MODULE -I

CORPORATE RESTRUCTURING
• It is very difficult for any firm to survive without
restructuring itself in growing stages. It may be
possible for a firm to run successfully for a
short period but in long run, it may not be
possible without restructuring due to change in
the business environment. So corporate
restructuring is required when there is change
in business environment.
• Due to LPG (liberalization, globalization and
privatization), there are lot of profitable business
opportunities in the market. So the firm needs to
leverage its benefits. The firms require lot of funds
and resources and hence goes for restructuring.
• Further there are lot of competitors in the market,
they manufacture very high quality of product and
sell it at a reasonable price. Consequently , a firm
needs to go for restructuring to have more
technological support to manufacture a improved
product by restructuring itself.
• So restructuring has become a buzzword in the
corporate world. Many companies are
competing with one another in search for
excellence and experimenting many techniques
and ideas to survive in the corporate market.
They are trying to turn the business by cutting
down jobs, buying companies, closing down
unprofitable division etc. So corporate
restructuring has assumed paramount
experience.
 Meaning
• As per Oxford dictionary, “Restructure means
to give a new structure or rebuild or rearrange”.
• As per Collin English dictionary, Corporate
Restructure is a change in business strategy of
an organization resulting in diversification,
closing down part of business etc. to increase
its profitability.
• So corporate restructuring can be defined as a
change in organization of a business.
 Nature of Corporate Restructuring
• Corporate restructuring involves accepting or
adopting a new way of running an organization and
abandoning the old ones. It requires the
organizations to reconsider its design i.e. systems
,procedures, policies and norms with a view to
achieve desired objectives.
• It is a constant and integral part of doing business
by numerous business companies now a days due
to change in the business environment.
• Restructuring of a firm becomes essential when the
firm feels at a point that the original structure can
no longer manage the output and objectives.
• It involves reorganization of firm’s activities,
assets and liabilities through consciously
management actions to improve future cash
flows and make more profit.
• It is comprehensive process by which a
company can consolidate its business
operations to be synergetic , competitive and
successful.
• Planning of corporate restructuring requires a
detailed analysis of business demand, available
resources, competitors analysis and
environmental impact.
• Restructuring is done by a team of professionals
including business experts, company secretaries,
charted accountants, HR professionals, who have to
play a key role in corporate restructuring.
• Restructuring is done within the regulatory framework
of Indian companies act, 1956.
• Large companies often go for restructuring as they
face many problems as compare to small business.
• Restructuring takes place in different forms such as
merger, acquisition, take over, alliances etc.
 Objectives of Corporate Restructuring
• To focus on core strengths, operational synergy and
efficient utilization of managerial capabilities and
infrastructure.
• To consolidate and economies the scale by expansion
and diversion to exploit extended domestic and global
markets.
• To revive the sick unit by adjusting losses of the sick
unit with profits of a healthy company.
• To restructure the capital by appropriate mix of loan
and equity funds to reduce the cost of servicing and
improve return on capital employed.
• To improve the corporate performance and to
bring it at par with competitors by adopting the
radical changes brought out by information
technology.
• To accomplish cost of staff reduction by selling
and closing unprofitable division.
• To move the operations of manufacturing to a
lower cost location.
• To reorganize the operation such as sales,
marketing and distribution.
• Forms of Corporate
Restructuring
 I. MERGER

• A merger refers to an agreement in which two

companies join together to form one company.
• In other words, a merger is the combination of two
companies into a single legal entity.
• It is the absorption or fusion of one company by
another.
• It is an arrangement whereby the assets of two or
more companies come under the control of one
company.
 REASONS FOR MERGER
• The globalization of business has compelled
companies to open new export houses to meet
global competition. Global market concept has
necessitated many companies to restructure.
• Revolution in information technology has made
it necessary for companies to adopt new
changes for improving corporate performances.
• Economies of scale can be achieved by
consolidating the capacities and by expansion of
activities.
• By restructuring the enterprise, a sick company can
be successfully revived can be brought back to
profitable lines.
• Helps in financial reorganization(capital structure)
which brings the company to achieve a desired
balance of debt and equity, thereby have more return
on capital employed.
• Tactical move that enables a company to reposition
itself (with a merger partner) into a stronger
operational and competitive industry position.
• In case of a new product or new business entry and
expansion of market is a strong reason for merger.
• Another important reason is to improve value of
the firm of the existing company formed by
combination of resources by the merged
companies.
• When two companies join, the expertise of both
the companies are shared to have more sales
and profit leading to growth of the organization.
 TYPES OF MERGER
A. HORIZONTAL MERGER
• It is a merger of two or more companies that
compete in the same industry.
• It is a merger with a direct competitor and hence
expands as the firm's operations in the same
industry to acquire a large market share.
• Horizontal mergers are designed to achieve
economies of scale and result in reduce the number
of competitors in the industry.
• In the banking industry in India, acquisition of Times
Bank by HDFC Bank, in consumer electronics,
acquisition of Electrolux’s Indian operations by
Videocon International Ltd. are some of the
examples.
 B. VERTICAL MERGER
• It is a merger which takes place upon the combination
of two companies which are operating in the same
industry but at different stages of production or
distribution system.
• A vertical merger can happen in two ways: One is when
a firm acquires another firm which produces raw
materials used by it. For e.g., a tyre manufacturer
acquires a rubber manufacturer.
• Another form of vertical merger happens when a firm
acquires another firm which would help it get closer to
the customer. For e.g., a consumer durable
manufacturer acquiring a consumer durable dealer.
 There are two types of vertical
integration:
a) Backward Integration:
It is method of vertical integration in which a
firm will get ownership of its supplier.
b) Forward Integration:
it is a method of integration in which a firm will
gain ownership of its distributors.
 C. CONGLOMERATE MERGER
• It refers to the combination of two firms
operating in industries unrelated to each other.
• In this case, the business of the target company
is entirely different from those of the acquiring
company. For e.g., a watch manufacturer getting
merged with a cement manufacturer, a steel
manufacturer with a software company etc.
• There are no important common factors between
the companies in production, marketing and
research and development.
• Conglomerate mergers are merger of different
kinds of businesses under one flagship
company.
• The purpose of merger remains utilization of
financial resources, enlarged debt capacity and
also synergy of managerial functions.
 D.COGENERIC MERGER
• Co-generic merger is a kind in which two companies
are in same industry or related industries but don't
offer same products.
• It includes the extension of the product line that are
all the way required in the daily operations. For i.e.,
combination of a computer system manufacturer
with a UPS manufacturer.
• In a co-generic merger, the companies may share
similar distribution channels
 Theories of Merger
1. Differential Efficiency Theory
• According to differential theory of merger, one reason for a
merger is that if the management of a company X is more
efficient than the management of the company Y than it is
better if company X acquires the company Y and increase
the level of the efficiency of the company Y.
• This theory assumes that, if some companies are
operating at level which is below the optimum potential of
the company than it is better if it is acquired by another
company. 
• This is because firms with greater efficiency would be able
to identify firms with good potential but operating at lower
efficiency.
•
• This theory is applicable in case of Horizontal
merger.
• This merger helps in private gain and also
societal gain.
• Lastly level of efficiency in the economy will also
be increased
 2. INEFFICIENT MANAGEMENT THEORY
• This is similar to the concept of managerial efficiency
but it is different in that inefficient management .
• The management in control is not able to manage asset
efficiently ,mergers with another firm can provide the
necessary supply of managerial capabilities.
• In this replacement of incompetent managers were the
sole motive for mergers and also manager of the target
company will be replaced .
 3. Synergy Theory
• Synergy is the concept that the value and performance of
two companies combined will be greater than the sum of
the separate individual parts.
• Synergy is the potential benefit achieved through the
combining of companies, is often a driving force behind a
merger.
• According to this theory, two businesses can merge to
form one company that is capable of producing more
revenue and resulting in cost reduction significantly than
either could have been able to independently.
• There are two types of synergy:
• Operating synergy • Financial synergy
 Operating Synergy
• Operating synergy is something which is improved
by economies of scale. this means reduction in cost
and increasing the volume of production.
• Operating efficiency is improved by acquiring more
customers, suppliers and beating off the
competitors in the market.
 Financial synergy
• This is the impact of merger on capital structure
of the company. This helps the company in
reduction of cost capital.
• Tax saving is another considerations. When the
two firms merge, their combined debt capacity
may be greater than the sum of their individual
capacities before the merger.
 4. PURE DIVERSIFICATION THEORY
• Diversification is a business development strategy allowing
a company to enter additional lines of business that are
different from the current products, services and markets.
• Merger through diversification is preferred when the   firm
may lack required internal resources or capabilities.
• Diversification of business activities brings competitive
advantages allowing companies to reduce business risks.
• It may be done including demand for diversification by
managers and other employees ,preservation of
organizational reputation, financial and tax advantage.
• The employees of a firm develop various skills over time working on
different types of activities of the firm which makes them much more
efficient.
• A firm builds up information on its employees over time, which helps it
to match employees with jobs within the firm. Managerial teams are
thus formed within the firm. When the firm is shut down, these teams
are destroyed and value is lost. If the firm diversifies, these teams can
be shifted from unproductive activities to productive ones, leading to
improved profitability, continuity and growth of the firm.
• Goodwill: - A firm builds up a reputation over time in its relationships
with suppliers, creditors, customers and others, resulting in goodwill.
It does this through investments in advertising, employee training,
R&D, organizational development and other strategies. Diversification
helps in preserving its reputation and goodwill.
• Financial and tax benefits: - Diversification through mergers also
results in financial synergy and tax benefits. It increases the corporate
debt capacity and reduces the present value of future tax liability of
the firm.
 5. STRATEGIC REALIGNMENT TO CHANGING
ENVIRONMENT
• It suggests that the firms use the strategy of Merger as
ways to rapidly adjust to changes in their external
environments .
• When a company has an opportunity of growth available
only for a limited period of time slow internal growth may
not be sufficient.
• Then the company goes for merger to get the financial and
technological support.
• For example use of technology is the less expensive and
fastest way of carrying out business activities.
 6. HUBRIS HYPOTHESIS
• Hubris is the characteristic of excessive confidence
or arrogance, which leads a person to believe that he
or she may do no wrong.
• Hubris may be developed after a person encounters a
period of success. 
• So Hubris is overestimation of one’s own capabilities,
when someone is in a power or position.
• Hubris can arise because of over confidence gained
in previous successful Mergers and by citing that
they take the approval of board of directors for
merger and consequently the merger takes place.
 7. AGENCY PROBLEM THEORY
• In  corporate finance, An agency problem occurs when
there is a conflict of interest between the managers
(agents) and shareholders (principals) of the firm.
• The managers always look for their personal benefits and
less emphasis on shareholders wealth creation activities.
• So a firm in order to retain the interest of shareholders
and separate the control rights from managers, in the
form of going merger.
• This becomes solution to agency problems. This enables
the outside managers to control decision process of the
target firm by bypassing the existing managers and board
of directors.
 8. INFORMATION SIGNALING THEORY

• This is the announcement of mergers negotiation

or an tender offer which may convey some of the
confidential information as signals by the target
company to acquiring that future cash flows are
likely to increase and that future will increase in
future values.
 Reverse Merger
• A reverse merger is a merger in which a private company becomes
a public company.
• A reverse merger is when a  private company  becomes a  public
company by purchasing control of the public company.
• In a reverse merger, the private company become public company
without much formalities and at less cost and get listed on stock
exchange without IPO(Initial Public offering).  
• Reverse merger helps the companies in saving taxes. The losses of
smaller companies can be carried forward when they become a
combined entity. This results in companies having to pay lesser
taxes.
• Example - One example of a reverse merger is Godrej Soaps —
profitable and with a turnover of  Rs.437 crore — did a reverse
merger with loss-making Gujarat Godrej Innovative Chemicals .
 II. DEMERGER
• Demerger is an act of splitting off a part of an existing
company to become a new company, which operates
completely separate from the original company. In the
other words, when company split off its existing business
activities into several components with an intent to form
a new company.
• Shareholders of the original company are usually given
an equivalent stake of ownership in the new company.
• The entity that emerges has its own board of directors.
• A demerger is often done to help each of the segments
operate more smoothly, as they can now focus on a more
specific task.
 EXAMPLE
• For e.g. In this case, Bajaj limited has been
demerged into (a) Bajaj auto limited to focus on
the auto business, (b) Bajaj Finserv. Ltd (BFSL)
to focus on insurance, consumer finance etc,
and (c) Bajaj Holdings & Investment Ltd (BHIL)
to focus on investments and new business
opportunities.
• Demerger is essentially a scheme of arrangement
under Section 391 to 394 of the Companies Act,
1956 .
• It requires approval by majority of shareholders
holding shares representing three-fourths value in
meeting convened for the purpose, and sanction of
High Court.
• Demerger is also called as a corporate divorce.
Sometimes demerger is the result of merger
failure(HDFC and Maxlife).
• Demerger can called as opposite of merger
because in merger two companies come together
whereas in demerger undertaking of a company
gets separated into separate identity.
 Rationale of Demerger
• Improve valuation:-In case of Dabur India, demerger
was done to create a global presence for Dabur’s
pharmaceuticals business and provide focus to
maximize penetration in global markets.
• Focus on core business: Demerger helps to separate
less recognized investment out of core business. The
company can then focuses on core business and exploit
the benefits of core competencies to the maximum
extent and utilize surplus cash in productive way. E.g.
Demerger of cement business of Larsen & Toubro Ltd
into Ultra tech cement co ltd (Aditya Birla group co.)
which enabled L & T to become a focused engineering
company.
• Attract investors:- Demerger of company can
attract specific institutional investors having
interest in particular sector.
• Family settlement:- Split among family members
can be a reason for demerger. E.g. Demerger of
Reliance Industries Ltd in which the business was
divided between two brothers as in Shri Anil
Dhirubhai Ambani would lead financial services,
power and telecom businesses and Shri Mukesh
Dhirubhai Ambani would continue to lead the other
businesses including petrochemicals, oil and gas
exploration and production, refining and other
businesses comprising the remaining undertaking
Forms/Types of Demerger
 1. Spin off
• It is business strategy wherein division of a company
becomes an independent business and both the parent
company and the resulting company act as a separate
corporate entities(two independent business).
• Generally, the spin-off strategy is adopted when the
company feels that the potential of the business unit
can be well explored when operating under the
independent management structure and possibly
attracting more outside investments.
• The "spin-out" company takes assets, intellectual
property, technology and/or existing products from the
parent organization.
• The shareholders are allowed to hold share in
the subsidiary company in form of a special
dividend. (shares in both the company).
• Effective removal of parent company from
management and decision making of subsidiary
company.
 2. Split up
• Split-up involves the decomposition of the existing firm
and the birth of a number of new firms from the
remnants of the decomposed firm.
• The strategy requires breaking up of whole of the
existing firm into two or more resulting companies in
the withdrawal of parent company’s existence and
leaving the new offs spring to survive.
• The whole of the business/undertaking of the existing
company is transferred to one or more new
company/companies formed for the purpose and the
demerged company is dissolved by passing special
resolution by its shareholders. Such company is wound
up voluntarily and disappears. 
 Procedure for Demerger
• In order to affect a demerger, there must be a
provision in the Memorandum of understanding
of the principal company. 
• The procedure for demerger is specified under
section, 391 to 394 of Indian companies act,
1956 which requires the following steps to be
followed :
 Step-1. Scheme of arrangement

• At initial stage, a scheme of arrangement has to be

prepared by the company stating the reasons and
 share swap ratio , transfer of assets, liabilities and
many more. Such a scheme has to be approved by
the Board of directors and has to be
communicated to shareholders, creditors,
employees and all related stakeholders.
 Step. 2-Application to the Court
• Upon preparation of the Scheme, the application has
to filed with the court in that location in which the
company is registered, along with the scheme   to
obtain an order for holding meetings of
members/creditors. The application is also
accompanied with the following documents:
• Memorandum and articles of association of the
Company;
•  Latest Audited Balance Sheets ;
• List of Shareholders and Creditors;
• Board’s Resolution approving the Scheme, and
• Draft notice of Meeting.
 Step.3 -Obtaining court’s order for holding
meeting of Members/Creditors
• The court examines the fairness of the scheme
submitted by the applicants and subsequently
issues summons in Form 35 of the Court Rules.
The court has to ensure that the scheme is
capable of being implemented.
 Step.4-Notice of meeting of
Members/Creditors

• Once the Court gives the order, notice of the

meeting needs to be served to the
members/creditors. A notice in Form 36 is sent
to the interested parties by the persons
authorized by the courts at least twenty one days
before the date.  Such notice shall also be
advertised in Form 38 in such newspapers that
are well circulated among the interested parties.
 5. Holding meeting of Members/Creditors
• A meeting shall be held according to the
directions of the court and the result of such
meeting shall be decided by separately counting
votes in favour and against the motion. The
chairperson of each meeting shall submit a
report in Form 39 within the time prescribed by
the court.
 6. Petition to the Court for sanctioning the
scheme of Demerger

• The scheme has to be approved by the requisite

majority of the shareholders and the creditors of
the company (pursuant to court-convened
meeting). It has to be sanctioned by three-
fourths of members/creditors to file an appeal. 
A petition has to be submitted to the court for
authorizing the demerger.
 Step.7- Court’s order on petition
sanctioning the scheme of Demerger
• After hearing the objections, the Court may pass
an order approving the scheme of scheme of
demerger in the same newspaper in which the
notice of meeting was advertised.
 Modes/Methods of Demerger
• Demerger by agreement– A demerger may be
effected by agreement where under the
demerged company spins off its specific
undertaking to a resulting company, formed with
another name.
• So all the specific property, liabilities and issues
of the principal company, transferred to the
resulting company immediately before the
demerger, becomes the property, liabilities and
issues of the resulting company.
• Demerger under scheme of arrangement–
• Under scheme of arrangement, a company can
separate its division or split of its entity through
a scheme of arrangement under the provisions
of the Companies Act, 1956 with approval from
the court.
• Demerger under voluntary winding up -
The original company which has split into several
companies after division could be wound up
voluntarily pursuant to the provisions of
Sections 484 to 498 of the Companies Act, 1956.
In such a situation, the company getting wound
up may transfer its operations to the resulting
companies.
 Reasons for Demerger
• To Focus on core activities.
• Corporate attempt to adjust to changing economic
and political environment of the country.
• To correct the previous investment decision and
exploit the potential of resulting company and
maximize the profit.
• When company reaches a point and it would be
profitable if brings out a separate division.
• To create more accountability on management as
each company will have separate balance sheet.
• To increase  job security if loss-making parts of
the business are demerged.
• Greater competition leads to lower prices and
serves the customer better.
 III. TAKEOVER
• Takeover is a corporate growth device whereby one
company acquires control over another company,
usually by purchasing all or a majority of its shares.
• It is different from merger in the sense that, merger
takes place by mutual decision between two
companies to combine and become one entity in
order to expand the business operations while
takeover means the acquiring of a company in order
to increase the market share of the business and
usually in takeover, the large companies buy the
smaller companies.
• So takeover refers to transfer of control of firm
to another firm.
• When the purchaser takes over the control over
the target company, it is known as take over.
 Examples
• Johnson & Johnson  took over Dutch vaccine
maker Crucell.
• Bharti Airtel is the largest mobile network in
India. It is also expanding its reaches throughout
the globe. In February, 2010, Bharti Airtel added
180 million new customers in its list by acquiring
an African Mobile Network provider called Zain
Africa. 
 Objectives
• To effect savings in overheads and other working
expenses on the strength of combined resources.
• To achieve product development through acquiring
firms with compatible products and
technological/manufacturing competence.
• To diversify through acquiring companies with new
product lines.
• To improve productivity and profitability by joint
efforts of technical and other personnel of both
companies as a consequence of unified control.
• To increase market share
• To achieve market development by acquiring
one or more companies in new geographical
territories or segments, in which the activities of
acquirer are absent or do not have a strong
presence.
• To eliminate competition.
• To create shareholder value and wealth by
optimum utilisation of the resources of both
companies.
 Types of takeover
1.Friendly or Negotiated Takeover:-
• Friendly takeover means takeover of one company by change
in its management & control through negotiations between
the target company and the acquirer.
• Friendly takeover is undertaken with the consent of taken
over company.
• In friendly takeover, there is an agreement between the
management of two companies through negotiations and the
takeover bid may be with the consent of majority or all
shareholders of the target company.
• The bidder tells the target’s board of directors about its
intention and makes an offer. The board then advises its
shareholders to accept the offer. Subsequently, the friendly
takeover goes ahead.
• Example : In 2000,Tata Tea took over Tetley Tea.
2. Hostile takeover:
• In hostile takeovers, normally the management is not
consulted and a direct offer is given to shareholders without
the knowledge of management. Or, it may be a case that
management rejected the offer by bidding company and the
bidder is still pursuing a direct deal with shareholders.
• For example,  Company A wants to achieve a hostile takeover
of Company B. Company A goes directly to the shareholders
of Company B with an offer to buy their stock at a premium
price - substantially above the current market price. This is
known as making a tender offer, and if successful, Company
A takes majority ownership of Company B, even if the board
of Company A objects.
• Example -Hewlett-Packard’s takeover of Compaq, Oracle and
Peoplesoft etc.
• Bailout Takeover
• A bailout takeover is an urgent or even forced acquisition of a
financially unstable company by a government or a stable
enterprise with the goal of returning the troubled business to
a position of financial strength.
• In a bailout takeover, the government or strong company
takes over the weak company by purchasing its shares.
• The acquiring entity develops a rehabilitation plan for the
weak company, describing how it will be managed and how its
financial position will be turned around.
• An example of a bailout takeover was PNC Financial Service’s
acquisition of National City Corp. as National City
experienced massive losses .
 Procedure for Takeover
• The takeover could take place through different
methods. A company may acquire the shares of
a unlisted company through under Section 395
of the Companies Act , 1956.
• However where the shares of the company are
widely held by the general public, it involves the
process as set out in the SEBI (Substantial
Acquisition of Shares and Takeovers)
Regulations, 1997, as amended in 2002, 2004
and 2006.
 IV. ACQUISITION
• An acquisition is a situation whereby one company
purchases most or all of another company's shares in
order to take control over it.
• An acquisition occurs when a buying company obtains
more than 50% ownership in a target company.
• As part of the exchange, the acquiring company often
purchases the target company's stock and other assets.
• Example : Acquisition of Times Warner by AOL
• There is no tangible difference between
an  acquisition  and a  takeover; both words can be used
interchangeably - the only difference is that each word
carries a slightly different connotation.
• Typically, takeover is used to reference a hostile
takeover where the company being acquired is
resisting. In contrast, acquisition is frequently used to
describe more friendly acquisitions, or used in
conjunction with the word  merger, where both
companies are willing to join together. 
So, "takeover" suggests that the target company resists
or opposes the purchase. In contrast, "acquisition"
describes a more amicable transaction.
 General features
• When one company acquires another, clearly
establishes as its new owner.
• Legal View: target ceases to exist.
• Buyer swallows target
• Buyer’s stock continues to be traded.
• Turbulent process to integrate both the work
cultures
• Additional expenses to buy another
• Companies perform acquisitions for various
reasons: they may be seeking to achieve:
• Economies of scale,
• Greater market share,
• Increased synergy,
• cost reductions etc.
• The acquiring company would usually proceed with
the corporate action by offering to purchase the
shares of the target company.
 V. Business/Strategic Alliance
• A strategic alliance is an arrangement between two
companies that have decided to contribute
resources to undertake a specific, mutually
beneficial project.
• Each company may provide the strategic alliance
with resources such as products, distribution
channels, manufacturing capability, project funding,
capital equipment, knowledge, expertise etc.
• In a strategic alliance, each company maintains its
autonomy while gaining a new opportunity.
 EXAMPLE
• Etihad Airways, based in Abu Dhabi, has got tied
up with India’s Jet Airways. This alliance will
provide considerable benefits for both carriers,
as it opens Etihad to 23 cities in India, and offers
Jet Airways passengers connection possibilities
to the US, Europe, Middle East and Africa that
were previously unavailable.
 Advantages/objectives of Strategic
Alliance
• Provides Access to New Target Markets
• Allows to Share Knowledge and Resources
• Helps Create Economies of Scale
• Strengthens the Strategic Objectives
• Risk elimination
 Types of strategic alliance
• Joint Venture
• A  joint venture  is established when the parent
companies establish a new  child company. For
example, Company A and Company B (parent
companies) can form a joint venture by creating
Company C (child company).
• Example : Indian Oil Skytanking Limited was
established in year 2010 as a joint venture between
Holders-Ruchi Soya and Indian Oil.
• Non-equity Strategic Alliance
• A non-equity strategic alliance is created when two
or more companies sign a contractual relationship to
pool their resources and capabilities together.
• Equity Strategic Alliance
• In Equity Strategic Alliances agreements are
supplemented by equity investments, making the
parties shareholders as well as stakeholders in each
other.  Each company holds certain percentage of
equity in another.
• Global strategic alliance:
• Takes place between two companies across national
boundaries. (Etihad airways and Jew airways)
• Horizontal Strategic Alliances
• Horizontal strategic alliances are formed between
partners operating in the same business
area.(Renault and Nissan alliance)
• vertical strategic alliance
• Vertical strategic alliances are associations among
businesses in different industries.(ICICI Bank and
Vodafone India).
 V. Divestiture
• Divestiture means to sell off certain assets such as a
manufacturing plant, a division or product line.
• Demerger, wherein a company’s Division is separated as an
independent company is also regarded as a divestiture .
• Divestiture, is the opposite of an investment(capital expenditure),
and it is the process of selling an asset for either financial, social
or political goals.
• The company divests with the intent to manage their asset
portfolios. This means removing all those assets that are not
contributing to the core business operations. As the business
grows, a firm enters into several business lines due to which it is
often difficult or impossible for a firm to focus on its core
businesses. Thus, one of the reasons for employing the divestiture
is to sell off the unrelated business units and restore the focus on
the core business unit.
 Example

❑In 2015, parent company GE decided it would

divest its GE Capital business as part of a
restructuring plan.
 Rationale Behind Divestiture
• It enables the business to focus on its core
operations or the line of business where it holds
expertise.
• This is an effective tool for monetizing the assets
as Divestiture usually results in cash inflow for the
business.
• The divestiture strategy evaluates the performance
of their various divisions and divest those divisions
whose internal rate of return is below the
average/required rate of return of the business as
a whole.
• This is sometimes done to improve shareholder
value or due to enforcement by regulatory
authorities.
• Disinvestment can reduce the public debt that is
threatening to assume unmanageable
proportions.
 Types of Divestiture
1. PARTIAL SELL OFF
2. DEMERGER
 1. Partial Sell-offs
• The Partial Sell-offs is the form of divestiture wherein
the firm sells its business unit or a subsidiary to
another because it deemed to be unfit with the
company’s core business strategy.
• So , the firm may divest that unit which may not fit
with its strategic plan. Generally, those business units
which are unrelated to the core business unit and
requires a handsome amount of time and attention of
the management.
• The most common motive for the sell-off is to raise
capital and employ it in the core business unit of the
firm.
• Many times, firm divest business units to restore its
focus on the core business operations.
 2. Demerger
• When a company splits off its existing business
activities into several components, with the
intent to form a new company that operates on
its own or sell or dissolve the unit so separated,
is called a demerger.
 Reasons behind a divestiture
• 1. To sell off  redundant business units
• Most companies decide to sell off a part of
their core operations if they are not performing
in order to place more focus on the units that
are performing well and are profitable.
• 2. To generate funds
• Selling a business unit for cash is a source of
income without a binding financial obligation.
• 3. To increase resale value
• When the existing assets bring continuous loss, the
company goes for divestment to realize more gain in
liquidation than there is in retaining existing assets.

• 4. To ensure business survival or stability

• Sometimes, companies face financial difficulties;
therefore, instead of closing down or declaring
bankruptcy, selling a business unit will provide a solution.
 
• 5. To comply with regulators
• A court order requires the sale of a business to improve
market competition.
 LEGAL AND PROCEDURAL ASPECTS –
MERGER/ACQUISITION
• Analysis of proposal by the companies: whenever a proposal for merger or
amalgamation comes up then managements of concerned companies look
into the pros and cons of the scheme. The likely benefits such as
economies of scale, operational economies, improvement in efficiency,
reduction in cost, benefits of diversification, etc. are clearly evaluated. The
likely reaction of shareholders, creditors and others are also assessed. The
taxation implications are also studied. After going through the whole
analyses work, it is seen whether the scheme will be beneficial or not. After
going through the whole analysis work, it is seen whether the scheme will
be beneficial or not. It is pursued further only if it will benefit the interested
parties otherwise the scheme is shelved.
• Determining exchange ratios:  The amalgamation or merger schemes
involve exchange of shares. The shareholders of amalgamated companies
are given shares of the amalgamated company. It is very important that a
rational ratio of exchange of shares should be decided. Normally a number
of factors like book value per share, market value per share, potential
earnings, and value of assets to be taken over are considered for
determining exchange ratios.
• Approval of board of directors: After discussing the amalgamation
scheme thoroughly and negotiating the exchange ratios, it is put
before the respective board of directors for approval.
• Approval of share holders: After the approval of the scheme by the
respective board of directors, it must be put before the
shareholders. According to sec.391 of  Indian Companies Act, the
amalgamation scheme should me approved at a meeting of the
members or class of the members, as the case may be, of the
respective companies representing there-fourth in value and
majority in number, whether present in person or by proxies. In
case the scheme involves exchange of shares, it is necessary that
is approved by not less than 90% of the shareholders of the
transferor company to deal effectively with the dissenting
shareholders.
• Consideration of interests of the creditors:  The view of creditors
should also be taken into consideration. According to Sce.391,
amalgamation scheme should be approved by majority of creditors
in number and three-fourth in value.
• Approval of the court:  After getting the scheme approved, an
application is filed in the court for its sanction. The court will consider
the view point of all the parties appearing, if any, before it, before
giving its consent. It will see that the interests of all concerned parties
are protected in the amalgamation scheme. The court may accept,
modify or reject an amalgamation scheme and pass order accordingly.
However, it is up to the shareholders whether to accept the modified
scheme or not. It may be noted that no scheme of amalgamation can
go through unless the registrar of companies sends a report to court
to the effect that the affairs of the company have not been conducted
as to be prejudicial to the interests of its members or to the public
interest.
• Approval of  Reserve Bank of India :  In terms of sec.19(1)(d) of the
foreign exchange regulation Act, 1973, permission of  the RBI is
required for the issue of any security to a person resident outside
India Accordingly, in a merger, the transferee company has to obtain
permission before issuing shares in exchange of shares held in the
transferor company. Further, sec 29 restricts the acquisition of whole
or any part of any undertaking in India in which non-residents interest
is more than the specified percentage.
 Tax Implications -
• Tax Relief to the Amalgamating Company
• Exemption from Capital Gains Tax [Sec. 47(vi)]: Under
section 47(vi) of the Income-tax Act, capital gain arising
from the transfer of assets by the amalgamating
companies to the Indian Amalgamated Company is
exempt from tax as such transfer will not be regarded as a
transfer for the purpose of Capital Gain.
• Exemption from Capital Gains Tax in case of International
Restructuring [Sec. 47(via)]:
• Under Section 47(via), in case of amalgamation of foreign
companies, transfer of shares held in Indian company by
amalgamating foreign company to amalgamated foreign
company is exempt from tax, if the following two
conditions are satisfied:
• At least twenty-five per cent of the shareholders of the
amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company,
• and Such transfer does not attract tax on capital gains in
the country, in which the amalgamating company is
incorporated.
• Tax Relief to the shareholders of an Amalgamating
Company:
• Exemption from Capital Gains Tax [Sec 47(vii)]: Under
section 47(vii) of the Income-tax Act, capital gains
arising from the transfer of shares by a shareholder of
the amalgamating companies are exempt from tax as
such transactions will not be regarded as a transfer for
capital gain purpose, if:
• The transfer is made in consideration of the allotment to
him of shares in the amalgamated company;
• and Amalgamated company is an Indian company.
Tax Relief to the Amalgamated Company
• Carry Forward and Set Off of Accumulated loss and
unabsorbed depreciation of the amalgamating company
[Sec. 72A]: Section 72A of the Income Tax Act, 1961
deals with the mergers of the sick companies with
healthy companies and to take advantage of the carry
forward of accumulated losses and unabsorbed
depreciation of the amalgamating company. But the
benefits under this section with respect to unabsorbed
depreciation and carry forward losses are available only
if the followings conditions are fulfilled:
• There should be an amalgamation of – (a) a
company owning an industrial undertaking (Note
1) or ship or a hotel with another company, or (b)
a banking company referred in section 5(c) of
the Banking Regulation Act, 1949 with a
specified bank (Note 2), or (c) one or more public
sector company or companies engaged in the
business of operation of aircraft with one or
more public sector company or companies
engaged in similar business.
• The amalgamated company should be an Indian Company.
• The amalgamating company should be engaged in the
business, in which the accumulated loss occurred or
depreciation remains unabsorbed, for 3 years or more.
• The amalgamating company should held continuously as
on the date of amalgamation at least three-fourth of the
book value of the fixed assets held by it two years prior to
the date of amalgamation.
• The amalgamated company holds continuously for a minimum
period of five years from the date of amalgamation at least
three-fourths in the book value of fixed assets of the
amalgamating company acquired in a scheme of
amalgamation.
• The amalgamated company continues the
business of the amalgamating company for a
minimum period of five years from the date of
amalgamation. o The amalgamated company
fulfils such other conditions as may be prescribed
to ensure the revival of the business of the
amalgamating company or to ensure that the
amalgamation is for genuine business purpose.
Amortization of expenditure in case of Amalgamation [Sec.
35DD]:
• Under Sec 35DD for expenditure incurred in connection with
the amalgamation the assessee shall be allowed a
deduction of an amount equal to one-fifth of such
expenditure for each of the five successive previous years
beginning with the previous year in which the amalgamation
takes place.
Treatment of preliminary expenses [Sec. 35D(5)]:
• When and amalgamating company merges with an
amalgamated company under a scheme of amalgamation,
the amount of preliminary expenses of the amalgamating
company to the extend not yet written off shall be allowed
as deduction to the amalgamated company in the same
manner as would have been allowed to the amalgamating
company.
 Treatment of capital expenditure on family planning
[U/S 36(1)(ix)]:
• If Asset representing capital expenditure on family
planning is transferred by the amalgamating company
to the amalgamated company under a scheme of
amalgamation, such expenditure shall be allowed as
deduction to the amalgamated company in the same
manner as would have been allowed to the
amalgamating company.
Treatment of bad debts [Sec. 36(1)(vii)]:
• When due to amalgamation debts of the amalgamating
company has been taken over by amalgamated
company, and subsequently, such debts turn out to be
bad, it shall be allowed as deduction to the
amalgamated company.
 CROSS BORDER MERGER AND ACQUISITION
• The trend for merger and acquisition has become a global scenario
in the present time due to technological advancement and
globalization. It is most widely used form of cooperate restructuring
in the present times   Merger and acquisition provides the involved
companies a greater access to the international market and access
to advanced technologies and other instruments. Merger is the
consolidation of two or more corporate entity into a single entity,
whereas an acquisition is the process of acquiring a particular
targeted entity. Merger and Acquisition can be both domestic and
cross-border. When M&A takes place between the corporate entities
registered in the same country it is called domestic M&A while in
Cross border M&A takes place when an enterprise from one country
buys the assets or control of entity in another country.
• International mergers and acquisitions are growing day by
day. These mergers and acquisitions refer to those mergers
and acquisitions that are taking place beyond the boundaries
of a particular country. International mergers and
acquisitions are also termed as global mergers and
acquisitions or cross-border mergers and acquisitions.
• It is the merger or /and acquisition of two companies that
have headquarters in two different countries.
• In a cross-border merger, the assets and operations of two
firms belonging to two different countries are combined to
establish a new legal entity.
• In a cross-border acquisition, the control of assets and
operations is transferred from a local to a foreign
company, with the former join the latter.
• Such deals are treated differently from local acquisitions
as they are governed by different set of laws. They are
culturally different.
 Effects/ Benefits of Cross Border Merger and
Acquisitions

• Normally, it is apparent that cross border merger and

acquisitions are a reformation of industrial assets and
production structures on a worldwide basis. It
empowers the global transfer of technology, capital,
goods and services and integrates for universal
networking. Cross border M&A's leads to economies of
scale and scope which helps in gaining efficiency.
Apart from this, it also benefits the economy such as
increased productivity of the host country, increase in
economic growth and development particularly if the
policies used by the government are favourable.
• Capital build-up:
• Cross border merger and acquisitions support in
capital accumulation on a long term basis. In order to
expand their businesses it not only undertakes
investment in plants, buildings and equipment's but
also in the incorporeal assets such as the technical
know-how, skills rather than just the physical part of
the capital.
• Employment creation:
• It is observed that the M&A's that are undertaken to
drive restructuring may lead to downscaling but
would lead to employment gains in the long term.
The downsizing is sometimes essential for the
continued existence of operations. When in the long
run the businesses expands and becomes
successful, it would create new employment
opportunities.
• Technology handover:
• When firms across countries join together, it
sustains positive effects of transfer of technology,
sharing of best management skills and practices
and investment in intangible assets of the host
country. This results in innovations and has an
influence on the operations of the company.
 Legal procedure for International
Merger/Acquisition
• The earlier law only permitted inbound merger which means
that only foreign company was allowed to merge with Indian
company and not vice versa. The Companies Act 2013
proposed to allow both forms of merger under section 234 of
the act but was not notified.
• The Act provides for the merger of an Indian company into the
foreign company. It states that provisions related to merger
and amalgamation shall apply mutatis mutandis to merger and
amalgamation between companies registered under the
companies act and those incorporated within the jurisdictions
of the countries as are notified by the central government in
consultation with the RBI.  The scope of the term foreign
company has been increased by including such company or
body corporate incorporated outside India whether they have a
place of business in India or not.
• As under the definition clause the foreign company
is defined as the company incorporated in any
jurisdiction outside India that has a place of
business in India whether by itself, through agent,
physically or through electronic mode and conduct
its business activity in India in any other
manner. The payment of consideration can be made
to the shareholders of the merging companies either
in cash or in the form of depository receipt.
• The section 234 of the Act was notified by the Ministry
of Corporate Affairs in consultation with the RBI with
the corresponding rules vide notification dated 13th
April 2017. The rules are titled as the companies
(Compromise, Arrangement and Amalgamation)
Amendment Rules, 2017 inserting Rule 25A and
Annexure B in the companies (Compromise,
Arrangement and Amalgamation) Rules, 2016 in
relation with the operation of section 234. It provides
that both the categories of merger i.e. inbound and
outbound shall be subjected to prior approval of RBI
and provisions of Companies Act  2013. For an
outbound cross-border merger the foreign entity
involved should be from a jurisdiction permitted by the
central government in consultations with the RBI
 Jurisdictions for which outbound merger is
permitted
(i) The state whose securities market regulator is a signatory of
bilateral Memorandum of Understanding with SEBI or International
Organization of Securities Commission’s Multilateral MoU, or
(ii) Whose central bank is a member of Bank for International
Settlements (BIS), and
(iii) In case of a jurisdiction, that has not been identified in the public
statement of Financial Action Task Force (FATF) as being the
following:
(a) Jurisdiction that has a strategic Anti-Money Laundering or
Combating the Financing of Terrorism deficiencies to which counter
measures usually apply; or
(b) Jurisdiction not having sufficient progress in dealing with the
deficiencies or that has not committed to any action plan developed
with the Financial Action Task Force to address the deficiencies.”
 TAX IMPLICATIONS OF CROSS BORDER M & A
• In terms of Section 47(vi) of the IT Act, transfer of any capital asset is
generally subject to capital gains tax in India. However, certain types of
mergers enjoy tax-neutrality with respect to capital gains taxes under Indian
tax law as is dealt with below.
• Inbound Mergers:
• In an inbound merger, a foreign company merges with an Indian company and
the amalgamated entity is an Indian company. Amalgamation enjoys tax-
neutrality with respect to transfer taxes and both the amalgamating company
transferring the assets and the shareholders transferring their shares in the
amalgamating company are exempt from tax. To achieve tax-neutrality for the
amalgamating company transferring the assets, the amalgamated company
should be an Indian company and the amalgamation should be as per Section
2(IB). In an amalgamation as per Section 2(IB) of the IT Act, all the properties
and liabilities of the merging companies immediately before the amalgamation
should become the properties and liabilities of the amalgamated company, and
75% of the shareholders of the amalgamating companies have to remain the
shareholders of the amalgamated company as well. Additionally, to achieve
tax-neutrality for shareholders of the amalgamating company, the entire
consideration should comprise of shares in the amalgamated company.
• Outbound Mergers:
• An outbound merger is one where an Indian
company merges with a foreign company and
the amalgamated entity is a foreign company.
The IT Act presently grants tax exemptions on
mergers if the transferee is an Indian company
but does not recognize a situation where the
transferee is a foreign company.  Therefore, with
the introduction of cross-border mergers under
the 2013 Act, corresponding changes would
have to be made in the IT Act.
• Carry forward of losses. 
• Amalgamated companies have the privilege of
setting off depreciation and carry forward of
unabsorbed/accumulated losses against its accrued
profits.  The same is however not available to public
companies where shareholders carrying 51% voting
rights on the last date of the year in which set off is
sought are different from shareholders carrying 51%
voting rights on the last date of the year in which the
given loss was incurred by the company. Carry
forward of losses is applicable only for the sectors
that are specifically provided under the IT Act or
notified by authorities.
• Stamp Duty & Registration.
• The transfer of assets, particularly immovable properties, requires
registration with state authorities and payment of stamp duty for
purposes of authenticating transfer of title. Stamp duty rates differ from
state to state and range from 5% to 10% for immovable properties and
from 3% to 5% for movable properties. The same is calculated on the
amount of consideration received for the transfer or the market value of
the property transferred (whichever is higher). Some state stamp acts
contain special beneficial provisions pertaining to stamp duty on court-
approved mergers.
• Value Added Tax (VAT).
•  Implications of VAT in court-approved mergers vary from state to state.
Most states stipulate that the transfer of properties, etc., between the
merging entities by way of a court-approved merger attracts VAT till the
date of the High Court order. In the absence of such provision, courts
have held the effective date of the merger to be the day the merger
scheme becomes operative and not the date of the order of the court. In
such cases, VAT has been held as not applicable on the transfer of
properties between the merging entities during the period from the
effective date of merger till the date of the order of the jurisdictional
High Court.