Introduction to Merger

Meaning :

Mergers and acquisitions are the most popular means of corporate restructuring or business
combinations in comparison to amalgamation, takeovers, spin-offs, leverage buy-outs, buy-back
of shares, capital re-organisation, sale of business units and assets etc. Corporate restructuring
refers to the changes in ownership, business mix, assets mix and alliances with a motive to
increase the value of shareholders. To achieve the objective of wealth maximisation, a company
shouldcontinuously evaluate its portfolio of business, capital mix, ownership and assets
arrangements to find out opportunities for increasing the wealth of shareholders. There is a great
deal of confusion and disagreement regarding the precise meaning of terms relating to the
business combinations, i.e. mergers, acquisition, take-over, amalgamation and consolidation.
Although the economic considerations in terms of motives and effect of business combinations
are similar but the legal procedures involved are different. The mergers/amalgamations of
corporates constitute a subject-matter of the Companies Act and the acquisition/takeover fall
under the purview of the Security and Exchange Board of India (SEBI) and the stock exchange
listing agreements.
A merger/amalgamation refers to a combination of two or more companies into one company.
One or more companies may merge with an existing company or they may merge to form a new
company. Laws in India use the term amalgamation for merger for example, Section 2 (IA) of the
Income Tax Act, 1961 defines amalgamation as the merger of one or more companies (called
amalgamating company or companies) with another company (called amalgamated company) or
the merger of two or more companies to form a new company in such a way that all assets and
liabilities of the amalgamating company or companies become assets and liabilities of the
amalgamated company and shareholders holding not less than nine-tenths in value of the shares
in the amalgamating company or companies become shareholders of the amalgamated company.
After this, the term merger and acquisition will be used interchangeably. Merger or
amalgamation may take two forms: merger through absorption, merger through consolidation.
Absorption is a combination of two or more companies into an existing company. All companies
except one lose their identity in a merger through absorption. For example, absorption of Tata
Fertilisers Ltd. (TFL) by Tata Chemical Limited (TCL). Consolidation is a combination of two or
more companies into a new company. In this form of merger, all companies are legallydissolved
and new company is created for example Hindustan Computers Ltd., Hindustan Instruments
Limited, Indian Software Company Limited and Indian Reprographics Ltd. Lost their existence
and create a new entity HCL Limited.
A Brief History of Mergers and Acquisitions
Introduction
Mergers occur in waves. There have been five clear waves since the end of the nineteenth
century. Each wave had different characteristics and was generated by different combinations of
events. However, there are remarkable similarities between the first wave and the
current fifth wave. It is important to be able to understand merger wave patterns because
they provide a valuable insight into how the current fifth wave may evolve.
Merger Waves
It is important to understand that mergers and acquisitions are very much driven by external
forces. In addition, a cursory examination of the history of mergers and acquisitions reveals that
they tend to occur in waves. There appears to be a direct relationship between merger activity
and external economic forces such as national events of major significance and variations in the
global economy.
● The railroad wave (approximately 1895–1905). In the United States there was a first
major wave of mergers between 1890 and 1910. This wave was fuelled by the completion of the
transcontinental railway system that linked cities across the entire US for the first time. This
continental transport system created an integrated national market in the US. Rail links provided
the opportunity for local or regional companies to evolve into fully national companies. This
wave is sometimes referred to as the railroad wave. It was characterised by both vertical and
horizontal integration mergers. Some global brand names were established through the
horizontal integration of leading producers during this wave. Examples include Coca-Cola and
General Electric.
● The automobile wave (approximately 1918–1930). The next major merger wave in the
US was generated by the expansion in the general availability of automobiles in the 1920s and
early 1930s. Whereas the railway system had linked cities together across the continent, the
widespread availability and affordability of automobiles allowed local customers to gain access
to a larger number of local and regional outlets. Automobiles also enabled companies to make
much more use of professional sales teams. The widespread use of trucks and delivery vans
stimulated companies based particularly in food and food processing. This wave is sometimes
referred to as the automobile wave. It was again characterised by a high level of vertical and
horizontal integration. The most prominent feature was perhaps the level of horizontal
integration among secondary (as opposed to primary) producers in heavy industry and the
financial sectors.
● The conglomerate wave (approximately 1955–1970). The 1920s wave was followed
by the 1960s wave. This wave is sometimes referred to as the conglomerate wave. Legislation in
the US at that time made it difficult for companies to integrate horizontally or vertically. At the
same time the dynamic US economy provided the incentive for rapid growth. This induced
companies to form mergers and acquisitions with other companies operating outside the
acquirer’s normal sphere of operations. This wave was characterised by a large number of
management problems as acquirers experienced difficulty in managing their newly acquired
assets, and there were numerous problems and failures.
● The mega-merger wave (approximately 1980–1990). The 1980s was a decade of
rising share prices and a very buoyant economy. Relatively low interest rates made acquisition
finance readily available. This fuelled a considerable number of cash-financed acquisitions of
firms that were relatively low performers. There were examples of so called mega-mergers,
which were indeed carried out on a very large scale by the standards of that time. The wave itself
is sometimes referred to as the mega-mergers wave. Successive US and UK governments
deregulated numerous sectors and relaxed anti merger and merger-control legislation. These
actions actively encouraged large-scale horizontal mergers. In the US competition was
significantly reduced in a number of industries, including oil production and chemicals.
● The globalisation wave (approximately 1994 to the present). The current
globalisation wave started in the mid 1990s and expanded rapidly though the last few years of
the twentieth century and into the early years of the twenty-first century. These relatively few
but extremely important years were characterised by a number of very significant facts.
Market growth was slow. Mergers and acquisitions allowed companies to grow in
otherwise slow markets.
Interest rates were very low. Companies were able to take out relatively large loans at
much lower interest rates than would have been possible just a few years previously.
The relatively low cost of finance made mergers and acquisitions more of an economic
reality for a wider number of companies.
Supply exceeded demand in most industries, putting pressure on prices and generating a
necessity to reduce costs. One way of achieving this was through the scale economies that could
be generated by successful mergers and acquisitions.
By the late 1990s many industries were mature or close to being mature; they realised
that scale economies through mergers and acquisitions provided a viable way of reducing costs
and increasing competitiveness.
 The growth of computers and IT made an increasing impact on company operations.
Geographical separation and international frontiers became less important as the Internet
expanded and crossed traditional trade borders.
 Companies began to realise that the global marketplace opens up access to both buyers and
sellers of products and services. The increase on the supply side places a downward pressure on
prices and therefore on costs. The current wave is sometimes referred to as the globalisation
wave. It is characterised by very high growth in new technologies and new communication
media including the Internet. In generating the fifth merger wave it can generally be said that
companies were exposed to global competition; many of the old trade barriers weakened or
disappeared all together. In many countries public utilities were privatised, and global
competition generated pressures for deregulation in many areas. The net result was a blurring of
traditional trade boundaries and sectors. The result was an increasing pressure on companies to
change. Companies generally had to reduce costs and produce higher-quality, more
customer-oriented products. These factors combined to produce a generally favourable
environment for mergers and acquisitions.
The fifth wave is ongoing and is remarkably similar in many ways to the first wave. It will
be recalled that the first wave was propagated by the completion of the railroad network.
This was effectively the result of new technology opening up a nationwide market for goods.
In the globalisation wave, new technology in the form of computers, IT and the Internet is
opening up global markets. The globalisation imperative is assisted by a number of associated
initiatives, such as:
● the increasingly global view taken by companies;
● the expansion of the internet and electronic communications;
● the privatisation of previously state-owned bodies;
● the development of common currencies such as the euro;
● the deregulation of financial institutions;
● the relaxation of regulations relating to mergers and acquisitions;
● the increasing liberalisation of world trade and investment;
● the formation of trading blocs such as the EU.
International mergers create companies with an international scale and effectively link the
world capitalist system more firmly together.

Objectives of Mergers and Acquisitions

In any merger or acquisition, expectations are usually high in the market such that the purpose is
to have stronger and more advantageous market dominance by the company. This perception
usually puts pressure on the management of the companies involved to identify performance
indices that will improve the merger and acquisition deal. Identification is just the beginning, as
it must be accomplished by strategic plans to achieve and actualize the merger and acquisition
objectives, which include amongst others:
● diversifying into new markets
● enlarging managerial expertise
● increasing market share
● expanding the product line
● maximizing financial potential
● achieving technological success
Furthermore, due cognizance must be given to the competitive conditions that will drive
valuations in all merger and acquisition deals. These competitive conditions include:
● The drive for market dominance
● The creation of extraordinary values
● The search for productive and regenerative investment to finance
● The need for a competitive presence within and outside their area of coverage or
business
 ● The concentration on the building blocks for competitive advantage e.g. innovativeness,
creativity, prompt customer responsiveness.

Five major factors are key to the evaluation of mergers and acquisition. These are:

● Common economic vision

● Strategic fit
● Synergy
● Merger and acquisition criteria
● post merger risk area

Advantages of Mergers and Acquisitions

The major advantages of merger/acquisitions are mentioned below:

Economies of Scale: The operating cost advantage in terms of economies of scale is considered
to be the primary objective of mergers. These economies arise because of more intensive
utilisation of production capacities, distribution networks, engineering services, research and
development facilities, data processing system etc. Economies of scale are the most prominent in
the case of horizontal mergers. In vertical merger, the principal sources of benefits are improved
coordination of activities, lower inventory levels.
Synergy: It results from complementary activities. For examples, one firm may have financial
resources while the other has profitable investment opportunities. In the same manner, one firm
may have a strong research and development facilities. The merged concern in all these cases
will be more effective than the individual firms combined value of merged firms is likely to be
greater than the sum of the individual entities.
Strategic benefits: If a company has decided to enter or expand in a particular industry through
acquisition of a firm engaged in that industry, rather than dependence on internal expansion, may
offer several strategic advantages: (i) it can prevent a competitor from establishing a similar
position in that industry; (ii) it offers a special timing advantages, (iii) it may entail less risk and
even less cost.
Tax benefits: Under certain conditions, tax benefits may turn out to be the underlying motive for
a merger. Suppose when a firm with accumulated losses and unabsorbed depreciation mergers
with a profit-making firm, tax benefits are utilised better. Because its accumulated
losses/unabsorbed depreciation can be set off against the profits of the profit-making firm.
Utilisation of surplus funds: A firm in a mature industry may generate a lot of cash but may not
have opportunities for profitable investment. In such a situation, a merger with another firm
involving cash compensation often represent a more effective utilisation of surplus funds.

Diversification: Diversification is yet another major advantage especially in conglomerate

merger. The merger between two unrelated firms would tend to reduce business risk, which, in
 turn reduces the cost of capital (K0) of the firm’s earnings which enhances the market value of
the firm.

● Where a merger or acquisition is horizontal (the companies produce essentially the same
products or services), it leads to a reduction in the number of competing firms in a particular
industry. It generally augurs well for monopoly in that industry or market.
● They give the greatest scope for economics of scale and the elimination of duplicate facilities,
particularly in horizontal mergers and acquisition where there are common processes or similar
factors of production. This aids in obtaining inherent benefits, especially with respect to staff
functions such as personnel, advertising, accounting and financial responsibilities.
● Where a merger or acquisition is vertical (one of the companies is an actual or potential supplier
of goods and services to the other), it ensures a source of supply or an outlet of products or
services. This in turn, improves efficiency by improving the flow of production and ultimately
reduces handling cost.
● In conglomerate mergers or acquisitions (coming together of companies in different industries),
it leads to greater stability of earnings through the spreading of activities in different industries
with different business cycles and sometimes it aids in eliminating a static or dying industry.
● Generally, it has been proven that the combination of two different industries or companies, if
properly worked out, could result in savings in many different ways. Large scale production will
ultimately result in lower cost.

Mergers and acquisitions remain one of the viable turnaround options for restoring health to
distressed companies and should be seen as a means for their survival and growth in the 21st
century. Every merger and acquisition deal is always a big gamble which may or may not work
out regardless of the detailed planning and careful appraisal of each other’s culture or
background. Therefore, it is absolutely necessary to thoroughly evaluate a merger or acquisition
before, during and after the deal is done in order to identify the propellers moving the new
company forward.

LEGAL PROCEDURE OF MERGER AND ACQUISITION

The following is the summary of legal procedures for merger or acquisition as per Companies
Act, 1956:

• Permission for merger: Two or more companies can amalgamate only when amalgamation is
permitted under their memorandum of association. Also, the acquiring company should have the
permission in its object clause to carry on the business of the acquired company.
• Information to the stock exchange: The acquiring and the acquired companies should inform
the stock exchanges where they are listed about the merger/acquisition.
• Approval of board of directors: The boards of the directors of the individual companies should
approve the draft proposal for amalgamation and authorize the managements of companies to
further pursue the proposal.
• Application in the High Court: An application for approving the draft amalgamation proposal
duly approved by the boards of directors of the individual companies should be made to the High
Court. The High Court would convene a meeting of the shareholders and creditors to approve the
amalgamation proposal. The notice of meeting should be sent to them at least 21 days in
advance.

• Shareholders’ and creditors’ meetings: the individual companies should hold separate meetings
of their shareholders and creditors for approving the amalgamation scheme. At least, 75 per cent
of shareholders and creditors in separate meeting, voting in person or by proxy, must accord their
approval to the scheme.
• Sanction by the High Court: After the approval of shareholders and creditors, on the petitions
of the companies, the High Court will pass order sanctioning the amalgamation scheme after it is
satisfied that the scheme is fair and reasonable. If it deems so, it can modify the scheme. The
date of the court’s hearing will be published in two newspapers, and also, the Regional Director
of the Company Law Board will be intimated.
• Filing of the Court order: After the Court order, its certified true copies will be filed with the
Registrar of Companies.
• Transfer of assets and liabilities: The assets and liabilities of the acquired company will be
transferred to the acquiring company in accordance with the approved scheme, with effect from
the specified date.
• Payment by cash or securities: As per the proposal, the acquiring company will exchange
shares and debentures and/or pay cash for the shares and debentures of the acquired company.
These securities will be listed on the stock exchange.

Types and Process

Types of Mergers, Acquisitions & Takeovers, Process of Mergers and Acquisitions, Value
Creation.

Types of Mergers
Mergers may be classified into the following three types- (i) horizontal, (ii) vertical and (iii)
conglomerate.
Horizontal Merger
Horizontal merger takes place when two or more corporate firms dealing in similar lines of
activities combine together. For example, merger of two publishers or two luggage
manufacturing companies. Elimination or reduction in competition, putting an end to price
cutting, economies of scale in production, research and development, marketing and
management are the often cited motives underlying such mergers.
Vertical Merger

Vertical merger is a combination of two or more firms involved in different stages of production
or distribution. For example, joining of a spinning company and weaving company. Vertical
merger may be forward or backward merger. When a company combines with the supplier of
material, it is called backward merger and when it combines with the customer, it is known as
forward merger. The main advantages of such mergers are lower buying cost of materials, lower
distribution costs, assured supplies and market, increasing or creating barriers to entry for
competitors etc.

Conglomerate merger
Conglomerate merger is a combination in which a firm in one industry combines with a firm
from an unrelated industry. A typical example is merging of different businesses like
manufacturing of cement products, fertilisers products, electronic products, insurance investment
and advertising agencies. Voltas Ltd. is an example of a conglomerate company. Diversification
of risk constitutes the rationale for such mergers.

e.g. Pepsico’s purchase of Pizza Hut.

The Merger & Acquisition Process can be broken down into five phases:
Phase 1 - Pre Acquisition Review: The first step is to assess your own situation and determine
if a merger and acquisition strategy should be implemented. If a company expects difficulty in
the future when it comes to maintaining core competencies, market share, return on capital, or
other key performance drivers, then a merger and acquisition (M & A) program may be
necessary.
It is also useful to ascertain if the company is undervalued. If a company fails to protect its
valuation, it may find itself the target of a merger. Therefore, the pre-acquisition phase will often
include a valuation of the company - Are we undervalued? Would an M & A Program improve
our valuations?
The primary focus within the Pre Acquisition Review is to determine if growth targets (such as
10% market growth over the next 3 years) can be achieved internally. If not, an M & A Team
should be formed to establish a set of criteria whereby the company can grow through
acquisition. A complete rough plan should be developed on how growth will occur through M &
A, including responsibilities within the company, how information will be gathered, etc.

Phase 2 - Search & Screen Targets: The second phase within the M & A Process is to search
for possible takeover candidates. Target companies must fulfill a set of criteria so that the Target
Company is a good strategic fit with the acquiring company. For example, the target's drivers of
performance should compliment the acquiring company. Compatibility and fit should be assessed
across a range of criteria - relative size, type of business, capital structure, organizational
strengths, core competencies, market channels, etc. It is worth noting that the search and
screening process is performed in-house by the Acquiring Company. Reliance on outside
investment firms is kept to a minimum since the preliminary stages of M & A must be highly
guarded and independent.
Phase 3 - Investigate & Value the Target: The third phase of M & A is to perform a more
detail analysis of the target company. You want to confirm that the Target Company is truly a
good fit with the acquiring company. This will require a more thorough review of operations,
strategies, financials, and other aspects of the Target Company. This detail review is called "due
diligence." Specifically, Phase I Due Diligence is initiated once a target company has been
selected. The main objective is to identify various synergy values that can be realized through an
M & A of the Target Company. Investment Bankers now enter into the M & A process to assist
with this evaluation.
A key part of due diligence is the valuation of the target company. In the preliminary phases of
M & A, we will calculate a total value for the combined company. We have already calculated a
value for our company (acquiring company). We now want to calculate a value for the target as
well as all other costs associated with the M & A. The calculation can be summarized as follows:
Value of Our Company (Acquiring Company) $ 560
Value of Target Company 176
Value of Synergies per Phase I Due Diligence 38
Less M & A Costs (Legal, Investment Bank, etc.) ( 9)
Total Value of Combined Company $ 765
Phase 4 - Acquire through Negotiation: Now that we have selected our target company, it's
time to start the process of negotiating a M & A. We need to develop a negotiation plan based on
several key questions:
● How much resistance will we encounter from the Target Company?
● What are the benefits of the M & A for the Target Company?
● What will be our bidding strategy?
● How much do we offer in the first round of bidding?
The most common approach to acquiring another company is for both companies to reach
agreement concerning the M & A; i.e. a negotiated merger will take place. This negotiated
arrangement is sometimes called a "bear hug." The negotiated merger or bear hug is the preferred
approach to a M & A since having both sides agree to the deal will go a long way to making the
M & A work. In cases where resistance is expected from the target, the acquiring firm will
acquire a partial interest in the target; sometimes referred to as a "toehold position." This toehold
position puts pressure on the target to negotiate without sending the target into panic mode.
In cases where the target is expected to strongly fight a takeover attempt, the acquiring company
will make a tender offer directly to the shareholders of the target, bypassing the target's
management. Tender offers are characterized by the following:
● The price offered is above the target's prevailing market price.
● The offer applies to a substantial, if not all, outstanding shares of stock.
● The offer is open for a limited period of time.
● The offer is made to the public shareholders of the target.
A few important points worth noting:
Generally, tender offers are more expensive than negotiated M & A's due to the resistance of
target management and the fact that the target is now "in play" and may attract other bidders.
Partial offers as well as toehold positions are not as effective as a 100% acquisition of "any and
all" outstanding shares. When an acquiring firm makes a 100% offer for the outstanding stock of
the target, it is very difficult to turn this type of offer down. Another important element when two
companies merge is Phase II Due Diligence. As you may recall, Phase I Due Diligence started
when we selected our target company. Once we start the negotiation process with the target
company, a much more intense level of due diligence (Phase II) will begin. Both companies,
assuming we have a negotiated merger, will launch a very detail review to determine if the
proposed merger will work. This requires a very detail review of the target company - financials,
operations, corporate culture, strategic issues, etc.
Phase 5 - Post Merger Integration: If all goes well, the two companies will announce an
agreement to merge the two companies. The deal is finalized in a formal merger and acquisition
agreement. This leads us to the fifth and final phase within the M & A Process, the integration of
the two companies. Every company is different - differences in culture, differences in
information systems, differences in strategies, etc. As a result, the Post Merger Integration Phase
is the most difficult phase within the M & A Process. Now all of a sudden we have to bring these
two companies together and make the whole thing work. This requires extensive planning and
design throughout the entire organization. The integration process can take place at three levels:
1. Full: All functional areas (operations, marketing, finance, human resources, etc.) will be
merged into one new company. The new company will use the "best practices" between the two
companies. 2. Moderate: Certain key functions or processes (such as production) will be merged
together. Strategic decisions will be centralized within one company, but day to day operating
decisions will remain autonomous.
3. Minimal: Only selected personnel will be merged together in order to reduce redundancies.
Both strategic and operating decisions will remain decentralized and autonomous.
If post merger integration is successful, then we should generate synergy values. However,
before we embark on a formal merger and acquisition program, perhaps we need to understand
the realities of mergers and acquisitions.
FINANCIAL EVALUATION OF A MERGER/ACQUISITION
A merger proposal be evaluated and investigated from the point of view of number of
perspectives. The engineering analysis will help in estimating the extent of operating economies
of scale, while the marketing analysis may be undertaken to estimate the desirability of the
resulting distribution network. However, the most important of all is the financial analysis or
financial evaluation of a target candidate. An acquiring firm should pursue a merger only if it
creates some real economic values which may arise from any source such as better and ensured
supply of raw materials, better access to capital market, better and intensive distribution network,
greater market share, tax benefits, etc.
The shareholders of the target firm will ordinarily demand a price for their shares that reflects the
firm’s value. For prospective buyer, this price may be high enough to negate the advantage of
merger. This is particularly true if several acquiring firms are seeking merger partner, and thus,
bidding up the prices of available target candidates. The point here is that the acquiring firm must
pay for what it gets. The financial evaluation of a target candidate, therefore, includes the
determination of the total consideration as well as the form of payment, i.e., in cash or securities
of the acquiring firm. An important dimension of financial evaluation is the determination of
Purchase Price.
Determining the purchase price: The process of financial evaluation begins with determining
the value of the target firm, which the acquiring firm should pay. The total purchase price or the
price per share of the target firm may be calculated by taking into account a host of factors. Such
as assets, earnings, etc.
The market price of a share of the target can be a good approximation to find out the value of the
firm. Theoretically speaking, the market price of share reflects not only the current earnings of
the firm, but also the investor’s expectations about future growth of the firm. However, the
market price of the share cannot be relied in many cases or may not be available at all. For
example, the target firm may be an unlisted firm or not being traded at the stock exchange at all
and as a result the market price of the share of the target firm is not available. Even in case of
listed and oftenly traded company, a complete reliance on the market price of a share is not
desirable because (i) the market price of the share may be affected by insiders trading, and (ii)
sometimes, the market price does not fully reflect the firm’s financial and profitability position,
as complete and correct information about the firm is nto available to the investors.
Therefore, the value of the firm should be assessed on the basis of the facts and figures collected
from various sources including the published financial statements of the target firm. The
following approaches may be undertaken to assess the value of the target firm:
1 Valuation based on assets: In a merger situation, the acquiring firm ‘purchases’ the target firm
and, therefore, it should be ready to pay the worth of the latter. The worth of the target firm, no
doubt, depends upon the tangible and intangible assets of the firm. The value of a firm may be
defined as:
Value = Value of all assets – External liabilities
In order to find out the asset value per share, the preference share capital, if any, is deducted
from the net assets and the balance is divided by the number of equity shares. It may be noted
that the values of all tangible and intangible assets are incorporated here. The value of goodwill
may be calculated if not given in the balance sheet, and included. However, the fictious assets are
not included in the above valuation. The assets of a firm may be valued on the basis of book
values or realisable values as follows:
2. Valuation based on earnings: The target firm may be valued on the basis of its earnings
capacity. With reference to the capital funds invested in the target firm, the firms value will have
a positive correlations with the profits of the firm. Here, the profits of the firm can either be past
profits or future expected profits. However, the future expected profits may be preferred for
obvious reasons. The acquiring firm shows interest in taking over the target firm for the
synergistic efforts or the growth of the new firm. The estimate of future profits (based on past
experience) carry synergistic element in it. Thus, the future expected earnings of the target firm
give a better valuation. These expected profit figures are, however, accounting figures and suffer
from various limitations and, therefore, should be converted into future cash flows by adjusting
non-cash items.
In the earnings based valuation, the PAT (Profit After Taxes) is multiplied by the Price-Earnings
Ratio to find out the value.
Market price per share = EPS × PE ratio

The earnings based valuation can also be made in terms of earnings yield as follows:

Earnings yield = EPS/MPS * 100

The earnings yield gives an idea of earnings as a percentage of market value of a share. It may be
noted that for this valuation, the historical earnings or expected future earnings may be
considered.
Earnings valuation may also be found by capitalising the total earnings of the firm as follows:
Value = Earnings/Capitalisation rate× 100
3. Dividend-based valuation: In the cost of capital calculation, the cost of equity capital, ke, is
defined (under consta nt growth model) as:
D0 (1+g)/ P0 + g = D1 / P0 +g

D0 = Dividend in current year

D1 = Dividend in the first year
g = Growth rate of dividend
P0 = Initial price
4. Capital Asset Pricing Model (CAPM)-based share valuation: The CAPM is used to find
out the expected rate of return, Rs, as follows:
Rs = IRF + (RM - IRF)β
Where,
Rs = Expected rate of return, IRF = Risk free rate of return, RM = Rate of Return on market
portfolio, β = Sensitivity of a share to market.
For example, RM is 12%, IRF is 8% and β is 1.3, the Rs is:
Rs = IRF + (RM - IRF)β
= 0.08 + (0.12 - 0.08) 1.3 = 13.2
5. Valuation based on cash flows: Valuation of a target firm can also be made on the basis of
firm’s cash flows. In this case, the value of the target firm may be arrived at by discounting the
cash flows, as in the case of NPV method of capital budgeting as follows:
i) Estimate the future cash inflows (i.e., Profit after tax + Non-cash expenses).
ii) Find out the total present value of these cash flows by discounting at an appropriate rate with
reference to the risk class and other factors.
iii) If the acquiring firm is agreeing to takeover the liabilities of the target firm, then these
liabilities are treated as cash outflows at time zero and hence deducted form the present value of
future cash inflows [as calculated in step (ii) above].
iv) The balancing figure is the NPV of the firm and may be considered as the maximum purchase
price, which the acquiring firm should be ready to pay. The procedure for finding out the
valuation based on cash flows may be summarized as follows:
where MPP = Maximum purchase price, Ci = Cash inflows over different years, L = Current
value of liabilities, and k = Appropriate discount rate.
6. Other methods of valuation: There are two other methods of valuation of business. Investors
provide funds to a company and expect a minimum return which is measured as the opportunity
cost of the investors, or, what the investors could have earned elsewhere. If the company is
earning less than this opportunity cost of the investors, the company is belying the expectations
of the investors. Conversely, if it is earning more, then it is creating additional value. New
concepts such as Economic Value Added (EVA) and Market Value Added (MVA) can be used
along with traditional measures of Return on Net Worth (RONW) to measure the creation of
shareholders value over a period.
(a) Economic Value Added: EVA is based upon the concept of economic return which refers to
excess of after tax return on capital employed over the cost of capital employed. The concept of
EVA, as developed by Stern Steward and Co. of the U.S., compares the return on capital
employed with the cost of capital of the firm. It takes into account the minimum expectations of
the shareholders. EVA is defined in terms of returns earned by the company in excess of the
minimum expected return of the shareholders. EVA is calculated as the net operating profit
(Earnings before Interest but after taxes) minus the capital charges (capital employed × cost of
capital). This can be presented as follows:
EVA = EBIT - Taxes - Cost of funds employed
= Net Operating Profit after Taxes - Cost of Capital Employed
where, Net Operating Profit after Taxes represents the total pool of profit available to provide a
return to the lenders and the shareholders, and Cost of Capital Employed is Weighted Average
Cost of Capital × Average Capital employed.
So, EVA is the post-tax return on capital employed adjusted for tax shield of debt) less the cost
of capital employed. It measures the profitability of a company after having taken cost of debt
(Interest) is deducted in the income statement. In the calculation of EVA, the cost of equity is
also deducted. The resultant figure shows as to how much has been added in value of the firm,
after meeting all costs. It should be pointed out that there is more to calculation of cost of equity
than simple deduction of the dividends paid. So, EVA represents the value added in excess of the
cost of capital employed. EVA increases if:
i) Operating profits grow without employing additional capital, i.e., through greater efficiency.
ii) Additional capital is invested in the projects that give higher returns than the cost of procuring
new capital, and iii) Unproductive capital is liquidated, i.e., curtailing the unproductive uses of
capital.
EVA can be used as a tool in decision-making within an enterprise. It can help integration of
customer satisfaction, operating efficiencies and, management and financial policies in a single
measure. However, EVA is based on the performance of one year and does not allow for increase
in economic value that may result from investing in new assets that have not yet had time to
show the results.
In India, EVA has emerged as a popular measure to understand and evaluate financial
performance of a company. Several companies have started showing the EVA during a year as a
part of the Annual Report. Hero Honda Ltd., BPL Ltd., Hindustan Lever Ltd., Infosys
Technologies Ltd. And Balrampur Chini Mills Ltd. Are a few of them.
(b) Market Value Added (MVA) is another concept used to measure the performance and as a
measure of value of a firm. MVA is determined by measuring the total amount of funds that have
been invested in the company (based on cash flows) and comparing with the current market
value of the securities of the company. The funds invested include borrowings and shareholders
funds. If the market value of securities exceeds the funds invested, the value has been created.

Funding
Funding of Mergers and Acquisitions, Financing Techniques, Various Sources of Financing.

REGULATIONS OF MERGERS AND TAKEOVERS IN INDIA

Mergers and acquisitions may degenerate into the exploitation of shareholders, particularly
minority shareholders. They may also stifle competition and encourage monopoly and
monopolistic corporate behaviour. Therefore, most countries have legal framework to regulate
the merger and acquisition activities. In India, mergers and acquisitions are regulated through the
provision of the Companies Act, 1956, the Monopolies and Restrictive Trade Practice (MRTP)
Act, 1969, the Foreign Exchange Regulation Act (FERA), 1973, the Income Tax Act, 1961, and
the Securities and Controls (Regulations) Act, 1956. The Securities and Exchange Board of India
(SEBI) has issued guidelines to regulate mergers, acquisitions and takeovers.
Legal measures against takeovers
The Companies Act restricts an individual or a company or a group of individuals from acquiring
shares, together with the shares held earlier, in a public company to 25 per cent of the total
paid-up capital. Also, the Central Government needs to be intimated whenever such holding
exceeds 10 per cent of the subscribed capital. The Companies Act also provides for the approval
of shareholders and the Central Government when a company, by itself or in association of an
individual or individuals purchases shares of another company in excess of its specified limit.
The approval of the Central Government is necessary if such investment exceeds 10 per cent of
the subscribed capital of another company. These are precautionary measures against the
takeover of public limited companies.
Refusal to register the transfer of shares
In order to defuse situation of hostile takeover attempts, companies have been given power to
refuse to register the transfer of shares. If this is done, a company must inform the transferee and
the transferor within 60 days. A refusal to register transfer is permitted if:
• A legal requirement relating to the transfer of shares have not be complied with; or
• The transfer is in contravention of the law; or
• The transfer is prohibited by a court order; or
• The transfer is not in the interests of the company and the public.
Protection of minority shareholders’ interests
In a takeover bid, the interests of all shareholders should be protected without a prejudice to
genuine takeovers. It would be unfair if the same high price is not offered to all the shareholders
of prospective acquired company. The large shareholders (including financial institutions, banks
and individuals) may get most of the benefits because of their accessibility to the brokers and the
takeover dealmakers. Before the small shareholders know about the proposal, it may be too late
for them. The Companies Act provides that a purchaser can force the minority shareholder to sell
their shares if:
• The offer has been made to the shareholders of the company;
• The offer has been approved by at least 90 per cent of the shareholders of the company
whose transfer is involved, within 4 months of making the offer; and
• The minority shareholders have been intimated within 2 months from the expiry of 4
months referred above.
If the purchaser is already in possession of more than 90 per cent of the aggregate value of all the
shares of the company, the transfer of the shares of minority shareholders is possible if:
• The purchaser offers the same terms to all shareholders and
• The tenders who approve the transfer, besides holding at least 90 per cent of the value
of shares, should also form at least 75 per cent of the total holders of shares.

SEBI GUIDELINES FOR TAKEOVERS

The salient features of some of the important guidelines as follows:
Disclosure of share acquisition/holding: Any person who acquires 5% or 10% or 14% shares or
voting rights of the target company, should disclose of his holdings at every stage to the target
company and the Stock Exchanges within 2 days of acquisition or receipt of intimation of
allotment of shares.
Any person who holds more than ]5% but less than 75% shares or voting rights of target
company, and who purchases or sells shares aggregating to 2% or more shall within 2 days
disclose such purchase or sale along with the aggregate of his shareholding to the target company
and the Stock Exchanges.
Any person who holds more than 15% shares or voting rights of target company and a promoter
and person having control over the target company, shall within 21 days from the financial year
ending March 31 as well as the record date fixed for the purpose of dividend declaration,
disclose every year his aggregate shareholding to the target company.
Public announcement and open offer: An acquirer who intends to acquire shares which along
with his existing shareholding would entitle him to exercise] 5% or more voting rights, can
acquire such additional shares only after making a public announcement to acquire at least
additional 20% of the voting capita] of target company from the shareholders through an open
offer.
An acquirer who holds 15% or more but less than 75% of shares or voting rights of a target
company, can acquire such additional shares as would entitle him to exercise more than 5% of
the voting rights in any financial year ending March 31 only after making a public announcement
to acquire at least additional 20% shares of target company from the shareholders through an
open offer.
An acquirer, who holds 75% shares or voting rights of a target company, can acquire further
shares or voting rights only after making a public announcement to acquire at least additional
20% shares of target company from the shareholders through an open offer.
Offer price: The acquirer is required to ensure that all the relevant parameters are taken into
consideration while determining the offer price and that justification for the same is disclosed in
the letter of offer. The relevant parameters are:
• Negotiated price under the agreement which triggered the open offer.
• Price paid by the acquirer for acquisition, if any, including by way of allotment in a
public or rights or preferential issue during the twenty six week period prior to the
date of public announcement, whichever is higher.
• The average of the weekly high and low of the closing prices of the shares of the target
company as quoted on the stock exchange where the shares of the company are
most frequently traded during the twenty six weeks or the average of the daily
high and low prices of the shares as quoted on the stock exchange where the
shares of the company are most frequently traded during the two weeks preceding
the date of public announcement, whichever is higher.
In case the shares of Target Company are not frequently traded then parameters based on the
fundamentals of the company such as return on net worth of the company, book value per share,
EPS etc. are required to be considered and disclosed.
Disclosure: The offer should disclose the detailed terms of the offer, identity of the offerer,
details of the offerer's existing holdings in the offeree company etc. and the information should
be made available to all the shareholders at the same time and in the same manner.
Offer document: The offer document should contain the offer's financial information, its
intention to continue the offeree company's business and to make major change and long-term
commercial justification for the offer.
The objectives of the Companies Act and the guidelines for takeover are to ensure full disclosure
about the mergers and takeovers and to protect the interests of the shareholders, particularly the
small shareholders. The main thrust is that public authorities should be notified within two days.
In a nutshell, an individual or company can continue to purchase the shares without making an
offer to other shareholders until the shareholding exceeds 10 per cent. Once the offer is made to
other shareholders, the offer price should not be less than the weekly average price in the past 6
months or the negotiated price.
LEGAL PROCEDURES FOR MERGER AND ACQUISITION:
Legal procedures for mergers and acquisitions are laid down under several acts like,
● The Companies Act, 1956
● Companies (Court) Rules, 1959
● Income Tax Act, 1961
● Listing Agreement
● The Indian Stamp Act, 1899
● Competition Act, 2002

i) As per Companies Act, 1956 The following is the summary of legal procedures for merger
or acquisition:
• Permission for merger: Companies can amalgamate only when amalgamation is
permitted under their memorandum of association. Also, the acquiring company should
have the permission in its object clause to carry on the business of the acquired company.
• Information to the stock exchange: The acquiring and the acquired companies should
inform the stock exchanges where they are listed about the merger/acquisition.
• Approval of board of directors: Draft proposal should be approved by the boards of the
directors of the individual companies for amalgamation and authorize the managements
of companies to further pursue the proposal
• Application in the High Court: An application for approving the draft amalgamation
proposal duly approved by the boards of directors of the individual companies should
be made to the High Court. The High Court would convene a meeting of the
shareholders and creditors to approve the amalgamation proposal. The notice of meeting
should be sent to them at least 21 days in advance.
• Shareholders’ and creditors’ meetings: separate meetings should be hold by the
individual companies for their shareholders and creditors for approving the
amalgamation scheme. 75 per cent of shareholders and creditors in separate meeting,
voting in person or by proxy, must accept their approval to the scheme.
• Sanction by the High Court: The High Court, after the approval of shareholders and
creditors, on the petitions of the companies, will pass order sanctioning the
amalgamation scheme after it is satisfied that the scheme is fair and reasonable. If it
deems so, it can modify the scheme. The date of the court’s hearing will be published in
two newspapers, and also, the Regional Director of the Company Law Board will be
intimated.
• Filing of the Court order: After the Court order, its certified true copies will be filed
with the Registrar of Companies.
• Transfer of assets and liabilities: The assets and liabilities of the acquired company will
be transferred to the acquiring company in accordance with the approved scheme, with
effect from the specified date.
 • Payment by cash or securities: As per the proposal, the acquiring company will
exchange shares and debentures and/or pay cash for the shares and debentures of the
acquired company. These securities will be listed on the stock exchange.

ii)
Rules 67-87 contains provisions dealing with the procedure for carrying out a scheme of
compromise or arrangement including amalgamation or reconstruction.

iii) Under the Income Tax Act, 1961

The Income Tax Act, 1961 covers aspects such as tax reliefs to
amalgamating/amalgamated companies, carry forward of losses, exemptions from capital gains
tax etc. For example, when a scheme of merger or demerger involves the merger of a loss
making company or a hiving off of a loss making division, it is necessary to check the relevant
provisions of the Income Tax Act and the Rules for the purpose of ensuring, inter alia, the
availability of the benefit of carrying forward the accumulated losses and setting of such losses
against the profits of the Transferor Company.

iv) Under the Listing Agreement

Under Clause 24(f) of the Listing Agreement, where the scheme of merger or demerger
involves a listed company, it is necessary to send a copy of the scheme to the stock exchanges
where the shares of the said company are listed to obtain their No Objection Certificate (NOC).
Generally stock exchanges raise several queries and on being satisfied that the scheme does not
violate any laws concerning securities such as the takeover code or the SEBI (ICDR)
Regulations, Stock Exchanges accord their approval. Where the shares are listed on BSE or NSE,
other Stock Exchanges wait for the approval by BSE or NSE before granting their approval.

v) Under the Indian Stamp Act

It is necessary to refer to the Stamp Act to check the stamp duty payable on transfer of
undertaking through a merger or demerger.

Competition Act, 2002

The provisions of Competition Act and the Competition Commission of India
(Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011
are to be complied with.

STEPS INVOLVED IN MERGER:

(i) Memorandum to authorise amalgamation
The memorandum of association of most of the companies contains provisions in their
objects clause, authorising amalgamation, merger, absorption, take-over and other similar
strategies of corporate restructuring. If the memorandum of a company does not have such a
provision in its objects clause, the company should alter the objects clause, for which the
company is required to hold a general meeting of its shareholders, pass a special resolution
under Section 17 of the Companies Act, 1956 and file e-Form No. 23 along with a certified copy
of the special resolution along with copy of explanatory statement under Section 173 and
Memorandum of Association & Articles of Association and a copy of agreement with the
concerned Registrar of Companies and the prescribed filing fee. The e-form should be digitally
signed by Managing Director or Director or Manager or Secretary of the company duly
authorized by the Board of Directors. The e-form should also be certified by chartered
accountant or cost accountant or company secretary (in whole time practice) by digitally signing
the e-form. Alteration should be registered by the Registrar of companies and only on such
registration the alteration will become effective. No confirmation by the Company Law Board or
by any outside agency is now required

(ii) Convening a Board Meeting

A Board Meeting is to be convened and held to consider and approve in principle,
amalgamation and appoint an expert for valuation of shares to determine the share exchange
ratio. Consequent upon finalisation of scheme of amalgamation, another Board Meeting is to be
held to approve the scheme.

(iii) Preparation of Valuation Report

Simultaneously, Chartered Accountants are requested to prepare a Valuation Report and
the swap ratio for consideration by the Boards of both the transferor and transferee companies
and if necessary it may be prudent to obtain confirmation from merchant bankers on the
valuation to be made by the Chartered Accountants.

(iv) Preparation of scheme of amalgamation or merger

All the companies, which are desirous of effecting amalgamation of or merger must
interact through their companies auditors, legal advisors and practicing company secretary who
should report the result of their interaction to their respective Board of directors. The Boards of
the involved companies should discuss and determine details of the proposed scheme of
amalgamation or merger and prepare a draft of the scheme of amalgamation or merger. If need
be, they can obtain opinion of experts in the matter. The drafts of the scheme finally prepared by
the Boards of both the companies should be exchanged and discussed in their respective Board
meetings. After such meetings a final draft scheme will emerge. The scheme must define the
“effective date” from which it shall take effect subject to the approval of the High Courts.

(v) Contents of Amalgamation Scheme

Any model scheme of amalgamation should include the following:
a) Appointed Date or Transfer Date
b) Effective Date
c) Arrangement with secured and unsecured creditors including debenture-holders.
d) Arrangement with shareholders (equity and preference)
e) Cancellation of share capital/reduction of share capital
f) Pending receipt of the requisite approvals to the amalgamation,

(vi) Approval of Scheme

 Approval scheme would be necessary to convene a Board Meeting of both the transferor
and transferee companies for approving the Scheme of Amalgamation, Explanatory Statement
under Section 393 and the Valuation Report including the swap ratio.
► Notice has to be given to the regional Stock Exchanges and other Stock Exchanges where
shares of the Company are listed under the listing requirements at least two days before
the Board Meeting is proposed to be held for purpose of approving the Amalgamation.
► Within 15 minutes after the Board Meeting, the Regional Stock Exchange and all other
Stock Exchanges are required to be given intimation of the decision of the Board as well
the swap ratio before such information is given to the shareholders and the media.
► Pursuant to clause 24 of the listing agreement, all listed companies shall have to file
scheme/ petition proposed to be filed before any Court/Tribunal under Sections 391, 394
and 101 of Companies Act, 1956, with the stock exchange, for approval, at least a month
before it is presented to the Court or Tribunal.

(vii) Application to High Court seeking direction to hold meetings

Rule 67 of the Companies (Court) Rules, 1959 lays down that an application under
Section 391(1) of the Companies Act, 1956 for an order seeking direction for convening
meeting(s) of creditors and/or members or any class of them shall be by way of Judge’s
summons supported by an affidavit. A copy of the proposed scheme should be annexed to the
affidavit as an exhibit thereto. The summons should be moved ex parte in Form No. 33 of the
Companies (Court) Rules, 1959. The affidavit in support of the application should be in Form
No. 34.

Jurisdiction of High Court

As explained earlier if the registered offices of both the companies are situated in the
same State, a joint application or separate applications should be moved to the High Court
having jurisdiction over the State in which registered offices of the companies are situated.
However, if the registered offices of the companies involved are situated in different States, they
should make separate applications to their respective High Courts.
Accordingly, an application should be made to the concerned High Court under Section
391(1) of the Companies Act, 1956 in accordance with the provisions of rule 67 of the Companies
(Court) Rules, 1959, for an order directing convening of meeting(s) of creditors and/or members
or any class of them, by a Judge’s summons supported by an affidavit.
Normally, an application under Section 391 of the Act is made by the company, but a
creditor or a member may also make the application. Although a creditor or a member or a class
of creditors or a class of members may move an application under Section 391(1) of the Act, yet,
such an application may not be accepted by the court because the scheme of compromise or
arrangement submitted to the court along with the application may not have the approval of the
Board of directors of the company or of the company in general meeting. However, the court
has the discretion to give such directions as it may deem proper.

Where the company is not the applicant:

Rule 68 lays down that where the company is not the applicant, a copy of the summons
and of the affidavit shall be served on the company, or, where the company is being wound up
on the liquidator not less than 14 days before the date fixed for the hearing of the summons.
Where an arrangement is proposed for the merger or for the amalgamation of two or more
companies, the petition must pray for appropriate orders and directions under Section 394 of
the Act for facilitating the reconstruction or amalgamation of the company or companies.

Obtaining order of the court for holding class meeting(s)

On receiving a petition, the court may order meeting(s) of the members/creditors to be
called, held and conducted in such manner as the court directs. Once the ordered meetings are
duly convened, held and conducted and the scheme is approved by the prescribed majority in
value of the members/creditors, the court is bound to sanction the scheme. The court looks into
the fairness of the scheme before ordering a meeting because it would be no use putting before
the meeting, a scheme containing illegal proposals which are not capable of being implemented.
At that stage, the court may refuse to pass order for the convening of the meeting. According to
Rule 69 of the said Rules, upon hearing of the summons, or any adjourned hearing thereof, the
judge shall, unless he thinks fit for any reasons to dismiss the summons, give directions as he
may think necessary in respect of the following matters:
a) Determining the members/creditors whose meeting or meetings have to be held for
considering the proposed scheme of merger or amalgamation;
b) Fixing time and place for such meetings;
c) Appointing a chairman or chairmen for the meetings;
d) Fixing quorum and procedure to be followed at the meetings including voting by proxy;
e) Determining the values of the members/creditors, whose meetings have to be held;
f) Notice to be given of the meetings and the advertisement of such notice; and
g) The time within which the chairman of the meeting or chairmen of the meetings are to
report to the Court the result of the meeting or meetings as the case may be.
The order made on the summons shall be in Form No. 35 of the said rules, with such
variations as may be necessary. Draft Notice, Explanatory statement under Section 393 of the
Companies Act, 1956 and form of proxy are required to be filed and settled by the concerned
High Court before they can be printed and dispatched to the shareholders.
After obtaining the court’s order containing directions to hold meeting(s) of
members/creditors, the company should make arrangement for the issue of notice(s) of the
meeting(s). The notice should be in Form No. 36 of the said Rules and must be sent by the
person authorised by the court in this behalf. The person authorised may be the person
appointed by the court as chairman of the meeting, or if the court so directs by the company or
its liquidator if the company is in liquidation, or by any other person as the court may direct.
The court usually appoints an advocate to be the chairman of such a meeting. Notice of the
meeting should be sent under certificate of posting to the creditors/members of the company, at
their last known addresses at least twenty-one clear days before the date fixed for the meeting.
The notice must be accompanied by a copy of the scheme for the proposed compromise or
arrangement and of the statement required to be furnished under Section 393 setting forth the
terms of the proposed compromise or arrangement explaining its effects and an explanatory
statement in terms of the provision of clause (a) of Sub-section (1) of Section 393 of the
Companies Act. A form of proxy in Form No. 37, as prescribed in the said rules, is also required
to be sent to the shareholders/creditors to enable them to attend the meeting by proxy, if they so
desire.
Notice by advertisement
Generally, the Court directs that the notice of meeting of the creditors and members or
any class of them be given through newspapers advertisements also. Where the court has
directed that the notice of the meetings should also be given by newspaper advertisements,
such notices are required to be given in the prescribed Form and published once in an English
newspaper and once in the regional language of the state in which the registered office of the
company is situated. The notice must particularly disclose any material interest of the directors,
managing director or manager whether as shareholders or creditors or otherwise and the effect
on their interests on the compromise or arrangement, if, and in so far as, it is different from the
effect on the like interests of other persons. Such information must also be included in the form
of a statement in the notice convening the meeting, where such notice is given by a newspaper
advertisement, or, if this is not practicable, such advertised notice must give notification of the
place at and the manner in which creditors or members entitled to attend the meeting may
obtain copies of such a statement. If debenture holders are affected, the statement must give like
information as far as it affects the trustees for the debenture holders. Statements which have to
be supplied to creditors and members as a result of press notification must be supplied by the
company to those entitled, free of charge. The Chairman appointed by the High Court has to file
an affidavit atleast 7 days before the meeting confirming that the direction relating to issue of
notices and the advertisement has been duly complied with, as required under Rule 76 of the
said Rules.

Information as to merger or amalgamation

Section 393(1) of the Companies Act, 1956 lays down that where a meeting of creditors
or members or any class of them is called under Section 391:
a. With every notice calling the meeting which is sent to a creditor or a member, there shall
be sent also a statement setting forth the terms of the compromise or arrangement and
explaining its effects; and in particular, stating any material interests of the directors,
managing director or manager of the company, whether in their capacity as such or as
members or creditors of the company or otherwise and the effect on those interests, of
the compromise or arrangement, if, and in so far as, it is different from the effect on the
like interests of other persons; and
b. In every notice calling the meeting which is given by advertisement, there shall be
included either such a statement as aforesaid or a notification of the place at which and
the manner in which creditors or members entitled to attend the meeting may obtain
copies of such a statement as aforesaid.
c. Sub-section (2) lays down that where the arrangement affects the rights of debenture
holders of the company, the said statement should give the like information and
explanation as respects the trustees of any deed for securing the issue of the debentures
as it is required to give as respects the companies directors.
According to Sub-section (3) of Section 393, where a notice given by advertisement
includes a notification that copies of the statement setting forth the terms of the compromise or
arrangement proposed and explaining its effect can be obtained by creditors or members
entitled to attend the meeting, every creditor or member so entitled shall, on making an
application in the manner indicated by the notice, be furnished by the company, free of charge,
with a copy of the statement. Every director, managing director or manager of the Company
and every trustee for debenture holders of the company, must give notice to the company of
such matter relating to himself as may be necessary for the purposes of this section. A failure to
do so is an offence punishable under Section 393(5).

Holding meeting(s) as per Court’s direction

The meetings are to be held as per directions of the Court under the chairmanship of the
person appointed by the Court for the purpose. Normally, the Court appoints a Chairman and
alternate Chairman of each meeting.

Convening of General Meeting

At the General Meeting convened by the High Court, resolution will be passed
approving the scheme of amalgamation with such modification as may be proposed and agreed
to at the meeting.
The Extraordinary General Meeting of the Company for the purpose of amendment of
Object
Clause (Section 17), commencement of new business [Section 149(2A)], consequent
change in Articles (Section 31) and issue of shares [Section 81(1A)] can be convened on the same
day either before or after conclusion of the meeting convened by the High Court for the purpose
of approving the amalgamation.
Following points of difference relating to the holding and conducting of the meeting
convened by the High Court may be noted:
(a) Proxies are counted for the purpose of quorum;
(b) Proxies are allowed to speak;
(c) The vote must be put on poll [Rule 77 of the Companies (Court) Rules].
In terms of Section 391, the resolution relating to the approval of amalgamation has to be
approved by a majority of members representing three-fourths in value of the creditors or class
of creditors or members or class of members as the case may be present and voting either in
person or by proxy.
The resolution will be passed only if both the criteria namely, majority in number and
three fourth in value vote for the resolution.
The minutes of the meeting should be finalised in consultation with the Chairman of the
meeting and should be signed by him once it is finalised and approved. Copies of such minutes
are required to be furnished to the Stock Exchange in terms of the listing requirements.

Reporting of the Results

The chairman of the meeting will submit a report of the meeting indicating the results to
the concerned High Court in Form 39 of the Court Rules within 7 days of the conclusion of the
meeting or such other time as fixed by the Court. The Report must state accurately¾
(a) The number of creditors or class of creditors or the number of members or class of
members, as the case may be, who were present at the meeting;
(b) The number of creditors or class of creditors or the number of members or class of
members, as the case may be, who voted at the meeting either in person or by proxy;
(c) Their individual values; and
(d) The way they voted.
Petition to court for confirmation of scheme
When the proposed scheme of compromise or arrangement is agreed to, with or without
modifications, as provided in Section 391(2) of the Act, a petition must be made to the court for
confirmation of the scheme of compromise or arrangement. The petition must be made by the
company and if the company is in liquidation, by the liquidator, within seven days of the filing
of the report by the chairman. The petition is required to be made in Form No. 40 of the said
rules. On hearing the petition the Court shall fix the date of hearing and shall direct that a notice
of the hearing shall be published in the same newspapers in which the notice of the meeting
was advertised or in such other papers as the court may direct, not less than 10 days before the
date fixed for hearing. (Rule 80) The court also directs that notices of petition be sent to the
concerned Regional Director, Registrar of Companies and the official liquidator.

Obtaining order of the court sanctioning the scheme

An order of the court on summons for directions should be obtained which will be in
Form No. 41.

Filing of copy of Court’s order with ROC

According to the provisions of Section 391(3) and Section 394(3) of the Companies Act, a
certified copy of the order passed by the Court under both the sub-sections is required to be
filed with the concerned Registrar of Companies. This is required to be filed with e-Form No. 21
as prescribed in the Companies (Central Government’s) General Rules and Forms, 1956.
Transfer of assets and liabilities
Allotment of shares to shareholders of Transferor Company
Listing of shares at Stock Exchange
Post merger integration

FILING OF VARIOUS FORMS IN THE PROCESS OF MERGER/ AMALGAMATION

The following forms, reports, returns etc. are required to be filed with the Registrar of
Companies, SEBI and

Stock Exchanges at various stages of the process of merger/amalgamation:

(a) When the objects clause of the memorandum of association of the transferee company is
altered to provide for amalgamation/merger, for which special resolution under Section
17 of the Companies Act, 1956, is passed;
(b) The company’s authorised share capital is increased to enable the company to issue
shares to the shareholders of the transferor company in exchange for the shares held by
them in that company for which a special resolution under Section 31 of the Act for
alteration of its articles is passed;
(c) A special resolution under Section 81(1A) of the Act is passed to authorise the
company’s Board of directors to issue shares to the shareholders of the transferor
company in exchange for the shares held by them in that company; and
(d) A special resolution is passed under Section 149(2A) of the Act authorising the transferee
company to commence the business of the transferor company or companies as soon as
the amalgamation/merger becomes effective; the company should file with ROC within
thirty days of passing of the aforementioned special resolutions, e-Form No. 23. The
 following documents should be annexed to the said e-form: (i) certified true copies of all
the special resolutions; (ii) certified true copy of the explanatory statement annexed to
the notice for the general meeting at which the resolutions are passed, for registration of
the resolution under Section 192 of the Act.
This e-form should be digitally signed by Managing Director/Director/Manager or
Secretary of the Company duly authorized by Board of Directors. This e-form should also be
certified by Company Secretary or Chartered Accountant or Cost Accountant (in whole time
practice) by digitally signing the e-form.
2. When a special resolution is passed under Section 149(2A) of the Act, authorising the
transferee company to commence the business of the transferor company or companies as soon
as the amalgamation/merger becomes effective, the transferee company should also file with
the Registrar of Companies, a duly verified declaration of compliance with the provisions of
Section 149(2A) by one of the directors or the secretary or, where the company has not
appointed a secretary, a secretary in whole-time practice in e-Form No. 20A. The original duly
filled in and signed e-form 20A on stamp paper, of the value applicable in the State where
declaration is executed, is also required to be sent to the concerned ROC office simultaneously,
failing which the filing will not be considered and legal action will be taken.
3. In compliance with the listing agreement, the transferee company is required to give
notice to the stock exchanges where the securities of the company are listed, and to the
Securities and exchange Board of India (SEBI), of the Board meeting called for the purpose of
discussing and approving amalgamation.
4. In compliance with the listing agreement, the transferee company is required to give
intimation to the stock exchanges where the securities of the company are listed, of the decision
of the Board approving amalgamation and also the swap ratio, before such information is given
to the shareholders and the media.
5. The transferee company is required to file with the Registrar of Companies, e-Form
No. 21 along with a certified copy of the High Court’s order on summons directing the
convening and holding of meetings of equity shareholders/creditors including debentures
holders etc. as required under Section 391(3) of the Companies Act. This e-form should be
digitally signed by the Managing Director or Director or Manager or Secretary of the Company
duly authorized by the Board of Directors. However, in case of foreign company, the e-form
should be digitally signed by an authorized representative of the company duly authorized by
the Board of Directors. The original certified copy of the Courts order is also required to be
submitted at the concerned. ROC office simultaneously of filing e-form 21, failing which the
filing will not be considered and legal action will be taken.
6. In compliance with the listing agreement, the transferee company is required to
simultaneously furnish to the stock exchanges where the securities of the company are listed,
copy of every notice, statement, pamphlet etc. sent to members of the company in respect of a
general meeting in which the scheme of arrangement of merger/amalgamation is to be
approved.
7. In compliance with the listing agreement, the transferee company is required to
furnish to the stock exchanges where the securities of the company are listed, minutes of
proceedings of the general meeting in which the scheme of arrangement of
merger/amalgamation is approved.
 8. To file with ROC within thirty days of passing of the special resolution, e-Form No. 23.
The following documents should be annexed to the said e-form: (i) certified true copy of the
special resolution approving the scheme of arrangement of merger/amalgamation; (ii) certified
true copy of the explanatory statement annexed to the notice for the general meeting at which
the resolution is passed, for registration of the resolution under Section 192 of the Act. This
e-form should be digitally signed by Managing Director/ Director/Manager or Secretary of the
Company duly authorized by Board of Directors. The e-form should also be certified by
Company Secretary or Chartered Accountant or Cost Accountant (in whole time practice) by
digitally signing the e-form.
9. The transferee company is required to file with the Central Government notice of
every application made to the court under Section 391 to 394 of the Companies Act, 1956. No
notice need be given to the Central Government once again when the Court proceeds to pass
final order to dissolve the transferor company.
10. To file with the Registrar of Companies within thirty days of allotment of shares to
the shareholders of the transferor company in lieu of the shares held by them in that company
in accordance with the shares exchange ratio incorporated in the scheme of arrangement for
merger/amalgamation, e- Form No. 2 the return of allotment along with the prescribed filing
fee as per requirements of Sections 75 of the Act. This e-form should be digitally signed by
Managing Director or Director or Manager or Secretary of the Company duly authorised by the
Board of Directors. The e-form should also be certified by Company Secretary or Chartered
Accountant or Company Secretary (in whole time practice) by digitally signing the e-form.