Indian market has to be geared to face competition from within the country and outside. Various laws have been amended and repealed including the Monopolies and Restrictive Trade Practices Act, 1969 which has became obsolete in the light of international economic developments relating more particularly to competition laws and there was a need to shift the focus from curbing monopolies to promoting competition. After India became signatory to the WTO the number of Mergers and Amalgamations have increased in India as different size companies with same or different line of business started to amalgamate among themselves and the small size companies have a compulsion to amalgamate with the bigger companies because they were scared of the competition to be faced from their foreign counterparts. Number of other factors like framing of Corporate law, competition law, protection of rights of the share holders and employees during Amalgamation were creating various complications in the field of Merger and Amalgamation. As such it has became imperative to examine this problem on Merger and Amalgamation of Companies in India under the WTO regime in the present context. The Tenth Lok Sabha came into existence under the grim economic condition of the country coupled with the minority government. Inspite of these constraints, the Tenth Lok Sabha completed its full tenure and adopted a new path of

development based on economic liberalization and thus,

shifted its tilt from

nationalization to privatization.1 India is growing big and with it our markets are also growing big as a result of which many companies are trying hard to get control over Indian market by purchasing new companies or by merging with emerging companies. According to Oxford Dictionary2 Merger means “Combining, especially of two commercial companies into one”. In other words Merger is a combination of two companies wherein one loses its corporate existence. The surviving company, which is also called the amalgamated company acquires both the assets and liabilities of the merged company, which is also called the amalgamating company. A Merger may be distinguished from a consolidation, which is a combination of two companies whereby an entirely new company is formed. Both the old companies cease to exist and shares of their common stock are exchanged for shares in the new company. When two companies of approximately the same size combine the term consolidation applies and when two companies differ significantly in size then merger is the more appropriate term.3 Now it is important to note that in practice the terms ‘merger1 and ‘consolidation’ tend to be used interchangeably to describe the combination of two companies. Mergers are called amalgamation in legal parlance. The word ‘Amalgamation’ or ‘Merger* is not defined anywhere in the Companies Act, 1956. However, it is defined under the IncomeTax Act, 1961.4 But the definition of ‘amalgamation’ in the Income-Tax Act 1961 is for 1

Matilal, A.N. (Dr.); Perspective and Performance of Lok Sabha in India; Kuppa Publications; Varanasi; 2002; p.2.

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Elliott Julia & Others; Oxford Dictionary & Thesaurus, Oxford University Press 2009 at p. 469. According to Black’s Law Dictionary “Merger means the fusion or absorption of one company by another, the dtter retaining Its own name and identity and acquiring assets, liabilities, franchises and powers of former, and the absorbed company ceasing to exist as a separate entity. It differs from a consolidation wherein all the corporations terminate their existence and become parties to a new one".

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See generally, Shinde S.R.; “Takeovers and Mergers - As Means of Industrial Restructuring”; in Mergers And Acquisition of Companies-, P. Mohana Rao (Ed.); Deep & Deep Publications Pvt. Ltd., New Delhi; 2D04: p.150.

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S.2(1 B) of the Income Tax Act, 1961 defines "amalgamation’ as follows : “Amalgamation in relation to companies, means the merger of one or more companies with another company or the merger of two or more comoanies to form one company (the company or companies which so merge being referred

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the purposes of that enactment only. It is limited in scope and may not be lifted and read in the companies Act, 1956.5 Thus, an amalgamation is an organic unification or amalgam of two or more legal entities or undertakings or a fusion of one with the other. There is no bar to more than two companies being amalgamated under one scheme.6 There are generally three common ways in which companies can amalgamate for gaining advantage in the market like (1) Horizontal (2) Vertical and (3) Conglomerate.

(1)

Horizontal It is an amalgamation which takes place between two companies in the same line

of business and which increases companies share in the market. (2)

Vertical It is an amalgamation which takes place when a company amalgamates with a

supplier. Both strengthen the amalgamated Company’s competitive position in the market. to as amalgamating company or companies and the company with which they merge or which Is formed as result of the merger, as the amalgamated company), in such a manner that (I)

all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;

(ii)

all the liabilities of the amalgamating company or companies Immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation;

(iii) shareholders holding not less than three-fourth in value of the shares in the amalgamating company or companies (other than shares already held there in Immediately before the amalgamation by or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the dlstrfoution of such property to the other company after the winding up of the first mentioned company. Thus, for a merger to qualify as an 'amalgamation’ for the purpose of the Income Tax Act, the above three conditions have to be satisfied. This definition is relevant Inter alia for sections 35(5), 35A(6), 35E(7), 41(4) Explanation 2, 43(1) Explanation 7, 43(6) Explanation 2, 43C, 47(vi) & (vii), 49(1) (iil)(e), 49(2), 72A of Income Tax Act. Transfer of assets to the transferee company pursuant to a scheme of amalgamation Is not a ‘transfer’ and does not attract capital gains tax under section 47(vi)., Likewise, shares allotted to shareholders of the transferor company is not a transfer attracting capital gains tax under section 47 (vii). 5

Companies Act 1956, S. 394(4)(b).

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Re. Patrakar Prakashan Pvt. Ltd± (1997) 33 SCL13 (MP).

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(3)

Conglomerate It is an amalgamation which takes place when the amalgamating companies are

in totally unrelated lines of business. The main purpose of conglomeration is diversification of risks. Amalgamation is based on the concept of synergy.7 It is a relationship in “2+2=5 effect,” where the whole is greater than the sum of the parts. Synergetic benefits can arise, where two companies can achieve more in combination than in their individual parts.8 The value of the amalgamated company is expected to be greater than the sum of the independent values of the amalgamating companies because of cost saving and efficiency. Reasonable motive for amalgamation is to provide economic gains in the form of increased economies.9 The main motives for amalgamation are firstly, the amalgamated company can have operative cost advantage, in effect, lower average cost of production. Secondly, financial economies can be in the form of higher debt capacity, lower rates of borrowing and less flotation of shares and debentures, etc. Thirdly, it can be used as a mode of inorganic growth. Fourthly, in an amalgamation, risk of the company can be lowered by diversifying into two or more industries. Diversification is a situation in which a company takes new lines of business to reduce the degree of risk and finally effectiveness is the degree of attainment of a predetermined goal so management effectiveness can be availed of through superior management talent or research capability. Merger and Amalgamation have played an important role in the transformation of the industrial sector of India since the Second World War. The economic and political 7

The word ‘Synergy’ has its origin from the Greek word ‘Sunergos’yih\ch means "Working together’.

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The concept of synergy can be explained symbolically as follows : V(AB)> V(A) + V(B) where, V(AB) is the value of the amalgamated company AB, V(A) is the independent value of the amalgamating company A before amalgamation, and V(B) is the independent value of the amalgamating company B before amalgamation.

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Mukherjee Amitabh and Hanif Md.; Corporate Accounting; Tata MC Graw-Hlll publishing company Ltd., New Delhi; 2006 P. 9.2.

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conditions during the Second World War and post war periods including several years after independence gave rise to a spate of Merger and Amalgamations. A new merger wave across India's corporate scenario tends to show that companies want to avoid stiff and unequal competition. In fact, different sized firms in the same industry having survived together suggest that economies of scale are relatively unimportant over a wider range of industries and mergers are taking place because economies of scale are increasingly difficult without them. That is why merger movement has gathered a new momentum. Of late new businesses are reshaping India’s largest industries, with consequences for all. It is likely to affect not only business strategies and job prospects but also the prices of daily necessities as competitors become fewer and more powerful. It is apprehended that shareholders are going to be the big losers in as much as sick companies are finding merger a good panacea. Several major merger movements have occurred in the United States and each was more or less dominated by a particular type of merger. All of the merger movements occurred when the economy experienced sustained high rates of growth and conceded well particular development in business environments. The growth of International trade firmly buttressed by the international institution of long standing, has further been accelerated with the establishment of WTO creating a commercial environment more conducive to multilateral exchange of goods and services. The WTO is the only international body dealing with the rules of trade between nations. The WTO began its life on 1st January 1995, but its trading systems is half a century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had provided the rules for the system. At its heart are the WTO agreements negotiated and signed by the bulk of the worlds trading nations. These documents provide the legal ground rules for international commerce. They are essentially contracts binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments the goal is to help producer of goods and services, exporters and importers conduct their business and its purpose is to help flow of trade as freely as possible so long as there are no undesirable side effects 5

whereas GATT had mainly dealt with trade in goods the WTO and its agreements now cover trade in services and in trade inventions, creations and designs. India becoming signatory to the WTO has an effect on all the sectors of the Indian economy as well as the corporate sector. Therefore the present study has highlighted the impact of WTO on amalgamation and merger of companies in India with reference to socio-legal perspective.

1.2. Review of Literature While a number of commendable works dealing with the Corporate Mergers and Amalgamation in general are available but no serious attempt appears to have been made to conduct an inquiry to study the Corporate Merger and Amalgamation under WTO regime and its impact on developing country like India. A book edited by Mr. P. Mohana Rao, on Mergers and Acquisitions of Companies contains articles on mergers and amalgamations but none of them has touched this issue. Most of the books on Company Law like Ramaiya’s Guide to the Companies Act, Johari’s Commentaries on Companies Act, Sanjiv Agarwal and others Commentary on the Companies Act have covered the issues relating to the statutory framework and judicial pronouncement of various High Courts and Supreme Court on merger and amalgamation. The works of Sridharan and Pandian and Ramanujam have not touched on this specific issue. Prof. R.N. Kar in his book Corporate Mergers and Acquisition has focused on international experiences and has mainly emphasized on Indian Context, and has not examined the issue of merger and amalgamation under WTO. Bharat’s Corporate Mergers Amalgamations and Takeover has covered a number of aspects relating to merger and amalgamation but has not covered this issue. Some of the books on competition laws like T. Ramappa on Competition Law, D.P. Mittal on Competition Law and Universal’s guide to Competition Law have only emphasized on effect of Merger and Amalgamation on Competition but have not touched this issue.

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None of the aforementioned works and other works in the area of Mergers and Amalgamations attempts a comprehensive and in depth study dealing with the impact of WTO on Merger and Amalgamation in India. The present endeavour tries to make a comprehensive study of the Amalgamation and Merger of Companies in India under WTO regime with reference to socio-legal perspective.

1.3. Objective of the study The broad objective of the research is to explore the impact of WTO on Amalgamation and Merger of Companies in India, whereas specific objectives of the research are historical context and evolution of merger and amalgamation, statutory framework and legal entitlement within the prevailing circumstances, implementation of Governance, interpretation of the High Courts and Supreme Court in certainty and predictability of law and implication of merger and employees on shareholders under social and humanitarian aspects. The research seeks to meet the above mentioned objectives through a set of explorative research questions: (i)

To know about the current status of Amalgamation and Merger of Companies in India.

(ii)

To what extent liberalized economic policies have exposed Indian companies to resort to merger and amalgamation for facing global challenges.

(iii)

To find out the effect of Globalization on the existing legislative framework with respect to legal entitlement in the present societal context.

(iv)

To explore the impact of WTO importantly on Amalgamation and Merger of Companies in India.

(v)

To examine the role of Superior Courts as to what extent they are compatible with the existing legislative framework and if there is any gap found then how it has

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been filled

up by judicial pronouncement evolving a new Merger and

Amalgamation jurisprudence. (vi)

To find out the role of Governance, its impact on maintaining transparency and accountability during Merger and Amalgamation of Companies.

(vii)

To what extent rights of shareholders and employees are protected during Merger and Amalgamation of Companies under the liberalized economic regime.

1.4. Hypothesis Hypothesis in any research study provides direction to research. It generally directs a researcher to identify the procedures and methods to be followed in solving the problem. The hypothesis of the present research study is that “Globalization has been a popular buzzword for more than a decade and under WTO today Amalgamations and mergers are being increasingly used throughout the world and in India as a strategy for achieving a larger size asset base, faster growth in market share and for becoming more competitive through economies of scale”.

1.5. Methodology of the Study Before the framework of the study is described, it is necessary to state that both primary and secondary sources of data are taken into account within limited resources and data on number of companies being merged are collected from Centre for Monitoring Indian Economy (CMIE) Prowess. The research study is partly empirical and partly doctrinal.

1.6. Framework of the Study Keeping in view the objective, hypothesis and methodology of the present study as delineated above, the work is proposed to be divided into seven more chapters. Matters to be discussed in these chapters are briefly enumerated below.

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Chapter-2

Merger and Amalgamation of Companies In India : A historical perspective

This chapter will be divided into three parts. Part one will discuss about Evolution of Company Law in English perspective whereby emphasis will be given on sources of English Mercantile law, Growth of Company Law under Royal Charter and Bubble Act, Rise of Joint stock company and Mergers under the English Companies Act. Part two will discuss about Evolution of Company law in Indian perspective whereby it will emphasize on relation between Indian Companies Act and English Corhpanies Act during colonisation, Prevailing Socio, Economic and Political Conditions, Promulgation of the Companies Act, 1956 and various reforms made in Industrial Policy after independence. Part three will discuss about Amalgamation and Merger of Companies before and After Independence and its gradual development post 1990s. Chapter - 3

Legal Aspects of Merger and Amalgamation

This chapter will be divided into four parts. Part one will be devoted to International Laws governing Merger and Amalgamation emphasizing upon advance countries like U.K. and U.S.A. Part two will deal with Laws governing Amalgamation and Merger in Indian Perspective like statutory framework, confirmation required from various authorities and procedural compliances. Part three will be devoted on Emergence of Competition Law as a regulator a new dimension in Merger and Amalgamation and Part four will discuss about the Mergers and Amalgamations under Companies Bill, 2009. Chapter - 4

Impact of WTO on Merger and Amalgamation

This chapter will be divided into three parts. Part one will discuss about Emergence of Globalization and liberalization in Indian Economy whereby globalization its concept and nature, its effect on Indian economy and importance of liberalization will be discussed. Part two will discuss about various aspects of GATT and WTO and Part three of this chapter will examine the effects on the Merger and Amalgamation under WTO regime.

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Chapter - 5

Role of Governance In Merger and Amalgamation

This chapter will be divided into five parts. Part one will discuss about Emergence of Governance in International and Indian Perspective. Part two will be devoted to the General overview with respect to importance of Governance in Corporate sector. Part three will discuss about Corporate Governance and globalization. Part four of this chapter will stress on changing design of Corporate Governance in Indian perspective. Part five of this chapter will be devoted on impact of Corporate Governance on Mergers and Amalgamation emphasizing upon Managerial challenges, Role of auditors and mechanism for whistle-blowing during Merger and Amalgamation. Chapter - 6

Judicial Approach to Merger and Amalgamation

This chapter will be divided into three parts. Part one will be devoted to the Role of Supreme Court on Merger and Amalgamation jurisprudence whereby jurisdiction of ft court and valuation of shares will be emphasized. Part two of this chapter will be devoted to the Role of High Courts on Merger and Amalgamation jurisprudence whereby various issues like eligibility criteria, role of share capital, convening of meeting, report of the official liquidator and registrar, piercing of corporate veil, duties of the court, significance of appointed date or transfer date and effect of amalgamation will be discussed. Part three of this chapter will make an analysis of High Court versus tribunal. Chapter - 7

Social and Humanitarian Aspects of Merger and Amalgamation

This chapter will be divided into two parts. Part one will be devoted to important issues relating to protection of Employees in Amalgamation whereby its effect, role of human resource development and judicial perception on employees protections under social and humanitarian perspective will be discussed. Part two will be devoted to protection of shareholders in Amalgamation and will emphasize upon shareholder’s activism, minority shareholders rights and judicial response in shareholder's protection. Chapter -8

Concluding observations and Suggestions

In this chapter necessary suggestions will be made on the basis of the observations made in the research work. 10