CROSS BORDER MERGER
Authored by APRAJITA PRIYADARSHINI
Cross border Merger is the new trend in expanding businesses around the globe. As it had been earlier in the times pre independence a very favorable place for trade and economic development of other countries, India is still steadily steeping up to reach a credible number in business rankings and is a favored business destination. The conducive economic environment across the globe has led to steadily increasing cross border mergers in companies. This article tries to simplify the meaning and need of cross border mergers as covered under the Companies Act, 2013.
Merger as defined under the Sec.230 of Companies Act, 2013 means and includes the consolidation of shares of different classes and its division into separate classes. Mergers basically unites two different companies into one and is done with the objective of expansion of business into new segments, increase the reach and scope of company as well as to gain market shares. There are two terms involved in such transactions – Mergers and Acquisitions. When a company takes over the other company or entity and declares itself to be the new owner, it is known as Acquisition. Mergers include the tie up of two equal sized business entities that join their respective forces and resources to move forward as one single new entity. Cross Border mergers fall under the purview of mergers in the Companies Act.
Cross border mergers can be simply defined as the process of merger between two companies that are located in two different countries resulting into a third company. It can be a merger between the two companies or acquisition of one company of India by the other foreign company or vice versa. The assets and liabilities of the two companies from two different countries are combined into a new legal entity under the process of merger. The country where the acquiring company is situated is known as the Home Country while the country where the target company is located is known as the Host Country.
Reasons for Cross Border Mergers
The Companies Act of 1956 did have a provision wherein a foreign company could come and merge with an Indian company but not the other way round. The Act of 2013 has opened ways to both the routes of mergers and acquisitions between companies across the borders. There are several reasons that owe to the evolution of the cross border mergers and acquisitions concept in India. Some of them are –
· Growth- The main purpose of mergers is the easier and less time consuming growth and expansion of a company by opting for an M&A with an existing firm.
· Synergy-When two undertakings work together, combining their resources and efforts, they may achieve a better output than their individual endeavors.
· Profitability- The volume of production may increase through the process of M&A which in turn reduces the production cost without an increase in the fixed cost. Thus profitability margin of the entity rises.
· Market Power- The Cross Border mergers are a great opportunity to turn into or continue being a market player. To gain access to new markets foreign companies have an inclination of acquiring or merging up with local companies with a good manufacturing and distribution channel.
· Access to Input and Technology- The M&A helps companies gain access to raw materials, innovative ideas and technologies, cheaper but productive labour. High cost of Research and Development has led many companies to adopt the M&A mechanism.
· Global Competition-With increase in the globalization and liberalization of the economic policies, the business entities are forced to restructure them to keep up in the global competition. To diversify products and markets, to reduce depend on exports, to avoid home country political and economic instability and compete with foreign competitors in their own territory, business entities are motivated for Cross-border M&A.
Types Of Cross Border Mergers
There are two types of Cross Border Mergers that have been recently introduced in the Companies Act 2013 under Sec 234.These are-
· Inbound Mergers and Acquisitions -In this kind of mergers, a foreign company merges with or acquires an Indian company. Eg: Daichii acquiring Ranbaxy
· Outbound Mergers and Acquisitions – In this process, an Indian company merges with or acquires a foreign company. Eg: Tata Steel acquires Corus
Process Of Cross Border Merger and Acquisitions in India
Subject to the provisions of any other law for the time being in force, a foreign company, May with the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice versa. A foreign company incorporated outside India may merge with an Indian company after obtaining prior approval of Reserve Bank of India and after complying with the provisions of Sections 230 to 232 of the Companies Act and these rules. Similarly a company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure B after obtaining prior approval of the Reserve Bank of India and after complying with provisions of Sections 230 to 232 of the Act.
With increasing globalization and its principles, the nation is steadily moving towards a stage where it intends to accept these principles through fairly new legislations. The concept of Cross Border merger thus is also an attempt to keep up with the globalization and liberalization of economy across the globe. The principle also needs to meet various barriers like double taxation, varying economic policies of the participant countries like conflict in the compliance laws, failure to integrate, Human Resource challenges and several others. Also due to the existence of several laws regulating the practice like the Companies Act, the SEBI, the Insolvency and Bankruptcy Code, Foreign Exchange Management Act and others, successful achievement of targets set for the cross border mergers can be said to be in ambiguity.