Basics of Mergers and Acquisitions Law and Practice in India

Mergers and Acquisitions are integral to corporate restructuring and strategic growth through consolidating the market position of firms, establishing competitive advantages, and achieving synergies in their operations. Indian mergers and acquisitions transactions fall within a more-than-ample legal and regulatory framework that ensures an equilibrium balance of business interest, regulatory compliance, and protection for the stakeholders' rights. Herein, is provided an overview of the basic understanding of law and practice about M&A in India.

Legal Framework Governing M&A in India

The Indian legal framework regarding M&A comprises a number of statutes, regulations, and guidelines. Some of the most prominent are:

1. The Companies Act, 2013 is the procedural and substantive law on mergers, amalgamations, and demergers. Sections 230 to 240 of the Act provide the framework for compromise, arrangements, and amalgamations, which mandate NCLT approval.

2.  The Competition Act, 2002 provides that mergers and acquisitions do not indulge in anti-competitive practices and abuse of dominance. Transactions, if they surpass the specified threshold, are mandatorily subject to approval from the Competition Commission of India.

3.  The SEBI Regulations govern acquisitions of listed companies to ensure transparency and protect minority shareholders. These include the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, and the SEBI (Delisting of Equity Shares) Regulations, 2021.

4.  The Income-Tax Act, 1961 provides tax incentives for mergers and demergers that meet specified conditions, including tax-neutral treatment for certain transactions.

5.  Cross border M&A is covered by FEMA, 1999, wherein the Reserve Bank of India is regulating foreign investment.

6. The IBC, 2016 allows acquisitions and restructuring as part of the process in the corporate insolvency resolution processes.

Types of M&A Transactions

M&A transactions may be in the form of a merger. A merger takes place when two or more companies are brought together as one, while one company remains and all the others cease to exist. Acquisition refers to the purchase of one company by another. The acquirer takes control over the target company in an acquisition.

A merger is a form of amalgamation, where two or more companies come together to form a new company, thus both cease to exist. Demerger refers to the transfer of a business division into an independent entity. Lastly, takeover refers to the acquisition of control of a company through purchasing a significant portion of its shares.

Key Steps in an M&A Transaction

M&A transactions can be of different forms. A merger involves combining two or more companies into one entity, where one company survives and the others cease to exist. An acquisition is the purchase of one company by another, where the acquiring company gains control over the target company.

An amalgamation is a type of merger where two or more companies merge to form a new entity, and both cease to exist. A demerger is a transfer of a business division into a separate entity. Finally, a takeover is defined as the taking over of a company's control by purchasing a significant number of its shares. The M&A process begins with a preliminary assessment, which involves evaluating the strategic fit, conducting due diligence, and assessing the valuation of the target company. 

The next important due diligence phase deals with legal, financial, and operational risks identification. Later, Memorandum of Understanding, Share Purchase Agreement, Scheme of Arrangement, among other things, would be prepared. Important here are regulatory clearances from authorities, including the NCLT, CCI, SEBI, and RBI, for name clearances.

Approvals from stakeholders such as shareholders and creditors are obtained. The transaction is then completed, and integration efforts are carried out post-transaction to ensure synergy realization.

Challenges in M&A Transactions

M&A transactions in India face many challenges. It is a very complex regulatory issue because of overlapping regulations, leading to potential delays. Disputes over methodologies of valuation may also arise. Another critical challenge is the need to align the organizational cultures post-merger. Finally, resistance from stakeholders, such as minority shareholders, employees, or creditors, can be significant.

Trends are driving the M&A landscape in India. The impact of globalization has led to cross-border transactions. Distressed asset acquisitions under the IBC framework are on an uptrend, and Environmental, Social, and Governance (ESG) factors are now being considered a serious factor in making M&A decisions.

Way Forward?

The growth and consolidation prospects of M&A transactions in India are significant; however, meticulous planning, adhering to relevant regulatory frameworks, and effective strategies for execution need to be strictly followed. Liberalization of Indian markets, developments in technology, and increased foreign investment will give a boost to this aspect, and companies who want to benefit from M&As will look forward to remaining updated on law developments, to properly conduct due diligence, and place emphasis on integrating strategies to capitalize on long-term value.

This article is authored by Samyak Deshpande. He was among the Top 40 performers in the Cyber & Technology Laws Quiz Competition organized by Lets Learn Law.