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IMPACT OF MERGERS AND ACQUISITION ON INDIA AND ASIA (By- Prarthana Markod)
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IMPACT OF MERGERS AND
ACQUISITION ON INDIA AND ASIA
Authored By- Prarthana Markod
Trade and Commerce has been a part
and parcel of lives of the people since ages. In the ancient times trade used
to be in the nature of a “Sole Proprietorship” where in the whole control of
profits, assets and expenses were in the hands of the sole owner! Then with
time came the need of a business companion so as to expand the reach of
business in terms of assets, knowledge and of course profits.
However, due to the limitations of a
partnership firm, there came a concept of Company in the 17th century, which was first witnessed in Europe as
the not-for-profit entities to build institutions, such as hospitals and
universities, for the public good.[1]
8th
century BC in India, early organizations, called Shreni, were
the first firms that could independently enter into contracts or own property,
which also meant they could sue and be sued.[2]
Thus,
we may safely say that there has been a change in the structure of commercial
organizations and the related laws like Contract Act, Partnership Act, Company
Law, MRTP Act and many more, with the change in the needs and the global trend
of the economy.
Concepts
like Limited Liability Partnership, Joint Ventures, BPO and KPO were not known
to the people a few years back, and in this context the concept of Mergers and
Acquisition is gaining popularity these days in the corporate sector.
Mergers and acquisitions
(M&A) is a general term that describes the consolidation of companies or
assets through various types of financial transactions, including mergers,
acquisitions, consolidations, tender offers, purchase of
assets, and management acquisitions.[3]
The concept of merger and acquisition
in India was not popular until the year 1988. During that period a very small
percentage of businesses in the country used to come together, mostly into a
friendly acquisition with a negotiated deal. The key factor contributing to
fewer companies involved in the merger is the regulatory and prohibitory
provisions of MRTP Act, 1969.
The year 1988 witnessed one of the
oldest business acquisitions or company mergers in India. It is the well-known
ineffective unfriendly takeover bid by Swaraj Paul to overpower DCM Ltd. and
Escorts Ltd.[4]
According to a
report from Bain, the 3600 M&A deals that
took place between 2015 and 2019 amounted to more than $310 Billion. According to the
report over 60% of the
deals by
volume and trade were attributed to industrial goods, energy, telecom, and the
media sector.[5]
Today India has witnessed major M&A
which includes the recent merger of Zee Entertainment
and Sony India Merger, Vodafone Idea Merger, Walmart Acquisition of Flipkart
and many more.
Now the question is why has Mergers and
Acquisition in India seen an upward graph in the recent times though it has to
go through several Rules and Laws like SEBI–SAS&T
Regulations, 1997 (Securities and Exchange Board of India), Competition Act,
2002 (Competition Commission of India), Income Tax Act, 1961 (Department of
Revenue), Transfer of Property Act, 1882, Indian Stamp Act, etc. during the process of incorporation.
Thus, the reason can be seen in both at a
macro level and at a micro level.
Micro Level/ Merging or Amalgamated Company: There are countless reasons for the companies
to merge, and out of them the main or the popular reason for such a decision is
growth and development of the business of the company! A business merger may give the acquiring
company an impetus to grow its market share and the customer base. In addition,
diversification in the business puts companies at an advantage to explore and
exploit various opportunities and resources in the commercial market.
Adding to this as M&A
creates a pool of Assets, Intellects and Resources, the future processes become
cost effective and economical in nature which in turn benefits the customers
with a wide range of products and services at a minimal cost.
Macro Level/ Economy of the
Country: Ultimately
all the decisions and the activities taken up by a commercial entity poses
impact on the economy of the country! The impact is not necessary to be
beneficial for the all the economies as each and every country is structured on
the basis of the demographic features, raw materials, relation with other
foreign country, role of the Government in the economy etc. However, it is
noteworthy to highlight the positive impact of the M&A of two organizations
in the economy!
In the times of Globalization and “Cut
throat competition,” a merger can help the company to pierce through the
international businesses with the help of advanced technologies, increased
customer base and rich resources, and the best example to support this point is
of Merger between Disney and Pixar in 2007. Disney has
been the biggest name in family entertainment for decades, creating classics
such as Cinderella, Mary Poppins, and The
Lion King. Pixar was a newer entry on the market, but made a huge impact
with its beloved films Toy Story and Finding Nemo.
The merger allowed Disney to consolidate its brand as the biggest
provider of family-friendly films and it allowed Pixar to greatly increase its
production process and release two new films per year. The post-merger Pixar
films, including Up and WALL-E, have been
hugely successful.[6]
Another big advantage of M&A to the
country is to uplift the Loss-making companies by merging it with large
companies so that the economy is freed of NPAs, Bad loans, improper utilization
of public money and the burden on
the government to recapitalize the organizations again and again.
The classic example of amalgamation of the 10 public sector banks into four
big banks is worthy to be spoken of! Through this our Finance Minister Nirmala
Sitharaman aspires to create big next generation banks with enhanced capacity
to increase credit and bigger risk appetite, with national presence and global
reach.
Cross border Merger; is a bye-product of Mergers and
Amalgamation which has seen an upward trend in the era of Globalization and
Liberalization in the major economy.
Cross-border
acquisition is when one company acquires a company that is based on a different
country or a foreign country to form a new legal entity. The two countries
involved are called Host Country (target company) and Home Country (acquiring
company). Cross Border mergers leads to expansion in terms of capital, resources
resulting into entry in international markets.
The most important
effect of Cross border mergers is the inflow of Foreign Direct Investment (FDI)
in the Home country. IMF
defines FDI as “The acquisition of at least ten percent of the ordinary shares
or voting power in a public or private enterprise by non-resident investors.
Direct investment involves a lasting interest in the management of an
enterprise and includes reinvestment of profits.”
Cross-border mergers
and acquisitions can be beneficial to a host country as the potentially
profitable assets can be used in investing in a profitable multi-national
venture rather than using it in never ending domestic economic crisis.
The trend of FDIs was initiated
during the19th century when a new international trade wave had begun which
succeeded in establishing giant businesses and profitable economy.
The international business regime had
stressed on the need for having a communal and cooperative business practices
across globe for mutual and overall growth of the nations. Such thought adopted
by many developed countries and cooperative associations like WTO, IMF etc,
strived for more capital inflows to many developing countries like India and
China.[7]
Though most of the M&A purchases
have originated from developed countries, but the growth of M&A purchases
from developing countries has increased noticeably over the past decade. Annual
OFDI flows from developing countries have grown faster than those from
developed countries over the past 15 years and they have contributed well to
the world economy during the recent economic difficulties in developed markets.
Among developing regions, Asia has
been at the forefront of OFDI (An
outward direct investment (ODI) is a business strategy in which a domestic firm
expands its operations to a foreign country).[8] The
OFDI stock from developing Asia reached more than $2 trillion or 10.5% of the
world total in 2009.[9]
The recent amendments to the FDI
policy of India have shown a positive sign for the country and also for many
sick units which can utilize the opportunity to renovate and reinvent
themselves. Out of all rapidly growing south-east Asian nations, India is one
of the benchmark destinations for many foreign investors. As per the report of
the Indian Finance ministry published in Financial Times, London, India had
attracted $31billion of FDI in 2015 followed by China with $28 billion and then
by US with $27 billion.[10]
Adding to this, India’s share in
BRICS in global FDI flows total to $322 billion in Financial Year 2014-2015,
which is 22% of the overall world’s flows also have proven the growth of FDIs
in promoting economic growth and development.[11]
Notable acquisitions by Indian
companies in the last decade are Tata Steel - Corus, Hindalco – Novelis, Lupin
– Gavin and Tata Motors - Jaguar Land Rover.
Adding to this, Mergers during
Covid-19 in Asia is worthy to note! Despite of a complete lockdown in the whole world, Asia was
successful in locking profitable deals due to factors such as recovery in trade, manufacturing
activities and a strong GDP growth forecast.[12]
According
to UNCTAD’s World
Investment Report 2021, published on 21 June, Foreign
Direct Investment (FDI) flows to developing countries in Asia increased by 4%
to $535 billion in 2020.[13]
According
to the UNCTAD, India comes among the top 5 Host countries in terms of Mergers
and Acquisition, along with China, Singapore, UAE and Hong Kong.
Supporting the above data; 2 major acquisitions took place in
India during Covid-19 which were of Big Basket and Tata Group for USD 1.3
billion and acquisition of Numaligarh Refinery by Engineers India and Oil India
for USD 1.28 billion.[14]
To conclude, I do not intend to overshadow
the failures and fatalities caused by risky mergers like failure of Tata
Steel-Corus, HDFC & Max Life, Reliance Communication & Aircel and of
Snapdeal & Flipkart, however if we look at the effect of Mergers and
Acquisition as a whole, such mergers and acquisition has helped the economy to
compete with the developed countries and have its entity in the international
market.
Therefore, strict Due diligence must
be followed during the process of Mergers and Acquisition also there must be
equal contribution by the government of the Country so that the economy is at
par with the best economies of the world!
Article Information
IMPACT OF MERGERS AND ACQUISITION ON INDIA AND ASIA (By- Prarthana Markod)
Author Name: Prarthana Markod
Title: IMPACT OF MERGERS AND ACQUISITION ON INDIA AND ASIA
Email Id: prarthana.markod@gmail.com
- Journal IJLRA
- ISSN 2582-6433
- Published 2022/07/05
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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