Mergers and Acquisition in Financial Sector

 Name – Andre Sachdeva

College - VSLLS, Vivekananda Institute of Professional Studies.

Introduction

In the present Business World, Mergers and Acquisitions have grown dramatically. In order to reshape the business organisation, this method is commonly used throughout the world. The most popular tactics employed by firms to expand and sustain their market share are mergers and acquisitions.

The services offered by financial institutions have changed somewhat as a result of the significant changes in the structure and operation of financial markets as well as regulatory reforms. Which started off as an initiative taken majorly by government bodies, has now caught on and been widely adopted by private financial organisations such as banks and insurance companies. 

Mergers and acquisition dynamics in India have shifted over time. The direct consequences of mergers and acquisitions have also been diverse across the Indian economy's various sectors.

 India has emerged as one of the leading nations with respect to merger and acquisition transactions over the years. Presently in 2022, India has recorded $82.3 Billion worth of ongoing and accomplished M&A. 

Mergers and Acquisitions: Definition and Types

The term "merger" refers to the direct consolidation of two or more corporate enterprises into a single corporation, with one enterprise continuing to operate even if the other does not. The current corporation is used to obtain the assets, liabilities, and stocks of the erstwhile company or organization. 

There are three different forms of mergers: horizontal, vertical, and conglomerate. 

Horizontal Merger refers to the one where the two combining companies are in the same line of business and sell essentially the same or similar products. One common example of Horizontal Merger is the formation of Brook Bond Lipton India Ltd. through the merger of Brook Bond and Lipton India. Vertical Merger refers to the merger of two or more businesses which are engaged in the production of the same product, but at different stages or services. The merger of Flag telecom and Reliance Telecommunication is one such example. Conglomerate Merger refers to merger of two or more organisations which are completely unrelated to one another. L&T and Voltas Ltd. is an example of Conglomerate Merger. 

Typically, acquisition refers to a larger business entity purchasing a smaller business. Acquisition is the phrase used to describe the purchase of all or a portion of a company's assets for the benefit of the desired commercial organisation. The acquiring company is referred to as Holding Company. 

Legal Aspect Governing M&A

In India, M&A have been defined and regulated through various Legal Acts which are as follows: 

Mergers and Banking Regulations Act, 1949

According to Section 44A of the Banking Regulation Act of 1949(1), no banking businesses may merge unless the proposed merger is authorized by a two-thirds majority of the stakeholders of each merging company. It is then transmitted to the RBI for approval.

The Companies Act, 1956

The crucial rules on mergers, amalgamations, and reconstructions are included in Sections 391 to 396 of the Companies Act, 1956(2), which deal with the agreement and association with lenders and shareholders of an employer required for a merger.

Income Tax Act, 1961

The Income Tax Act(3) defines "amalgamation" as the combination of at least one agency with a second agency or the combination of at least two groups to form one agency. The ITA also mandates that the fulfilment of the supplementary requirements be confirmed by the merger's legitimacy.

Foreign Exchange Management Act, 1999

The agency or groups involved in this cross-merger are required under the Foreign Exchange Management Act Guidelines to ensure compliance with the FEMA Guidelines and the presentation made to the relevant National Court of Company Law (NCLT) in accordance with the declared unification. Cross-mergers are governed by Rule 25A of the Company Mergers Rules and Section 234 of the Companies Act.

Companies Act, 2013(4)

The primary and most significant piece of legislation that controls all businesses registered in India is the Companies Act. All business transactions, including as mergers and acquisitions, must adhere to the 2013 Companies Act's requirements. Sections 230 to 234 of Chapter XV include the common regulation pertaining to M&As.

Reasons and Benefits of Mergers & Acquisitions 

There are various factors why companies take over one another or merger into one company. The most common reason is for the benefit of either both the companies or the Holding Company. 

Enhancing both Businesses

In mergers and acquisitions a word called “synergy” is commonly thrown around. The basic tenet of synergy is that when two businesses work together, operational expenses will go down and each business' performance will rise. The most common justification for a merger or acquisition is synergy. A business will frequently decide to merge with another business because the two organisations' limitations and strengths are complementary.

Expanding the business

Every significant business wants to grow, and one of the simplest ways to do that is through mergers and acquisitions. A corporation can choose to acquire or merge with one of its rivals, a practise known as a horizontal merger, rather than putting in the effort necessary to expand market share. If an organisation wishes to enter a market where another business has already found success, growing through a merger is usual.

Shaking Up Your Business Ideas

Other reasons for mergers and acquisitions include sharpening a company's focus or broadening its array of commercial ventures. A business that wants to sharpen its emphasis on its core competencies may seek to merge with another business in the same sector that has performed better in the market.

Tax Advantages

The corporations involved in mergers and acquisitions may also benefit from alluring tax advantages.

Efficiency of Cost

The combination will boost the business's purchasing power, which helps in negotiations for large orders and results in value efficiency.

Limitations of M&A

It is a well known fact that where there are benefits there are limitations. The Limitations of mergers and acquisitions are as follows:-

Combining businesses that function similarly may also suggest repetition and increased expertise within the organisation, which may need layoffs. Conflicts and internal struggles within the company, which may also occur among the staff of merged firms, will bring a lot of problems. The choice of flexibility might potentially be reduced through M&A.

Extrade is harsh if a competitor company revolts and key resources are those with better features. killing of experienced staff members aside from those who are in charge of the post. Such a loss is predictable because it indicates a lack of business knowledge. Poorly managed integration can also result in failure; a bankrupt firm because the two companies are merging, they must be a right guiding principle to follow and work but in absence of that it will advertise to be unsuccessful.

Conclusion

There are numerous underlying reasons for mergers and acquisitions. As a result, it would be challenging to determine whether a merger or acquisition was successful or unsuccessful using only one metric.Nevertheless, different merger waves are real corporate occurrences that must be taken into consideration. 

In recent years, the banking, financial, and insurance industries (BFSI) have seen significant mergers and acquisitions.The Indian affiliation has been driven to pursue mergers and acquisitions as a full-scale important conclusion by the ongoing competitiveness inside the well-known market region. Over the course of existence, India's mergers and acquisitions model has changed.

The short-term effects of the mergers and acquisitions have also varied across the various sectors of the Indian monetary system. In the recent past, it wasn't very common for Indian businesspeople to be successful in their ventures outside of their country. Performances in mergers and acquisitions are enthusiastic for the technique role in company firm growth.

End Notes

(1) Banking Regulation Act, 1949, § 44A, Act of Parliament, 1949(India)

(2) Companies Act, 1956,  § 391-396, Act of Parliament, 1956 (India)

(3)  Income Tax Act, 1961, Act of Parliament, 1961 (India)

(4) Companies Act, 2013,  § 230-234, Chapter XV, Act of Parliament, 2013, (India)

Bibliography

1. B.K. Bhoi, Mergers and Acquisitions: An Indian Experience, Volume 21, Reserve Bank of India Occasional Papers, 2000 (July 03, 2022), https://rbidocs.rbi.org.in/rdocs/Publications/Pdfs/18577.pdf 

2. Sakshi Verma, Mergers and Acquisitions: Banking Sector, VidhiSastras Adovocates and Solicitors, (July 03, 2022), https://vidhisastras.com/mergers-and-acquisitions-banking-sector/ 

3. CFI Team, Mergers & Acquisitions (M&A) Transactions of two companies combining in some form, Corporate Finance Institute, February 18, 2022, https://corporatefinanceinstitute.com/resources/knowledge/deals/mergers-acquisitions-ma/ 

4. Éva PINTÉR, Mergers and Acquisitions in the Financial Service Industry, Volume 3, International Journal Of Social Sciences And Humanity Studies, 2011, (July 02, 2022), https://www.sobiad.org/eJOURNALS/journal_IJSS/arhieves/2011_1/eva_pinter.pdf