What is Merger & Acquisition?
Merger and Acquisition (M&A) refers to the consolidation of companies or assets through various types of financial transactions. In India, M&A activities are governed by multiple laws including the Companies Act 2013, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, Competition Act 2002, and various tax laws.
Key Definitions
- Merger: Combination of two or more companies into a single entity, where one company survives (amalgamation) or a new company is formed
- Acquisition: Purchase of controlling stake (typically 50% or more) in another company without merging the entities
- Amalgamation: Legal process where two or more companies combine to form a new entity or merge into an existing one
- Takeover: Acquiring control of a company by purchasing majority stake, either friendly or hostile
Difference Between Merger and Acquisition
| Aspect | Merger | Acquisition |
|---|---|---|
| Nature | Consensual combination of equals | One company buys another |
| Legal Entity | Original entities cease to exist (or one survives) | Target remains separate subsidiary |
| Approval Required | NCLT approval typically required | May not require court approval |
| Control | Shared management in mergers of equals | Acquirer has full control |
Types of M&A Transactions
1. Horizontal Merger
Combination of companies operating in the same industry and at the same stage of production. Example: Two competing pharmaceutical companies merging.
2. Vertical Merger
Combination of companies at different stages of the supply chain. Example: A manufacturer merging with its supplier or distributor.
3. Conglomerate Merger
Combination of companies in unrelated business activities. Example: A technology company acquiring a hospitality business.
4. Reverse Merger
A private company acquires a publicly-listed shell company to gain stock exchange listing without IPO process. SEBI has strict regulations for reverse mergers.
5. Demerger (Spin-off)
Division of a company into separate entities. Can be through slump sale or court-approved demerger under Sections 230-232 of Companies Act.
Legal Framework in India
Companies Act 2013
Sections 230-232 (Compromises, Arrangements, Amalgamations), Section 233 (Fast-track mergers), Section 235 (Power to acquire shares of shareholders dissenting from scheme)
SEBI Regulations
SEBI (SAST) Regulations 2011 for open offers, SEBI (Listing Obligations) Regulations for listed companies, SEBI (Buyback) Regulations
Competition Act 2002
CCI approval required for combinations exceeding thresholds (typically ₹1,000 crore turnover or ₹4,000 crore asset value)
Income Tax Act 1961
Sections 391-394 (Tax neutrality for amalgamations), Section 72A (Carry forward of losses), Section 47 (Transfers not regarded as transfer)
Fast Track Merger (Section 233)
A streamlined process available for:
- • Holding company with wholly-owned subsidiary
- • Merger of two or more small companies
- • Merger of startups (as per notification)
Benefits: No NCLT approval required; approval by Central Government (Regional Director) within 30 days of filing.
M&A Process Step-by-Step
Stage 1: Strategic Planning
- • Define M&A objectives (market expansion, technology acquisition, cost synergies)
- • Identify target companies
- • Form internal M&A team
- • Engage investment bankers and advisors
- • Prepare preliminary valuation
Stage 2: Letter of Intent (LOI)
- • Non-binding expression of interest
- • Key terms outline (valuation, structure, timeline)
- • Exclusivity period negotiation
- • Confidentiality obligations
Stage 3: Due Diligence
Comprehensive investigation covering legal, financial, tax, and operational aspects. See detailed section below.
Stage 4: Definitive Agreements
- • Share Purchase Agreement (SPA) or Business Transfer Agreement (BTA)
- • Share Exchange Ratio (for stock deals)
- • Representations and warranties
- • Indemnification clauses
- • Conditions precedent and subsequent
Stage 5: Shareholder and Board Approvals
- • Board resolution approving the scheme
- • Shareholder approval by special resolution (75% majority)
- • Creditors' approval where required
- • Separate meeting for minority shareholders if needed
Stage 6: Regulatory Approvals
- • NCLT sanction for court-approved mergers
- • CCI approval for combinations exceeding thresholds
- • Sectoral regulators (RBI for banks, IRDAI for insurance, etc.)
- • SEBI approvals for listed companies
- • FEMA compliance for foreign investments
Stage 7: Closing and Integration
- • Transfer of shares/assets
- • Payment of consideration
- • Filing of prescribed forms with ROC
- • Post-merger integration execution
Due Diligence Requirements
Due diligence is the comprehensive appraisal of a business undertaken by a prospective buyer to establish its assets and liabilities and evaluate its commercial potential.
Legal Due Diligence
- • Corporate structure and constitutional documents
- • Litigation and disputes
- • Material contracts review
- • Intellectual property rights
- • Regulatory compliance status
- • Employment contracts and ESOPs
Financial Due Diligence
- • Historical financial statements
- • Revenue recognition policies
- • Related party transactions
- • Working capital analysis
- • Debt and contingent liabilities
- • Management discussion and analysis
Tax Due Diligence
- • Direct tax compliance (Income Tax)
- • Indirect tax compliance (GST, customs)
- • Transfer pricing documentation
- • Pending assessments and disputes
- • Tax holiday eligibility
- • Withholding tax compliance
Operational Due Diligence
- • Business model and operations
- • Supply chain assessment
- • Customer concentration analysis
- • Technology and IT systems
- • ESG compliance
- • Market position and competition
Valuation and Share Exchange
Valuation is critical for determining the share exchange ratio in stock-based mergers. For listed companies, valuation must be conducted by registered valuers.
Valuation Methods
- Discounted Cash Flow (DCF): Present value of projected future cash flows
- Comparable Company Analysis: Trading multiples of peer companies
- Precedent Transaction Analysis: Multiples from comparable M&A deals
- Asset-Based Valuation: Net asset value approach
- Market Price Method: For listed companies, based on stock exchange prices
Share Exchange Ratio
The ratio at which shares of the target company will be converted into shares of the acquiring company. Requires:
- • Fairness opinion from independent valuers
- • SEBI compliance for listed companies
- • Shareholder approval
- • Disclosure in scheme documents
Regulatory Approvals Required
NCLT Approval (Court-Approved Mergers)
Required for all amalgamations and certain other arrangements under Sections 230-232 of Companies Act 2013. NCLT evaluates fairness to shareholders and creditors.
Competition Commission of India (CCI)
Mandatory for combinations exceeding thresholds (assets > ₹2,000 crore or turnover > ₹6,000 crore). Must be obtained before closing.
SEBI Approvals
For listed companies: Open offer obligations under SAST Regulations, delisting if applicable, scheme approval for listed entities.
Sectoral Regulators
RBI (banks, NBFCs), IRDAI (insurance), TRAI (telecom), PFRDA (pensions), etc. depending on industry.
FEMA Compliance
Foreign investment in Indian companies and overseas investments by Indian companies require RBI/FEMA compliance.
NCLT Approval Process
The National Company Law Tribunal (NCLT) plays a crucial role in sanctioning mergers and amalgamations under the Companies Act 2013.
Step-by-Step NCLT Process
Draft Scheme of Arrangement
Prepare detailed scheme covering transfer of assets/liabilities, share exchange ratio, treatment of employees, etc.
Board Resolution
Both companies' boards approve the scheme and authorize filing with NCLT.
Application to NCLT (Form NCLT-1)
File petition with NCLT along with scheme, affidavit, notice of admission, etc.
NCLT Direction for Meetings
NCLT issues directions for convening shareholder and creditor meetings.
Shareholder/Creditor Meetings
Approval by requisite majority (typically 75% by value). Chairperson files report with NCLT.
Second Motion Petition
File petition for final sanction with meeting results, newspaper advertisements, etc.
NCLT Hearing and Order
NCLT hears objections (if any) and sanctions the scheme if fair and reasonable.
Filing with ROC
File certified copy of NCLT order with Registrar of Companies within 30 days.
Tax Implications
Tax-Neutral Amalgamations (Section 47)
Transfer of assets in a scheme of amalgamation is not treated as a transfer for capital gains tax purposes if:
- • All assets and liabilities of the amalgamating company become assets/liabilities of the amalgamated company
- • At least 75% of shareholders of the amalgamating company become shareholders of the amalgamated company
- • Transfer is made to an Indian company
Carry Forward of Losses (Section 72A)
Accumulated losses and unabsorbed depreciation of the amalgamating company can be carried forward by the amalgamated company if:
- • Business of the amalgamating company is carried on for at least 5 years
- • At least 75% of the book value of fixed assets is held for 5 years
- • For specified industries (banking, insurance, etc.)
GST Implications
Transfer of business as a going concern is not treated as supply and is not subject to GST. However, specific asset transfers may attract GST.
Post-Merger Integration
Successful M&A requires effective post-merger integration to realize synergies and achieve strategic objectives.
Integration Areas
- • Organizational structure and governance
- • Human resources and culture integration
- • IT systems harmonization
- • Finance and accounting consolidation
- • Operations and supply chain
- • Customer and vendor integration
Key Success Factors
- • Clear communication strategy
- • Dedicated integration team
- • Defined synergies and KPIs
- • Cultural alignment initiatives
- • Retention of key talent
- • Customer retention programs