Adv. Lazim Vengattil, Associate, Alishahz Legal LLP

INTRODUCTION

In the first parts of our Mergers and Acquisitions (M&A) series, we discussed the vital role of legal expertise, and we then examined the provisions and procedural complexities under the Companies Act, 2013 Part two of M&A series. Now, as we move on to Part 3, we’ll look closely at the different kinds of mergers, this segment will look into the various types of mergers and also, we will delve into the diverse laws that govern M&A transactions, discussing the regulatory landscape that shapes these corporate transformations.

DIFFERENT FORMS OF M&A

Horizontal Mergers: Also known as ‘horizontal integration,’ this type involves entities engaged in competing businesses at the same industrial stage. It typically aims at market consolidation by eliminating competitors and is closely scrutinized by the Competition Commission of India (CCI). This may result in economies of scale and scope, strengthening market presence.

Vertical Mergers: This type of merger involves entities at different stages of the industrial or production process. It enhances independence, lowers transaction costs, and synchronizes demand and supply. This facilitates a move towards self-sufficiency and streamlines business operations.

Congeneric Mergers: This type of merger involves companies in related industries but offering different products. It often involves sharing distribution channels, providing synergies for the merger. This enhances market shares, expands product lines, and ensures seamless integration.

Conglomerate Mergers: This type of merger involves entities in unrelated industries. It utilizes financial resources, enlarges debt capacity, and diversifies without significant startup costs. This increases the value of outstanding shares and explores diverse businesses.

Cash Merger: In this type of merger, shareholders receive cash instead of shares in the merged entity. This provides an exit for shareholders seeking liquidity and offers immediate monetary value, liquidity, and flexibility.

Triangular Merger: This is a tripartite arrangement involving the target, acquirer, and a subsidiary. It is often chosen for regulatory and tax efficiency. There are two types: forward (target merges into the subsidiary) and reverse (subsidiary merges into the target).

REGULATORY LANDSCAPE AND COMPLIANCE OF M&A TRANSACTIONS

M&A transactions involving listed companies in India are subject to regulatory compliances under the Securities and Exchange Board of India Act 1992 (SEBI Act) and the rules and regulations framed thereunder. Key regulations include the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.

The Competition Act governs M&A transactions to ensure that they do not have an adverse effect on competition in the market. Combinations exceeding certain asset and turnover thresholds are required to notify the CCI and obtain its approval before consummation. The main antitrust issue during the review of an M&A transaction is whether the acquisition will substantially lessen competition. The Competition (Amendment) Act, 2023, introduced several significant changes to the Competition Act, 2002, one of the most significant changes is the establishment of a new deal value threshold.

M&A deals involving foreign exchange, including cross-border M&A, are subject to regulations and guidelines prescribed under FEMA, administered by the Reserve Bank of India (RBI). The main regulations include the Foreign Exchange Management (Non-debt Instruments) Rules 2019, the Foreign Exchange Management (Debt Instruments) Regulations 2019, and the Foreign Exchange Management (Cross-Border Merger) Regulations 2018.

The Insolvency and Bankruptcy Code (IBC) 2016 provides a framework for the resolution of insolvency and bankruptcy issues in India. It plays a significant role in M&A transactions involving distressed assets or companies undergoing insolvency proceedings. An acquisition by way of implementation of a resolution plan has been granted various regulatory exemptions, but if the combined values of the assets or turnovers of the resolution applicant and the target cross the thresholds prescribed under the Competition Act, it will be mandatory for the resolution applicant to obtain prior approval for the proposed acquisition from the CCI.

There are some sector-specific regulations and regulators to regulate acquisitions in those sectors. For example, in the context of an acquisition of an insurance company, approval from the Insurance Regulatory and Development Authority of India is required. RBI approval is required for an acquisition of banking companies and non-banking financial companies (NBFCs). M&A transactions in India are also subject to various tax implications under the Income Tax Act 1961, the Central Goods & Services Act 2017. The tax implications can vary depending on the structure and nature of the deal.

CONCLUSION

M&A is a complex area with lots of different factors to consider. Each deal is unique and comes with its own challenges and opportunities. Understanding the different types of mergers and the laws that govern them is really important for any business thinking about a merger or acquisition. But it’s also important to remember that the legal and regulatory side is just one part of the picture. A successful M&A deal also depends on things like strategic fit, cultural compatibility, and how well the businesses can integrate after the merger.