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Indian Economic Reforms-25 Years

A brief review of Law reforms related to Mergers and Acquisitions and its roll in the development of economic and
social sector

Amit Sharma(Research Scholar) Prof. Rakesh Chandra Katiyar(Pro.VC)


IBM, CSJM University IBM, CSJM University
Kanpur, India Kanpur, India
Amity.sh83@gmail.com

ABSTRACT Economic reforms- The changes introduced by employed M&A as an important growth strategy. The Ajay
the Indian Government which bring an improvement in the Piramal group has almost entirely been built up by M&As. The
Nation. Economic Reforms refers the introduction of south based, Murugappa group built an empire by employing
innovative policies which eliminating the market barriers and M&A as a strategy. Some of the companies acquired by
encouraging economic participation from private sectors. Murugappa group include, EID Parry, Coromondol Fertilizers,
Bharat Pulverising Mills, Sterling Abrasives, Cut Fast
Reducing the fiscal deficit, increasing exports, reducing Abrasives etc. Other companies and groups whose growth has
imports and increasing the growth rate of the economy was the been contributed by M&As include Ranbaxy Laboratories
aim of reforms. The success of the new reforms was expected Limited and Sun Pharmaceuticals Industries particularly during
to and is likely to depend on the strategies adopted by firms in the later half of the 1990s. During this decade, there has been
response to these policies and fine tuning of policies by taking plethora of M&As happening in every sector of Indian
cognizance of emerging trends in firm level choice. The Indian industry. Even, the known and big industrial houses of India,
corporate sector responded to this policy change in a variety of like Reliance Group, Tata Group and Birla group have engaged
ways in the initial years of economic reforms. There was in several big deals.
vigorous business consolidation and restructuring by the firms OBJECTIVES OF THE RESEARCH
in a few chosen areas to correct the inefficiencies caused by
over diversification in the pre reform era. This entailed a The result of Indian economic liberalization, changes in the
significant increase in the number of mergers and acquisition rules and guide lines rapidly revolutionize the business
with majority of them being horizontal in nature. Given the environment, there has been a burst in the M&As in India.
policies induced flexibilities, while the domestic companies
especially the private enterprises took the route of merger and This gives rise to certain question in the sphere of mergers and
acquisition to restructure their business grow, the acquisitions which need to be investigated
multinational companies used the same to enter into and raise
control in Indian industry. This paper attempts to investigate Is there any sudden move in M&A activities in India
various law reforms related to M&A and also in light the roll post economic reforms?
of M&A in the development of economic and social sector.
KeywordsReforms; Mergers; Acquisitions. Is there any roll of M&A in the development of
economic and social sectors?
INTRODUCTION
Is it the process of deregulation which has moved at a
The functional importance of M&A is undergoing a sea high rate M&A activities or there are some other
change since liberalization in India. The MRTP Act and other reasons?
legislations have been amended paving way for large business
groups and foreign companies to resort to the M&A rout for Do the Indian economies get benefit from M&A after
growth. Further the SEBI substantial acquisition of share and the reforms?
take over Regulation, 1994, 1997, have been notified. The
decision of the government to allow companies to buy back
their share through the promulgation of buy back ordinance, all REVIEW OF LITERATURE
these developments, have influenced the market for corporate
control in India. Merger and Acquisition as a strategy The research on economic reforms related to M&As and its
employed by several corporate groups like R.P.Goenka, Vijay impact on the economic has been carried out. Various research
Mallya and Manu chhabria for growth and expansion of the studies specific to the present study has been found out.
empire in India in the eighties. Some of the companies taken Evaluating the roll of M&A in the development of economy
over by RPG group included Dunlop, Cet, Philips Carben and social sector has been the subject of a great deal of
black, Gramaphone India, Mallyas United breweries(US) research. Khemani (1991) states that there are multiple reasons,
Group was straddled mostaly by M&As. Further in post motives, economic forces and institutional factors that can be
liberalization period, the giant Hindustan Lever limited has
taken together or in isolation, which influence corporate
decisions to engage in M&As. It can be assumed that these voluntary turnover, and related hidden costs and untapped
reasons and motivations have enhanced corporate profitability potential (Buono, 2003). Ghosh ((2001) examined the question
as the ultimate, long-term objective. It seems reasonable to of whether operating cash flow performance improves
assume that, even if this is not always the case, the ultimate following corporate acquisitions, using a design that accounted
concern of corporate managers who make acquisitions, for superior pre-
regardless of their motives at the outset, is increasing long-term acquisition performance, and found that merging firms did
profit. However, this is affected by so many other factors that it not show evidence of improvements in the operating
can become very difficult to make isolated statistical performance following acquisitions. Kruse, Park and Suzuki
measurements of the effect of M&As on profit. The "free cash (2003) examined the long-term operating performance of
flow" theory developed by Jensen (1988) provides a good Japanese companies using a sample of 56 mergers of
manufacturing firms in the period 1969 to 1997. By examining
example of intermediate objectives that can lead to greater the cash-flow performance in the five-year period following
profitability in the long run. This theory assumes that corporate mergers, the study found evidence of improvements in
shareholders do not necessarily share the same objectives as operating performance, and also that the pre and post-merger
the managers. The conflicts between these differing objectives performance was highly correlated. The study concluded that
may well intensify when corporations are profitable enough to control firm adjusted long-term operating performance
generate "free cash flow," i.e., profit that cannot be profitably following mergers in case of Japanese firms was positive but
re-invested in the corporations. Under these circumstances, the insignificant and there was a high correlation between pre and
corporations may decide to make acquisitions in order to use post-merger performance. Marina Martynova, Sjoerd Oosting
these liquidities. It is therefore higher debt levels that induce and Luc Renneboog (2007) investigated the long-term
profitability of corporate takeovers in Europe, and found that
managers to take new measures to increase the efficiency of both acquiring and target companies significantly outperformed
corporate operations. According to Jensen, long-term profit the median peers in their industry prior to the takeovers, but the
comes from the re-organization and restructuring made profitability of the combined firm decreased significantly
necessary by takeovers. Most of the studies on impact of following the takeover. However, the decrease became
M&As can be categorized according to whether they take a insignificant after controlling for the performance of the
financial or industrial organization approach. One way to control sample of peer companies. Due to the existence of strict
measure the performance is to monitor the share prices after the government regulations, Indian companies were forced to go to
M&A deal is struck. Empirical studies of this type indicate that new areas where capabilities are difficult to develop in the
a target firms shareholders benefit and the bidding firms short run. In pursuit of this growth strategy, they often change
their organization and basic operating characteristics to meet
shareholders generally lose (Franks & Harris, 1989). The most the diversified businesses and management. In a study by
commonly employed financial approach examines trends in the Prahalad and others (1977), it has been found that, Indian
share prices of corporations involved in M&As and compares enterprises in both the private and public sectors are much
them with a reference group of corporations. Corporate diversified. This diversification led to M&As. They also found
performance is considered to have improved if the returns to that India has a large percentage of unrelated diversifiers as
shareholders are greater after the M&As. The results obtained compared to the USA, UK, France, Germany, and Italy (Kaul
using this approach, largely in the United States and also in 1991, 2003). The work of Rao and Rao (1987) is one of the
Canada, show that corporate takeovers generally have earlier attempts to analyse mergers in India from a sample of
favorable consequences for shareholders of the target 94 mergers orders passed during 1970-86 by the MRTP Act
1969. In the post 1991 period, several researchers have
companies. attempted to study M&As in India. Some of these prominent
Another set of studies evaluate the impact of M&As in various studies are; Beena (1998), Roy (1999), Das (2000), Saple
measures of profitability before and after M&As. This type of (2000), Basant (2000), Kumar (2000), Pawaskar (2001) and
industrial organization studies normally considers longer time Mantravedi and Reddy (2008). There are few other studies
horizons than the share price studies. Most of the firms do not which analyses mergers as case studies only.
show significant improvement in long term profitability after
LAW REGULATING MERGERS PRE- REFORMS
acquisition (Scherer, 1988). There are some studies which have
concluded that conglomerate M&As provide more favorable The Companies Act , 1956 Section 390 to 395 of Companies
results than horizontal and vertical M&As (Reid, 1968; Act, 1956 deal with arrangements, amalgamations, mergers and
Mueller, 1980). Many researchers have investigated, whether the procedure to be followed for getting the arrangement,
related mergers in which the merging companies have potential compromise or the scheme of amalgamation approved.
Though, section 391 deals with the issue of compromise or
economy of scale perform better than unrelated conglomerate
arrangement which is different from the issue of amalgamation
mergers. The evidence is inconclusive in terms of return to as deal with under section 394, as section 394 too refers to the
shareholders (Sudersanam et al., 1993). In terms of accounting procedure under section 391 etc., all the section are to be seen
profitability, Hughes (1993) summaries evidence from a together while understanding the procedure of getting the
number of empirical studies to show that conglomerate mergers scheme of amalgamation approved. Again, it is true that while
perform better than horizontal mergers. Poor corporate the procedure to be followed in case of amalgamation of two
performance in post-merger period has been attributed to companies is wider than the scheme of compromise or
numerous reasons manager's desire for position and arrangement though there exist substantial overlapping.
influence, low productivity, poor quality, reduced commitment, THE INDIAN INCOME TAX ACT (ITA), 1961
Merger has not been defined under the ITA but has been SEBI TAKE OVER CODE 1994
covered under the term 'amalgamation' as defined in section
2(1B) of the Act. To encourage restructuring, merger and SEBI Takeover Regulations permit consolidation of shares or
demerger has been given a special treatment in the Income-tax voting rights beyond 15% up to 55%, provided the acquirer
Act since the beginning. The Finance Act, 1999 clarified many does not acquire more than 5% of shares or voting rights of the
issues relating to Business Reorganizations thereby facilitating target company in any financial year. [Regulation 11(1) of the
and making business restructuring tax neutral. As per Finance SEBI Takeover Regulations] However, acquisition of shares or
Minister this has been done to accelerate internal liberalization. voting rights beyond 26% would apparently attract the
Certain provisions applicable to mergers/demergers are as notification procedure under the Act. It should be clarified that
under: Definition of Amalgamation/Merger Section 2(1B). notification to CCI will not be required for consolidation of
shares or voting rights permitted under the SEBI Takeover
Regulations. Similarly the acquirer who has already acquired
control of a company (say a listed company), after adhering to
LAW REGULATING MERGERS POST REFORMS all requirements of SEBI Takeover Regulations and also the
Act, should be exempted from the Act for further acquisition of
shares or voting rights in the same company.
THE COMPETITION ACT, 2002
FINDINGS
Following provisions of the Competition Act, 2002 deals with
mergers of the company: - The size of the economy can often give the first impression of
(1) Section 5 of the Competition Act, 2002 deals with the might of a country. GDP gives the total worth of the goods
Combinations which defines combination by reference to and services produced in a country in one particular year.
assets and turnover Indias GDP stood at Rs 5,86,212 crore in 1991. About 25
(a) exclusively in India and years later, it stands at Rs 1,35,76,086 crore, up 2216 percent.
(b) in India and outside India. In dollar terms, Indias GDP crossed the $2 trillion mark in
For example, an Indian company with turnover of Rs. 3000 2015-16. Currently, the country is ranked ninth in the world in
crores cannot acquire another Indian company without prior terms of nominal GDP. India is tipped to be the second largest
notification and approval of the Competition Commission. On economy in the world by 2050 and we can say that M&A
the other hand, a foreign company with turnover outside India defiantly play a vital role in the development of New India
of more than USD 1.5 billion may acquire a company in India after reforms.
with sales just short of Rs. 1500 crores without any notification CONCLUSION
to (or approval of) the Competition Commission being
required. Indian companies have adopted M&A as a strategic choice for
(2) Section 6 of the Competition Act, 2002 states that, no growth and expansion in general and particularly more
person or enterprise shall enter into a combination which prominently after the economic reforms. This gives strength to
causes or is likely to cause an appreciable adverse effect on various companies so that they can make coordination with the
competition within the relevant market in India and such a others and grow accordingly
combination shall be void.
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