Mergers And Demergers:

Integration decisions are often justified by the synergies they create. Synergies exist when assets are worth more when used in conjunction with each other than separately. Synergies of some form are essential for integration to be successful. Integration offers little or no benefit when they do not exist.[ [Hitt et al (2001); 47]
TN Hubbard MERGER is one of the most common forms of non organic corporate restructure programmes that is adopted by the corporate world forged so as to achieve growth for the company as a whole. In the strict economic sense of the word it would mean the union of two or more commercial interests, corporations, undertakings, bodies or any other entities. In the corporate business means, fusion of two or more corporations by the transfer of all property to a single corporation. The corporation that merges the other with it continues to exist after having absorbed the other entity. The concept of mergers or the definition of the same has not, however, been clearly given in the Companies Act, 1956. It has instead been defined in the Income Tax Act, 1961; the Companies Act mentions of mergers in the section 394 while dealing with the powers of the National Company Law tribunal ,and there is also some mention of the same in the sections 396 and 396A that deal with the power of the central government to merge or amalgamate companies in the public interest and the record maintenance by the merged entity.

The Halsburys Laws of England, Vol. VII(2) para 1462 page 1103 defines mergers as :

neither reconstruction nor amalgamation has a precise legal meaning. Amalgamation is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company. Strictly, amalgamation does not, it seems, cover the mere acquisition by a company of the share capital of other companies which remain in existence and continue their undertakings, but the context in which the term is used may show that is intended to include such an acquisition.

The section 2(1B) of the Income Tax act defines amalgamation as the merger of one company with another... Further, as per the IT Act, the entire property and all the liabilities of the amalgamating company or companies before the process of amalgamation becomes the property of the merged entity after the process of amalgamation is complete. The rationale behind the merger of corporate entities is basically to improve their profit earnings by acquiring new markets and hitherto virgin commercial territories. Mergers are basically the tools by which the companies achieve their economies of scale, whether in terms of production or marketing and with the spread in the shareholder base, the companies are better positioned to arrange resources for their further expansion and growth. Also, with an increase in the number of shareholders of the company, the companies also have the need to increase the value of the shareholders by accentuating the profits and cutting down on the costs. Very often the government provides the healthy companies with the tax incentives to take over and merge the sick industries with itself. There are various benefits that are guaranteed under the IT Act, 1961 and at times, the accumulated losses of the sick company are used to offset the profits of the healthy company, thereby helping it to profit in the process. The gestation period of the new businesses drastically reduces. With the talent pool of the merging company at its disposal, the new entity will have the expertise and the dexterity to maneuver through the new markets and avenues that were till now not available to it. Also, the combined resources of the two companies in terms of the production facilities, marketing outlets, liquidity etc. will be the strengths of the new body which will strategically position it in the market giving it an edge over the rivals. This particular aspect of the company benefiting out of the assets of the merged company assumes significance in the light globalization. In the fast integrating and globalizing world, the size of the company is a key factor to ensure that the company remains ahead in the race globally. TYPES OF MERGERS: There are different types of mergers that take place in the economy of a country. These are: 1. Horizontal mergers; 2. Vertical mergers; and 3. Conglomerate mergers

1. HORIZONTAL OR ANNEXING MERGERS: When the merger of such two or more companies takes place which produce the similar kinds of products and compete directly with each other. The merger of sick companies results in the elimination of duplication of facilities and operations and broadening the product line, reduction in the finance for working capital, widening the market area and reducing unhealthy

competition. The recent merger of the banks in the private sector and the merger of Arcellor with Mittal Steel are all instances of horizontal mergers.

2. VERTICAL OR STREAMING MERGERS: The process of vertical mergers are essentially a method of backward integration where the object is to ensure that the inputs of raw material are seamlessly available by merging the sources of their production with the main company which improves the efficiency of the merged entity besides also ensuring an outlet for the goods produced in the in the merged company. The merger of the CORUS with TATA will ensure, besides other things, the strengthening of the raw material source for its various other projects as car manufacturing by employing the technological prowess of the former which supplies steel to automobile manufacturers as VOLVO and FORD.

3. CONGLOMERATE OR DIAGONAL MERGERS: When two or more companies carrying out different businesses merge with each other to diversify the product profile and thus ensure that the earnings are greater with the availability of resources and technology as well as staff that can ensure better productivity of the merged company. Perhaps the most important aspect of diversification is the aim to make the company simply too large to avert the threats of take over by other rival companies. BESIDES, there is also something that is known as the process of reverse merger where unlike the convention, a stronger company merges with a sick company as is the case when a parent company merges with its subsidiary. In this case, the assets of the merging company are greater than the existing company and the issuance of new equity to the shareholders results in the increase in the original issued capital of the surviving company. DEMERGER is the exact opposite of the concept of merger.The definition of the term is provided in the IT Act, 1961 and it refers to the sections 391 and 394 of the Companies Act, 1956. As per the section 2(19AA) of the IT Act, it is a compromise restructuring process by which one or more undertakings of a company are transferred to another, usually the subsidiary of the demerging company. All the property as well as the liability of the demerging company, becomes the property of the resulting company and are transferred at values appearing in its books of account just before the demerger. The shareholders who hold not less than three fourth of the shares of the demerged company become the shareholders of the resulting company LEGALITIES OF MERGERS AND DEMERGERS: MERGERS AND THE JURISDICTION OF COURTS: Any scheme for mergers has to be sanctioned by the courts of the country. The company act provides that the high court of the respective states where the transferor and the transferee

companies have their respective registered offices have the necessary jurisdiction to direct the winding up or regulate the merger of the companies registered in or outside India. The high courts can also supervise any arrangements or modifications in the arrangements after having sanctioned the scheme of mergers as per the section 392 of the Company ActThereafter the courts would issue the necessary sanctions for the scheme of mergers after dealing with the application for the merger if they are convinced that the impending merger is fair and reasonable. The courts also have a certain limit to their powers to exercise their jurisdiction which have essentially evolved from their own rulings. For example, the courts will not allow the merger to come through the intervention of the courts, if the same can be effected through some other provisions of the Companies Act; further, the courts cannot allow for the merger to proceed if there was something that the parties themselves could not agree to; also, if the merger, if allowed, would be in contravention of certain conditions laid down by the law, such a merger also cannot be permitted. The courts have no special jurisdiction with regard to the issuance of writs to entertain an appeal over a matter that is otherwise final ,conclusive and binding as per the section 391 of the above act.

SCHEME OF MERGER AND AMALGAMATION: The scheme of merger is the most important document which governs each and every aspect of the merger by laying down the framework within which the entire transaction is to take place including the method of valuation of the companies involved, share exchange ratio, legal rights and obligations of the two or more corporates involved and the members, creditors and other parties who are affected by the process of the merger

PROCEDURE FOR MERGER: The legal procedure follows four stages for the merger process to take place:

A. The draft scheme of the merger has to be approved by the board of directors of the merging entities; B. Application to the company courts seeking directions for convening meetings of the various shareholders, creditors and the debenture holders of the companies; C. Convening class meetings as directed by the high court and the subsequent obtaining of approval of the shareholders and the creditors; D. Finally filing a petition for the sanction of the scheme before the high court as has been duly approved by the shareholders and the creditors of the companies.

demergers and the jurisdiction of the court:

The courts have the power to order or sanction for the demerger of a company as per the section 394(1)(b)(i) of the Companies Act, 1956. The scheme of arrangements can bring before a court the scheme of arrangements that can be termed as a demerger. The application of chapter V of part VI of the Companies Act has all the advantages of a merger and the transferor company is allowed to sell the property but without having to bear the brunt of stamp duty, capital gains etc. Demergers are also dealt with under the sections 391 to 394 of the Companies Act. SCHEME OF DEMERGER: The demerger of a company follows almost the same rules as are applicable to the merger of a company. A demerger is also an arrangement under the section 390 of the Act as it defines the demerger of the company in terms of the division of the shares of the company.The framing of the scheme for the demerger of the company derives from the sections 390 to 396A of the Companies Act, 1956. The demerger must have the approval of the court apart from the approval of all the people concerned with the company.

PROCEDURE OF DEMERGER: As per the companies act, the sale of the whole or the part of a company follows a two pronged process for the demerger of the said company the first step of which would entail the approval of the entire process by the companys board of directors and then by obtaining the necessary approval of the shareholders at a general meeting of the company by passing a special resolution and the resulting company has to ensure that the objects it now has include the carrying on of the business that it sought to prior to the demerger of the company. This process of the companys demerger should confirm to the provisions of either the section 293(1)(a) or sections 391 to 393 of the Companies Act. However, the procedure as per the above act cannot be considered as a demerger as per the provisions of the IT Act in a holistic and definite manner. The section 2(19AA) applies to the process of demerger as per which the it is a compromise restructuring process by which one or more undertakings of a company are transferred to another, usually the subsidiary of the demerging company. All the property as well as the liability of the demerging company, becomes the property of the resulting company and are transferred at values appearing in the formers books of account just before the demerger. The shareholders who hold not less than three fourth of the shares of the demerged company become the shareholders of the resulting company

ECONOMIC ASPECTS WITH SOME EXAMPLES: MERGERS IN THE PUBLIC SECTOR: Indian Air India merger that was mulled by the government was with the view to consolidate the position of the Indian state run aviation behemoths so that they compete in the highly competitive global markets. The aim was one company, one culture. The purpose behind the merger was to create a monolith that would be better positioned to take on global competition;

besides, with Air India keen on joining a global aviation alliance, the merger was intended to provide additional benefits to passengers including access to far-flung areas of the country currently not served by any domestic airline or not properly connected by the airways. The mechanism of this merger was to have a human face with a judicious decision taken on the front of the employees of both the companies. The wisdom of taking the merger route to bail out the weakly performing commercial banks of the country has been at the back of the governments mind for over 5 years now. An analysis by Fitch Ratings, Singapore, in between 2000 and 2001 points out that the majority of Indian banks are under-capitalized, when international provisioning norms are taken into account. The state of the financial sector in any country is closely linked with the overall health of the economy, and the Indian economy is beset with problems, says Fitch. The fact that one crisis has followed the other in rather quick succession, has certainly raised fresh questions on the health of major financial institutions in the country. By global standards, even the biggest of Indian banks are dwarfs in a business where size means clout and where geographical boundaries are blurring due to the ever increasing influence of globalization. The M. S. Verma Committee on Restructuring of Weak Commercial Banks has evolved a restructuring plan for such weak public sector banks UCO Bank and United Bank of India (as well as a third bank which was not performing as well) which, inter alia, envisaged infusion of fresh capital aggregating Rs 5,500 crore. Provisioning requirements for bad and doubtful debts, improving capital adequacy and investment for technology upgradation were included as part of the package. The report had sparked a bitter debate, much of which centered on alternatives. The controversy has intensified as a number of other public sector banks now run the risk of slipping into the category of weak banks. It is clear that unless these banks are put through a careful and wellconceived process of restructuring, they may succumb to intense competition from private and foreign banks, which have become increasingly aggressive. In the United States, after their merger, Citibank and Bank of America companies climbed in the rankings to the second and third slots respectively in the Forbes Global Magazines list of 100 most important and competitive businesses world wide when the merger between Citibank and Travelers to form Citigroup, and Bank of America with Nations Bank, Citigroup and Bank of America materialized. This development has generated considerable interest in India too, and has revived the debate on mergers and acquisitions as an option for revamping weak banks. The debate was further fuelled by tax proposals, which enable companies to adjust tax losses in the merger of a profit-making company with a loss-making one, it is widely believed that Indian companies particularly weak banks and financial institutions could substantially benefit from mergers and amalgamations. These apart, the government is seriously considering the merger and demerger route for the rejuvenation of the ailing PSUs as well as for ensuring that the ones which are profit making, continue to remain so and maintain their core competency in the era of globalization. The decision to merge the oil PSUs has been premised on this logic of increasing the efficiency and profit earnings of the companies but there has been a fair share of criticism from the quarters which believes that the mergers of oil PSUs is unwise. Also, the move to merge Nilachal Ispat Nigam Ltd. in Kalinga Nagar with SAIL is a move with a similar logic.

MERGERS IN THE PRIVATE SECTOR: Private Banks are taking to the consolidation route in a big way. The recent development over the takeover of the Maharashtra based Sangli Bank with the largest private sector bank of our country-ICICI Bank is a crucial development for the banking sector of our country. This merger will give a boost to the ambitions of the ICICI Bank to penetrate the rural sector in a substantial manner along with amassing a human resource pool that is adept at handling the rural sector banking transactions. Bank of Punjab (BoP) and Centurion Bank (CB) have been merged to form Centurion Bank of Punjab (CBP). RBI has approved merger of Centurion Bank and Bank of Punjab effective from October 1, 2005.The merger is at a swap ratio 9:4 and the combined bank is called Centurion Bank of Punjab with the merged entity having a presence of 240 branches and extension counters, 386 ATMs, about 2.2 million customers. DEMERGERS IN THE PRIVATE SECTOR: The demerger of the Reliance group is by far the biggest corporate restructure story in the private sector. The split in the group led to the formation of the two independent entities Reliance Industries ltd. led by Mr. Mukesh Ambani and the Anil dhirubhai Ambani Group led by the younger brother Mr. Anil Ambani. RIL has proposed the demerger in order to enable distinct focus of investors to invest in some of the key businesses and to lend greater focus to the operation of each of its diverse businesses. The explanatory statement says that with a view to achieve greater management focus and keeping in mind the paramount and overall interests of the shareholders of RIL, the board of directors believe that Shri Anil D. Ambani will provide such focused management attention and leadership to the financial services, power and telecom businesses and Shri Mukesh D. Ambani will continue to lead the other businesses including petrochemicals, oil and gas exploration and production, refining and textiles and other businesses comprising the Remaining undertaking In the past several body corporates have opted for the demerger route. Eveready Industries separated its tea business into McLeod Russell; Auto ancillary company Rane Madras transferred its investments into separate company and the investment company was also listed. The demerger list also includes Vardhman Spinning and Morarjee Realities. GTL is demerging its IT infrastructure business to GTL Infrastructure.

DEMERGERS IN THE PUBLIC SECTOR: Though it is one of the fundamental pillars of the governments policy to streamline the entire economy, this mode of corporate restructure has not however been exploited the way it ideally should have been.It prominently features on the governments plans and visions for the restructuring of the economy.Therefore, when fully exploited, the concept of demergers will help reshape the PSUs by allowing them to shed their excess staff strength and loss making assets.

Mergers and intellectual property rights: In these days of the emergence of a knowledge economy world over, the companies stand to gain substantially through the transfer of the intellectual property rights that comes to their chest of prized possessions after the process of merger is over. The intellectual property rights (IPRs) would essentially cover the areas of trade marks, design, patents and copyrights Though there is no set criteria to evaluate the commercial value of the IPRs, the factors to be kept in mind are: 1. whether there exists the requisite market for the product and the scale of operation of the technology is pertinent and optimum for the market; 2. whether the technology is market tested and fit for commercial exploitation or has become redundant in the present scenario and hence requires further research and development; and, 3.whether the technology is suitable with respect to the existing infrastructure that is in place.

CONCLUSION: With the rise of new regional economic powers in the world, there has been a rise in what has been termed as economic patriotism. The recent controversy that erupted with the vehement opposition to the Mittal Arcellor deal by the European powers is a case in point. But, despite the challenges, mergers and demergers are the two tools that hold an answer to the Indian corporate communitys thirst and relentless enterprise for a global presence today. Today, as the waves of globalization are lashing at the doors of an ever prospering Indian economy and drowning it in an insatiable appetite to develop and become an economic superpower, mergers and demergers could well be the magical talisman for IndiaInc. to achieve its dreams