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Chapter 1

Understanding Mergers & Acquisitions

1.1 Key Terminology

1. Corporate Restructuring

It is defined as a major business modification usually associated with personnel

downsizing and asset revaluation.

Corporate Restructuring

Expansion Contraction Corporate Controls

Amalgamation Spin off Going

Absorption Split ups Equity buyback

Tender Offer Asset Sales Anti Takeover Defense

Asset Acquisition Equity carve-outs Leveraged buy-outs

Joint Venture

Expansion

2. Amalgamation

This type of merger involves fusion of two or more companies. After the merger, the

companies loose their individual identity and a new firm comes into existence.

3. Mergers

A merger refers to a combination of two or more companies into one company. It is

defined as a combination of two or more companies into a single company where one

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survives and the others lose their corporate existence. The survivor acquires the assets as

well as liabilities of the merged company or companies.

Generally, the company, which survives, is the buyer, which retains its identity, and the

Seller Company is extinguished. Merger is also defined as Amalgamation. Merger is the

fusion of two or more existing companies. All assets, liabilities and stock of one company

stand transferred to transferee company in consideration of payment in the form of equity

shares of transferee company or debentures or cash or a mix of the two or three modes.

Thus, we can say that merger is a fusion between two or more enterprises, whereby the

identity of one or more is lost and the result is a single enterprise.

A merger may involve absorption or consolidation. In an absorption, one company

acquires another company. Example: Ashok Leyland LTD absorbed Ductron Castings

Limited. In a consolidation, two or more companies combine to form a new company.

Example: Hindustan Computers Ltd, Hindustan Instruments Ltd, Indian Software

Company Ltd, and Indian Reprographics Ltd combined to form HCL Ltd.

1.2 Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were

synonymous, the terms "merger" and "acquisition" mean slightly different things. When a

company takes over another one and clearly becomes the new owner, the purchase is

called an acquisition. From a legal point of view, the target companyceases to exist and

the buyer "swallows" the business, and stock of the buyer continues to be traded.


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In the pure sense of the term, a merger happens when two firms, often about the same

size, agree to go forward as a new single company rather than remain separately owned

and operated. This kind of action is more precisely referred to as a "merger of equals."

Both companies' stocks are surrendered, and new company stock is issued in its place.

For example, both Daimler-Benz and Chrysler ceased to exist when the two firms

merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Often, one

company will buy another and, as part of the deal's terms, simply allow the acquired firm

to proclaim that the action is a merger of equals, even if it's technically an acquisition.

Being bought out often carries negative connotations. By using the term "merger,"

dealmakers and top managers try to make the takeover more palatable.

1.3 Types of Mergers

1. Horizontal mergers

A horizontal merger normally involves the joining together of two or more companies

which are producing essentially the same products or rendering the same services,

products or services which compete directly with each other (for example, sugar and

artificial sweeteners). They involve a reduction in the number of competing firms in an

industry and tend to create the greatest concern from an anti-monopoly or competition

point of view. They generally contribute directly to concentration of economic power and

are likely to lead the merged entities to a dominant position of market power, thereby

reducing or eliminating competition. This is why in many countries, restrictive business

practices legislation or, in other words, competition law, seeks to enforce strict


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regulations on the merging or integration of competitors. A direct result of integration or

mergers of competitors into a single unit results into growth of monopoly power.

Horizontal mergers of even small enterprises may create conditions triggering

concentration of economic power

2. Vertical merger

It is a merger which takes place upon the combination of two companies which are

operating in the same industry but at a different stage of production or distribution

system. If the company takes over its supplier producers of raw material then it may

result in backward integration of its activities. On the other hand, forward integration

may result if a company decides to takeover the retailer or Customer Company.

An example of this is where a motor car manufacturer and a manufacturer of sheet metal

merge. Here, a supplying enterprise which merges with a customer enterprise can extend

its control over the market by foreclosing an actual or potential outlet for the products of

its competitors. The object of the merger may be to ensure a source of supply or an outlet

for products and the effect may improve efficiency.

3. Conglomerate mergers

Such merger is a combination of two establishments which are not related to similar

industry. In this case there is an increase in total economic activities of firm. It involves a

predominant element of diversification of activities. This may consist of a company

deriving most of its revenue from a particular industry, acquiring companies or entities

operating in other industries for one or more of the following reasons:

obtain greater stability of earnings through diversification;

employ spare resources whether of capital or management;


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obtain benefit of economies of scale; and

provide an outlet for the ambitions of management where anti-monopoly laws may

make further growth in the company's own field impracticable

4. Circular Combination

In a circular combination, companies producing distinct products in the same industry,

seek amalgamation to share common distribution and research facilities in order to obtain

economies by eliminating costs of duplication and promoting market enlargement. The

acquiring company obtains benefits in the form of economies of resource sharing and

diversification

5. Reverse merger

It is a merger of a profit making company into a loss making company. There is no

difference between a regular merger and a reverse merger however if one of the merging

company is a sick company under sick industrial company act then such merger should

take place through the board of BIFR. The transferee co gets the benefits of tax

concessions and rebate under the income tax act.

It is merger of a healthy company into a sick /loss making company as compared to

normal merger under which loss making company merges into profit making company

(tax friendly merger). Though it is not normally understood as such but merger of an

unlisted company into a listed company can also be considered as reverse merger (listing

friendly merger).

Purpose of Reverse Merger

It is resorted to mainly to save on direct taxes and to get benefits of loss and other tax

benefits available to loss making company, most of which is lost in normal merger. It


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also avoids necessity of getting special permission under tax laws (section 72A of Income

Tax act, 1961 or under special statute for rehabilitation of sick industrial companies) It is

also resorted to for variety of other reasons like to save on stamp duty, to save on public

issue expenses, to obtain quotation on a stock exchange etc.

1.4 Acquisitions

In general term Acquisition means acquiring the ownership in the property. An

acquisition/takeover happens when one company purchases the assets or shares, wholly

or partially, of another company. The payment is in cash or in shares or other securities.

The acquired company is not dissolved and it continues to exist as a separate entity.

Acquisition would mean acquiring a running business as a going concern from a

company or any other entity. An acquisition for the Acquirer Company would be a

divestiture or a hive off for the Seller Company.

As in the business context, an acquisition is the purchase by one company of a controlling

interest in the share capital of another existing company. It may be affected by

1. Agreement with the persons holding majority interest in the company management

like members of the board or major shareholders commanding majority of voting

power;

2. Purchase of shares in open market;

3. To make takeover offer to the general body of shareholders

4. Purchase of new shares by private treaty


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5. Acquisition of share capital of one company may be by either all or any one of the

following form of considerations viz. means of cash, issuance of loan capital, or

insurance of share capital.

A takeover generally involves acquisition of a certain block of equity capital of a

company, which enables the acquirer to exercise control over the affair of the co

1.5 Types of Acquisitions

A strategic acquisition occurs when one company acquires another as a part of its overall

business strategy. Achieving a cost advantage may be the desired result. For example, a

brewing company in need of additional capacity may purchase another brewer that it is

suffering from overcapacity. Or, perhaps, the target company may be able to provide

revenue enhancement through product extension or market dominance. The key is that

strategic reason exists for blending together two companies.

In contrast, a financial acquisition happens when a buyout firm is the acquirer. The

acquirers motivation in this instance is to sell off assets, cut costs, and operate whatever

remains more efficiently than before. Hopefully, these acquisitions result in creating

value in excess of the purchase price. The acquisition is not strategic, however, because

the company acquired is operated as an independent, standalone entity. A financial

acquisition involves a cash exchange, and payment to the selling shareholders is financed

largely with debt. Known as leveraged buyout (LBO).

1.6 Motives & Reasons for M & A

The factors behind M&A are to diversify the areas of activity, to achieve optimum size of

business, improve profitability, serve the customer better, economies of scale, acquire


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assets at lower than the market price, nurse a sick unit, get tax advantage by acquiring the

running concern.

1. Economies of scale

When the industry reaches the maturity stage or it is in recession, there is a consolidation

in the industry to cut costs. This happens by means of fragmented players being acquired

big firms or some big firms merging together. The operating cost advantages in terms of

economies of scale are considered to be the primary motive. Be it horizontal or vertical

merger. These result in lower average cost of production and higher sales, due to higher

level of operations.

At operational terms, real economies may arise from:

Production activity of the firm

Research and development activity

Marketing and distribution activity

Transport, storage and inventories, and

Managerial economies

2. Pecuniary economies

Cheaper finance is the most vital ingredient of pecuniary economy. A post merger firm,

being larger in size, is likely to raise finance at cheaper/lower rates. The reason is that the

larger the size of the firm the more secure the investors consider their funds, resulting in

lower risk of default. Besides, floatation cost per unit decreases with increase in the size

of shares and debentures.


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3. Synergy

The simplest rationale is the under valuation of the target firm. An under valued firm will

be a target for acquisition by other firms. However the fundamental motive for the

acquiring firm to take over the target firm may be to desire to increase the wealth of the

shareholders of the acquiring firm.

This is possible only if the value of the new firm is expected to be more than the sum of

the value of the target firm and the acquiring firm.

For example:

Merger of A ltd and B ltd decide into AB ltd than the merger is beneficial if, value of AB

ltd > value of A ltd + value of B ltd.

When two firms combine their resources and efforts they will be able to produce better

results than they were producing as separate entities because of saving in various types of

operating costs, for instance, one firm may have strong R&D team where as other may

have very efficient production department.

Synergy results from complimentary activities, e.g., one firm may have substantial

financial resources while the other has profitable investment opportunities. Likewise, one

firm may be strong in R & D, whereas the other firm may have a very efficient

production department. Similarly, one company may have well-established brands but

lack marketing organization, and another firm may have a very strong marketing

organization. The merged concern in all these cases will be more efficient than the

individual firms. Also, a post-merger firm is likely to raise finances at lower rates than


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that at which either of the pre-merger constituents could have acquired them, as it is

perceived to be more secure.

Mergers & Acquisition synergies include both tangible and intangible assets

Corporate brands and well-defined reputation;

Capital and new streams of revenue;

Core competencies in management or business processes;

People who possess unique skill or customer relationships;

Needed elements of a culture or operating environment

Management resources.

4. Early entry and Market Penetration

Mergers often enable the new firm to grow at a faster rate than via the internal expansion

route through its own capital budgeting proposals. The reason is that the acquiring

company enters a new market quickly, and avoids the delay associated with building a

new plant and establishing new products. Acquiring companies with good manufacturing

and distribution networks or few brands of a company gives the advantage of a rapid

market share.

Example

Cement majors Italicementi and Lafarge have used the acquisition route to gain entry into

the Indian Cement Sector. Italicementi acquired Zuari Cements and Lafarge acquired the

cement arm of Tata Iron and Steel and also from Raymond.


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5. Diversification

A merger between two unrelated firms would tend to reduce business risk, which in turn

reduces the discount rate/required rate of the firms earnings, thus increasing its market

value. In other words, such mergers help stabilize overall corporate incomes which would

otherwise fluctuate.

6. Acquisition of Brand Names, Patent Rights Etc.

A takeover or merger may be a relatively easy way of acquiring established brand names,

valuable patent rights, technical know-how etc.

7. Deployment of Surplus Funds

A profit-making company may have surplus funds that it is not in a position to invest

profitably. In the present context, many of the companies having a good track record are

approaching the capital market for raising resources. Funds are being raised by issuing

shares and debentures at a substantial premium, enabling the reduction of average capital

cost. At the same time there are companies that are starved of funds due to expansion

programs, developmental work or some other reasons.

8. Earnings Per Share

Increasing the EPS of the firm can also be the motive for the merger. A firm can increase

its EPS by acquiring another firm, which is profitable and has a low P/E ratio. However

an increase in EPS need not necessarily increase the market price of the share. The firm


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with a lower P/E ratio might be a lower growth firm and therefore after merger the

investor may not be willing to pay a higher price for new firm.

9. Avoiding Cut-Throat Competition

A merger/takeover route may enable companies to avoid competition in a situation where

there are too many players targeting a limited market.

E.g., VIP took over Universal Luggage and put an end to the massive price discounting,

which was eating up their profits.

10. Breakup Value

Firms can be valued by book value, economic values, or replacement value. Takeover

specialists also recognize breakup value as another basis for valuation. Analysts estimate

a companys breakup value, which is the value of the individual parts of the firm if they

were sold off separately. If this value is higher than the firms current value, then a

takeover specialist could acquire the firm at or even above its market value, sell it off in

pieces, and earn a profit.

11. Tax Benefits

Before we proceed with the tax treatment of Mergers & Acquisitions, we need to look at

the definition of Amalgamation as defined by sec 2 (1B) of the Income Tax Act

For the purpose of the Income-tax Act, amalgamation of companies means either merger

of one or more companies with another company or the merger of two or more


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companies to form one company. The definition of amalgamation under section 2(1B)

covers the following cases

Merger of A Ltd. With X Ltd.

Merger of A Ltd. And B Ltd. With X Ltd. (A Ltd. And B Ltd. go out of existence).

Merger of A Ltd. and B Ltd. into a newly incorporated company X Ltd. (A Ltd. and B

Ltd. go out of existence).

Merger of A Ltd., B Ltd. and C Ltd., into a newly incorporated company X Ltd. (A

Ltd., B Ltd. and C Ltd. go out of existence).

In the aforesaid cases, A Ltd., B Ltd. and C Ltd. are amalgamating companies, while X

Ltd. is an amalgamated

Income tax act 1961 is vital among all tax laws, which affect the mergers of firms from

the point of view of tax savings liabilities. However the benefits under this act are

available only if the following conditions mentioned in sec.2 (1B) of the act are fulfilled:

1. All the amalgamating companies should be companies within the meaning of the

sec.2 (17) of the income tax act 1961.

2. All the properties of the amalgamating company immediately before the

amalgamation should become the property of the amalgamated company by virtue of

the amalgamation.

3. All liabilities of the amalgamating company immediately before the amalgamation

should become the liabilities of the amalgamated company by virtue of the

amalgamation.

4. Shareholders holding not less than three-fourths in value of the shares in the

amalgamating company (other than shares already held by the amalgamated company


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or by its nominee) should become shareholders of the amalgamated company by

virtue of the amalgamation.

If a healthy company acquires a sick one, it can avail of income tax benefits under section

72-A of Income Tax Act. This stipulates that subject to the merger fulfilling certain

conditions, the healthy companys profit can be set off against the accumulated losses of

the sick unit. The money saved thus must be used for the revival of the sick unit. For

instance, the existing creditors of the sick unit may be paid off. The healthy company,

besides saving on tax, acquires additional manufacturing capacities and strengths.

1.7 Financing techniques in Mergers & Acquisition

The choice of financial instruments and techniques in acquiring a firm usually has an

effect on the purchasing agreement. The payment may take the form of either cash or

securities i.e. ordinary shares, convertible securities, deferred payment plan and tender

offers. There are various types of financing: -

1. Ordinary share financing

When a company considers common shares to finance merger the relative P/E ratio of the

two firms are an important consideration.

For a firm having a high P/E ratio, ordinary shares represent an ideal method for

financing mergers & acquisitions.

Similarly, the ordinary shares are more advantageous for both the companies when the

firm to be acquired has low P/E ratio.


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2. Debt & Preference Share Financing

Debt & Preference Share Financing is useful if an acquiring firm has a relatively lower

P/E ratio and according to the preference of some investors, other types of securities in

conjunction with/in lieu of equity shares.

The use of such source of finance has several advantages: -

Potential earning dilution may be partially minimized by issuing convertible security.

The convertible financing option may serve the income objectives of the shareholders

of the target firm without changing the dividend policy of the acquiring firm.

Convertible security represents the possible way of lowering the voting power of the

target company.

Convertible security may appear more attractive to the acquired firm, as it combines

the protection of fixed security with the growth potential of ordinary shares.

3. Deferred Payment Plan

This is also known as Earn out Plan as the payment is agreed to be made in future,

linking it to firms future earnings. In this case the acquiring firm, besides making the

initial payment also undertakes to make additional payment in future years to the target

firm in case the acquiring firm is able to increase its earnings.

The most commonly used is theBased period earn-out Plan

Under this plan, the shareholders of the target company are to receive additional shares

for a specified number for future years; if the firm is able to improve its earnings vis a

vis the earnings of the base period (i.e. the year before acquisition). The amount


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becoming due for payments in share for future years will be primarily a function of

excess earnings, P/E ratio and the market price of the shares of the acquiring firm.

The basis for determining the required number of shares to be issued is: -

Excess earnings x P/E ratio

Share Price (acquiring firm)

1.8 Types of Takeovers

Takeovers can be friendly or hostile. A negotiated settlement is possible in friendly

takeovers. Friendly ones are characterized by bargaining until agreement is signed.

Successful takeovers depend on the premium offered to the target companys current

share price, the composition of the board, the composition and sentiment of target

companys current shareholders.

Aggressive takeovers take the form of hostile takeover, bear hug, proxy contests, open

market operations and tender offers. Alternative takeover defenses may be classified

under pre-bid and post-bid.

1. Hostile takeover

Hostile takeover is an unsolicited offer made by a potential acquirer that is resisted by

target firm's management. It is normally disclosed in the press. Aggressive public

rejection of the offer is the first step in the process leading to a negotiated settlement. If

there are confidential negotiations before there is a public announcement of a bid or a

completed negotiation, the transaction may be considered friendly. The existence of

negotiations is some times revealed to attract alternative bidders.

Example: The open offer of Vijay Mallaya controlled UB Group for Shaw Wallace is an


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example of a Hostile Takeover. The target company management is not willing to part

with the control of the company and is planning to launch appropriate defenses.

2. Bear Hug

Bear hug limits target's options. If the friendly approach is considered inappropriate or is

unsuccessful, the acquiring company may attempt to limit the option of the target

management by making a formal acquisition proposal to the board of directors of the

target. The intent is to move the board to a negotiated settlement. The board may be

motivated to do so because of its fiduciary responsibility to the target's shareholders.

Once the bid is made the company is effectively put into play.

The target board is unlikely to reject the bid without obtaining a fairness opinion from an

investment banker that the offer is inadequate. Otherwise the management may face

litigation from shareholders that it has not properly discharged its fiduciary responsibility.

3. Proxy Contest

Proxy contest takes place for seats on the board of directors and those concerning

management proposals. By replacing board members proxy contests can be an effective

means of gaining control without owning 51 % of voting stock or used to eliminate

takeover defenses.

A successful proxy fight represents purchasing at a substantial premium a controlling

interest in the target company.

4. Tender Offer

A public limited company carries the risk that any person or company can go to its


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shareholders and offer to buy their shares. If enough shareholders are willing to sell or

tender their shares at a certain price a formal shareholder vote is not necessary. Tender

offers give share holders a chance to vote without a formal proxy.

Tender offer takes the battle to the shareholders. But it is only resorted to when a friendly

negotiated settlement is not possible. An unsolicited offer may be made to shareholders

without the target boards approval. It can force management's attention and response. If

the bid is real, management must find some alternative means of getting shareholders

comparable value. Otherwise, the hostile bidder may eventually be able to negotiate the

final bid with the target's management.

Tender offers can be for cash or securities. In either case the proposal is put directly to

the shareholders of the target. The offer is extended for a specific period of time, called

the offer period and may be unrestricted or restricted to a certain percentage or number of

the target's shares.

Since the tender offer is a direct appeal to shareholders, prior approval of the

management of the target firm is not required.

Example: The open offer of Holcim for a controlling stake in ACC is a good example of

tender offer. Some other tender offers are DHLs offer for Blue Dart and S & Ps offer

for CRISIL.

1.9 Defenses against Hostile Takeovers

The various defense tactics can be classified under Pre-Bid and Post-Bid defenses

A) Pre- Bid


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1. Lobster Trap

A strategy used by a target firm to prevent a hostile takeover. In a lobster trap, the

company passes a provision preventing anyone with more than 10% ownership from

converting convertible securities into voting stock.

2. White mail

A strategy that a takeover target uses to try and thwart an undesired takeover attempt. The

target firm issues a large amount of shares at below-market prices, which the acquiring

company will then have to purchase if it wishes to complete the takeover. If the

whitemail strategy is successful in discouraging the takeover, then the company can

either buy back the issued shares or leave them outstanding.

3. Macaroni Defense

An approach taken by a company that does not want to be taken over. The company

issues a large number of bonds with the condition they must be redeemed at a high price

if the company is taken over.

4. Poison Pills

Represent a new class of securities issued by a company to its shareholders, which has no

value unless an investor/potential acquirer acquires a specific percentage of the firms

voting stock. If this threshold percentage is exceeded the poison pill securities are

activated in such a way so to dilute the value of investors/acquirer stake in the company.

Poison pill securities alter the relationships between shareholders, managers and the

board of directors when a control-related event occurs. They alter the company to make it

unpalatable to an acquirer. The basic premise of poison pill is to make the target company

unattractive for the shareholders of the acquirer company.


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Poison pills slow down but rarely prevent takeovers. They delay and increase expense but

do not prevent a firm from being acquired. Escape clauses are embedded in poison pills

such that the issuing company board can redeem them through a nominal payment. This

avoids dilution of bidders ownership position in the event acquiring company is

considered friendly.

Poison pill transaction was used by Rassi Cement to thwart the takeover by ICL. The

details are given below:

5. Back end Plan

Shareholders receive a dividend of rights which gives them the option of exchanging the

rights along with a share of target stock for cash or senior debt securities for a specific

price set by the target's board. This price is usually set above the current market price of

the target company's shares. It is the asking price determined by target's board. Thus, if

the acquirer company will have to bear the brunt if they do takeover the target company.

The deal, if it goes through will reduce shareholder value who obviously will not give

their approval for the takeover.

6. Anti-Green mail Provisions

During the '80s many raiders profited by taking an equity position in target company

threatening takeover and subsequently selling their ownership position to the target firm

at a premium over what they paid for the targets shares. Companies removed the

incentive for greenmail by amending their articles of association/charter to restrict the

firm's ability to repurchase shares.

7. Fair Price Provision

Acquirer may be required to pay a fair market price to minority shareholders to amend its


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charter\articles of association. Fair price provisions are most effective when the target

firm is subject to a two tiered offer. Acquirer has to pay target shareholders who tender

their stock in second tier on the same terms offered to those tendering their stock in the

first tier.

8. Parachutes - Golden, Silver and Tin

Golden parachutes (several years pay) are employee severance agreements which are

triggered whenever a change in control takes place. A change in control is usually

defined to occur whenever an investor accumulates more than a fixed percentage of a

company's voting stock. The purpose of golden parachutes is generally to retain key

employees who may feel threatened by a pending change in control. Silver parachutes

(6 months to 1 year pay) are severance agreements that cover far more employees and are

also triggered in the same manner as golden parachutes. Tin parachutes cover virtually

all employees and consist of very modest severance payment.

B) Defenses Post- Bid

1. Greenmail

Greenmail is the practice of paying a potential acquirer to leave you alone. It consists of a

payment to buyback shares at a premium in exchange for the acquirer's agreement not to

undertake a hostile takeover. In exchange the potential acquirer signs a stand still

agreement which specifies the amount of stock that the acquirer can own, the

circumstances under which the raider can sell the stock currently owned and the terms of

the agreement.


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2. White Knights

A company seeking to avoid being taken over by specific raider may try to be acquired

by another firm which is considered friendly by the target company, a white knight. The

White knight should offer better terms than original bidder. Motivation for white knight

is generally more mercenary than chivalrous. White knight often demands protection in

the form of lock-up in an agreement of purchase and sale eventually signed with the

target. The lock up may involve giving the white knight options to buy into the stock of

the target company, that is yet to be issued, at a fixed price or giving to the acquirer the

targets assets, that are viewed as strategic by the White Knight at a fair price. Lock-ups

render the target less attractive to the original bidder. In the event a bidding war ensures,

the knight may exercise the stock options and sell the shares at a profit to the acquiring

company.

3. White Squires

White squires are firms that agree to purchase a large block of the target stock which is

often convertible preferred, approved but not issued, of the target company. Shareholder

approval to sell stock to white squire is necessary in case of listed companies. Approva1

is also necessary if such shares are issued to officers/directors or number issued equa1s

20% of target's outstanding shares.

4. ESOPS

They are trusts that hold firm's stock as an investment for their employees retirement

program. They are an alternative to a white knight or white squire. They can be

established quickly with the company either issuing shares directly to ESOP or having an

ESOP purchase shares on the open market. Any impact on earnings per share of issuing


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the stock to ESOP can be offset by the firm repurchasing shares on the open market.

5. Recapitalization

Recapitalization depends on articles of association charter. New debt may be issued for

buy-back of shares. Target becomes less attractive to the bidder. Additional shares may

be issued to make it difficult for the bidder to gain controlling interest. Increase in shares

dilutes earnings per share and reduces the targets share price.

Buybackreduces the number of shares that could be purchased by a potential buyer or by

arbs who will sell to the highest bidders. Reduction of shares may make it easier for the

buyer to gain control.

Buy-back in combination with white squire strategy in which the target can place stock in

friendly hands is considered effective defense. Buy-back by targeting specific

shareholders who may sell to the hostile bidder and self tender offer in which the target

buys its own shares are effective defenses.

6. Restructuring

Public limited companies can convert into private company by sale of attractive assets, by

undertaking a major acquisition or even by liquidating the company.

7. Liquidation

In case of liquidation, liquidating dividend should exceed what shareholders would have

got from the takeover bid.


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Chapter 2

Takeover Rules & Regulations

2.1 SEBI Definition of Takeover and Types of Takeovers

A takeover generally involves acquisition of a certain block of equity capital of a

company, which enables the acquirer to exercise control over the affairs of the company.

Sebi regulations define three types of Takeovers

1. Negotiated friendly

This takeover is organized by the holding company with a view to part with the

control of the management of the other group through negotiation.

2. Open market/Hostile

A hostile takeover is also referred to as a raid to the company. In such takeover the

management of the acquiring company acquires shares of target company from open

market or financial institution or any other source at a higher price than the prevailing

market price. Such takeover is hostile to the existing management.

3. Bail out

When a profit earning company takes over a financially sick company to bail it out, it

is known as bail out takeover.


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2.2 Key Terminology in the Takeover Code

1. Acquirer

Acquirer means any person who, directly or indirectly, acquires or agrees to acquire

shares or voting rights in the target company, or acquires or agrees to acquire control over

the target company, either by himself or with any person acting in concert with the

acquirer

2. Target Company

Target Company means a listed company whose shares or voting rights or control is

directly or indirectly acquired or is being acquired.

3. Control

Control shall include the right to appoint majority of the directors or to control the

management or policy decisions exercisable by a person or persons acting individually or

in concert, directly or indirectly, including by virtue of their shareholding or management

rights or shareholders agreements or voting agreements or in any other manner;

4. Offer period

Offer Period means the period between the date of entering into Memorandum of

Understanding or the public announcement, as the case may be and the date of

completion of offer formalities relating to the offer made under these regulations.


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5. Promoter means -

(i) the person or persons who are in control of the company, directly or indirectly,

whether as a shareholder, director or otherwise; or

(ii) person or persons named as promoters in any document of offer of securities to the

public or existing shareholders,

and includes,

(a) where the promoter is an individual, -

(1) a relative of the promoter within the meaning of section 6 of the Companies Act, 1956

(1 of 1956);

(2) any firm or company, directly or indirectly, controlled by the promoter or a relative of

the promoter or a firm or Hindu undivided family in which the promoter or his relative is

a partner or a coparcener or a combination thereof:

Provided that, in case of a partnership firm, the share of the promoter or his relative, as

the case may be, in such firm should not be less than 50%.

(b) where the promoter is a body corporate,

(1) a subsidiary or holding company of that body; or

(2) any firm or company, directly or indirectly, controlled by the promoter of that body

corporate or by his relative or a firm or Hindu undivided family in which the promoter or

his relative is a partner or coparcener or a combination thereof:

Provided that, in case of a partnership firm, the share of such promoter or his relative, as

the case may be, in such firm should not be less than 50%.


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6. Persons Acting In Concert" comprises:

(1) persons who, for a common objective or purpose of substantial acquisition of shares

or voting rights or gaining control over the target company, pursuant to an agreement or

understanding (formal or informal), directly or indirectly co-operate by acquiring or

agreeing to acquire shares or voting rights in the target company or control over the target

company.

(2) Without prejudice to the generality of this definition, the following persons will be

deemed to be persons acting in concert with other persons in the same category, unless

the contrary is established :

(i) a company, its holding company, or subsidiary of such company or company under the

same management either individually or together with each other;

(ii) a company with any of its directors, or any person entrusted with the management of

the funds of the company;

(iii) directors of companies referred to in sub-clause (i) of clause (2) and their associates;

(iv) mutual fund with sponsor or trustee or asset management company;

(v) foreign institutional investors with sub account(s);

(vi) merchant bankers with their client(s) as acquirer;

(vii) portfolio managers with their client(s) as acquirer;

(viii) venture capital funds with sponsors;

(ix) banks with financial advisers, stock brokers of the acquirer, or any company which is

a holding company, subsidiary or relative of the acquirer.

Provided that sub-clause (ix) shall not apply to a bank whose sole relationship with the

acquirer or with any company, which is a holding company or a subsidiary of the acquirer


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or with a relative of the acquirer, is by way of providing normal commercial banking

services or such activities in connection with the offer such as confirming availability of

funds, handling acceptances and other registration work.

(x) any investment company with any person who has an interest as director, fund

manager, trustee, or as a shareholder having not less than 2% of the paid-up capital of

that company or with any other investment company in which such person or his

associate holds not less than 2% of the paid up capital of the latter company.

*[ Note: For the purposes of this clause `associate' means:

(a) any relative of that person within the meaning of section 6 of the Companies Act,

1956 (1 of 1956); and

(b) family trusts and Hindu Undivided Families.]*

2.3 Non-Applicability of the Regulation

(a) Allotment in pursuance of an application made to a public issue.

Such allotment shall be exempt only if full disclosures are made in the prospectus about

the identity of the acquirer who has agreed to acquire the shares, the purpose of

acquisition, consequential changes in voting rights, shareholding pattern of the company

and in the Board of Directors of the Company, if any, and whether such allotment would

result in change in control over the company.

(b) Allotment pursuant to an application made by the shareholder for rights issue,

*[(i) to the extent of his entitlement; and

(ii) upto the percentage specified in consolidations of holdings]*


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Provided further that this exemption shall not be available in case the acquisition of

securities results in the change of control of management.

(c) Allotment to the underwriters pursuant to any underwriting agreement;

(d) acquisition of shares in the ordinary course of business by,-

(i) a registered stock-broker of a stock exchange on behalf of clients;

(ii) a registered market maker of a stock exchange in respect of shares for which he is the

market maker, during the course of market making;

(iii) by Public Financial Institutions on their own account;

(iv) by banks and public financial institutions as pledgees;

(v) a merchant banker or a promoter of the target company pursuant to a scheme of

safety net under the provisions of the Securities and Exchange Board of India

(e) Shares held by banks and financial institutions by way of security against loans

(f) Issue of American Depository Receipts and Global Depository Receipts or Foreign

Currency Convertible Bonds, till such time as they are not converted into equity shares;

(g) In addition to the above cases, even when there is a change in control and

management of the company, the Takeover Code would still not apply if at least 51% of

the shareholders of the company have approved the acquisition by the acquirer after

being made aware that such acquisition would result in change in control and

management.


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2.4 The Takeover Panel

1. The Board shall for the purposes of this Regulation constitute a Panel of majority of

independent persons from within the categories

2. For seeking exemption the acquirer shall file an application [supported by a duly

sworn affidavit] with the Board, giving details of the proposed acquisition and the

grounds on which the exemption has been sought.[Format of application]

3. The acquirer shall, along with the application pay a fee of Rs. 25, 000/- to the Board,

either by a bankers cheque or demand draft in favour of the Securities and Exchange

Board of India, payable at Mumbai.

4. The Board shall within 5 days of the receipt of an application forward the application

to the Panel.

5. The Panel shall within 15 days from the date of receipt of application make a

recommendation on the application to the Board.

6. The Board shall after affording reasonable opportunity to the concerned parties and

after considering all the relevant facts including the recommendations, if any, pass a

reasoned order on the application within 30 days thereof.

The order of the Board shall be published by the Board

2.5 SEBI Takeover Norms

SEBI being the market regulator has specified various Takeover Norms in order to

protect the interests of the shareholders and inculcate discipline and manipulation

amongst the corporate. The various regulations can be discussed under the following

heads:


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1. Acquisition of 5% voting rights

This is specified by the regulation 7 of the SEBI Act

An Acquirer acquiring more than 5% or 10% or 14% of shares or voting rights

(including shares or voting rights, if any, held by him) shall at every stage disclose his

aggregate holding to company within 2 days of

Receipt of intimation of allotment of shares

Acquisition of shares

Every Company should disclose to the stock exchanges where its shares are listed the

aggregate share holding of such persons as referred above within seven days of the

receipt of such information.

2. Acquisition of 15% & more

An acquirer acquiring shares/voting rights that, together with existing holdings by

him/person(s) working in concert with him entitle him, to exercise 15 per cent or more of

the voting rights in a company has to make a public announcement for an additional at

least 20% shareholding.

3. Consolidation of holdings

An acquirer (together with a person acting in concert) who holds 15 per cent or more but

less than 75 per cent of the shares/voting rights in a company cannot acquire additional 5

% or more shares/voting rights in any financial year ending March 31 st unless he makes a

public announcement for acquisition of shares.

Moreover, an acquirer who (together with a person acting in concert with him) has


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acquired 75 per cent of the shares/ voting rights in a company cannot acquire, either by

himself/or through a person acting in concert with him, any additional shares without

making a public announcement. The term acquisition, with reference to the substantial

acquisition and consolidation of holdings, includes both direct in a listed company as well

as indirect by virtue of acquisition of companies, whether listed/unlisted in India/abroad.

4. Acquisition of control

Irrespective of whether or not there has been any acquisition of shares/ voting rights no

person can acquire control over the target company without making public

announcement. The exception of this regulation is when the change in control is by a

special resolution of the shareholders passed in general meeting. Acquisition would

include direct/indirect acquisition of control of the target company by virtue of

acquisition of companies, whether listed/unlisted and whether in India/abroad.

5. Public Announcement of Offer

The Announcement has to be made by a Category I Merchant Banker appointed by the

company. The announcement should be made within 4 days of entering into the

agreement or deciding to acquire the shares/voting rights in excess of 5 %.

The same is true in case an acquisition results in change in the control of the company.

Additionally in case of indirect acquisition or change in the control of the company the

acquirer should make a public announcement within three months of consummation of

such acquisition or change in control or restructuring of the parent or the company

holding shares of or control over the target company in India.


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A copy should also be submitted to

(i) SEBI

(ii) Stock exchanges

(iii) Registered office of target company.

Contents of Pubilc Announcement Offer

1. The existing paid-up share capital of the target company, giving break-up of the

number of fully paid up & partly paid up shares.

2. Total number & percentage of shares proposed to be acquired from the public, subject

to the specified minimum.

3. Minimum offer price for each partly paid up share and fully paid - up share.

4. The identity of the acquirer(s) and in case the acquirer is the company/companies, the

identity of the promoters and, or the persons having control such company(ies)

belong.

5. The existing holding, if any, of the acquirer in the shares of the target company,

including holdings of persons acting in concert with him.

6. Salient features of the agreement, if any, such as the date, the name of the seller, the

price at which the shares are being acquired, the manner of payment of consideration

and the number & percentage of shares in respect of which the acquirer has entered

into agreement to acquire the shares or the consideration, monetary or otherwise, for

the acquisition of control over the target company, as the case may be.


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7. The highest and the average price paid by the acquirer or persons acting in concert

with him for acquisition, if any, of shares of the target company made by him during

the 12 months period prior to the date of public announcement.

8. Object and purpose of acquisition of shares; the future plans of the acquirer, if any,

for the target company including whether he proposes to strip/dispose off or

otherwise encumber any assets of the target company during the succeeding two years

except in the ordinary course of business of the target company. When the public

announcement sets out, the future plan should also be stated how he propose to

implement it.

9. The specified date the public announcement should specify a date for the purpose

of determining the names of shareholders to whom the letter of offer would be sent.

The specified date cannot be later than the 30th day from the date of the public

announcement.

10. The date by which the individual letters of offer would be posted to the shareholders

11. The date of opening and closure of the offer and the manner in which and the date by

which the acceptance & rejection of the offer should be communicated to the

shareholders

12. The date by which the shares in respect of which the offer is accepted would be

acquired against payment of consideration

13. Statement to the effect that firm arrangement for financial resources required to

implement the offer is already in place including the details regarding the source of

funds


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14. Provision for acceptance of the offer by person(s) who own shares but are not the

registered holder of such shares

15. The statutory approvals, if any, required to be obtained for the purpose of acquiring

the shares under the Companies Act, the MRTP Act, 1969, The Foreign Exchange

Regulation Act, 1973 and/or any other applicable laws.

16. Whether the offer is subject to a minimum level of acceptances from the shareholders

17. mode of payment of consideration

18. Approval of banks & financial institution

19. Such other information as is essential for the shareholders to make an informed

decision in regard to offer.


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6. Submission of Letter of offer to the Board

(1)The acquirer shall, through its merchant banker, file with the Board, the draft of the

letter of offer, containing disclosures as specified by the Board. within 14 days from the

date of public announcement with a fee ofRs. 50000.

(2) The letter of offer shall be dispatched to the shareholders not earlier than 21 days

from its submission to the Board

The Board specifies changes, if any, in the letter of offer, (without being under any

obligation to do so) the merchant banker and the acquirer shall carry out such changes

before the letter of offer is dispatched to the shareholders.

[Provided further that if the disclosures in the draft letter of offer are inadequate or the

Board has received any complaint or has initiated any enquiry or investigation in respect

of the public offer, the Board may call for revised letter of offer with or without

rescheduling the date of opening or closing of the offer and may offer its comments to the

revised letter of offer within seven working days of filing of such revised letter of offer.]

7. Offer Price

A) Mode of Payment

The offer price is payable in one of the following three forms:

(i) Cash

(ii) By issue, exchange, transfer of shares of the acquirer company

(iii) By issue, exchange, transfer of secured instruments of the acquirer company.


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However, if the acquirer has in the preceding twelve months made any payment to

any class of shareholders in cash in any manner, then the acquirer has to provide a

cash option to the shareholders in the offer letter.

In case of any changes in the offer in terms of its size or the price, then the acquirer

cannot reduce the cash amount previously mentioned in the original offer letter.

Where shareholder approval is required for

issuing any securities as consideration, the same should be obtained within 21 days,

failing which the entire consideration will have to be paid in cash.

B) Price Determination

i) When the shares of the Target Company are frequently traded

The minimum offer price should be the highest of the

(a) The negotiated price under the agreement

(b) The highest price paid by the acquirer/person working with the company for

acquisition or can be in a way of allotment in a right/public issue/ a preferential

treatment, if any, during the 26 month prior to the date of public announcement.

(c) The average of the quoted weekly high & low of the closing prices of the shares of

the target company on the stock exchanges where the shares of the target company are

mostly frequently traded during 26 weeks preceding the date of public announcement. or

the average of the daily high and low of the closing 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.

ii) When the shares of the target company are not frequently traded


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The offer price should be determined in consultation with the merchant banker based on

the following factors: -

The negotiated price under the agreement

The highest price paid by the acquirer/person working with the company for

acquisition or can be in a way of allotment in a right/public issue/ preferential

treatment, if any, during the 26 month prior to the date of public announcement..

Other parameters like Return on networth, EPS, P/E multiple Vis - a - Vis industry

average.

(Shares are said to be frequently traded, if on the stock exchange, the annualized trading

turnover in that share during the preceding calendar month prior to the month in which

the public announcement is made, is less than 2% (by number of shares) of listed shares)

iii) Acquisition price under creeping acquisition

1) An acquirer who has made a public offer and seeks to acquire further shares shall not

acquire such shares during the period of 6 months from the date of closure of the public

offer at a price higher than the offer price.

2) This shall not apply where the acquisition is made through the stock

exchanges.

C) Other salient points

1. Where the acquirer has acquired shares in the open market or through negotiation or

otherwise, after the date of public announcement at a price higher than the offer price

stated in the letter of offer, then, the highest price paid for such acquisition shall be

payable for all acceptances received under the offer: Provided that no such acquisition


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shall be made by the acquirer during the last seven working days prior to the closure of

the offer.

2. Any payment made to the persons other than the target company in respect of non

compete agreement in excess of twenty five per cent. of the offer price should be added

to the offer price

3. The letter of offer shall contain justification or the basis on which the price has

been determined.

8. Minimum number of shares

1. The public offer made by the acquirer to the shareholders of the target company shall

be for a minimum twenty per cent of the voting capital of the company.

2. If the public offer results in the public shareholding being reduced to 10% or less of

the voting capital of the company, or if the public offer is in respect of a company which

has public shareholding of less than 10% of the voting capital of the company, the

acquirer shall either,

(a) Make an offer to buy the outstanding shares remaining with the shareholders

in accordance with the Guidelines specified by the Board in respect of Delisting

of Securities; or

(b) Undertake to dis-invest through an offer for sale or by a fresh issue of capital to the

public, which shall open within a period of 6 months from the date of closure of the

public offer, such number of shares so as to satisfy the listing requirements.

3. The letter of offer shall state clearly the option available to the acquirer.


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4. For the purpose of computing the percentage, voting rights as at the expiration of 30

days after the closure of the public offer shall be reckoned.

5. Where the number of shares offered for sale by the shareholders are more than the

shares agreed to be acquired by the person making the offer, such person shall, accept the

offers received from the shareholders on a proportional basis, in consultation with the

merchant banker, taking care to ensure that the basis of acceptance is decided in a fair

and equitable manner and does not result in non-marketable lots.

The acquisition of shares from a shareholder shall not be less than the minimum

marketable lot.

9. Competitive bids

Competitive bids if any should necessarily be submitted within 21 days of the public

announcement of the original offer

The minimum size of the competitive bid should be such that the aggregate holding of

the number of shares offered and the shares already held should be at least equal to

the aggregate holding of the original acquirer.

Upon the announcement of the competitive bid, the original acquirer has the right to

make a revised offer within 14 days from the announcement failing which the original

offer will be considered valid and binding upon the original acquirer. However, the

date of closure of the original offer as well as all the competitive bids will be the date

of closure the last subsisting competitive bid.

Competitive bids are subject to the same regulations and provisions as the original

offer.


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The option of upward revision of the offer is available to the original acquirer as well

as to the competitive bidders at any time up to seven working days prior to the date of

closure of the offer. The acquirer is not allowed to change any other terms and

conditions of the offer except the mode of payment following an upward revision.

The acquirer has to meet the following conditions when making an upward revision in the

offer:

(a) Make a public announcement in respect of such changes or amendments in all the

newspapers in which the original public announcement was made;

(b) Simultaneously with the issue of public announcement referred in clause (a),

informing the Board, all the stock exchanges on which the shares of the company are

listed, and the target company at its registered office;

(c) Increase the value of the escrow account

10. Withdrawal of Offer

No Public Offer, once made, can be withdrawn except for the following circumstances

1. The statutory approval(s) required are refused

2. The sole acquirer, being a natural person, has died

3. Such circumstances as in the opinion of SEBI merits withdrawal

In the event of withdrawal, the acquirer or the Merchant Banker shall

(a) Make a public announcement in the same newspapers in which the public

announcement of offer was published, indicating reasons for withdrawal of the offer.

(b) Simultaneously with the issue of such public announcement, inform:

(i) the Board;


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(ii) All the stock exchanges on which the shares of the company are listed; and

(iii) The target company at its registered office.

11. Provision of Escrow

1) The acquirer shall as and by way of security for performance of his obligations under

the Regulations, deposit in an escrow account such sum as specified:

(a) Deposit at least 25% of the total consideration payable in public offer upto and

including Rs. 100 crores and 10% of the consideration in excess of Rs. 100 crores

(b) For offers which are subject to a minimum level of acceptance, and the acquirer

does not want to acquire a minimum of 20%, then 50% of the consideration payable

under the public offer in cash shall be deposited in the escrow amount.

2) The total consideration payable under the public offer shall be calculated assuming

full acceptances and at the highest price if the offer is subject to differential pricing,

irrespective of whether the consideration for the offer is payable in cash or otherwise.

3) The escrow amount should consist of

(a) cash deposited with a scheduled commercial bank ; or

(b) bank guarantee in favour of the merchant banker; or

(c) deposit of acceptable securities with appropriate margin, with the merchant

banker; or

(d) cash, deposited with a bank in case of offers that are subject to minimum level of

acceptance and the acquirer does not want to acquire a minimum of 20% .

4) Where the escrow account consists of deposit with a scheduled commercial bank, the

acquirer shall, while opening the account, empower the merchant banker appointed for


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the offer to instruct the bank to issue a banker's cheque or demand draft for the amount

lying to the credit of the escrow account.

5) Where the escrow account consists of bank guarantee, such bank guarantee shall be in

favour of the merchant banker and shall be valid at least for a period commencing from

the date of public announcement until 30 days after the closure of the offer.

6) The acquirer shall, in case the escrow account consists of securities empower the

merchant banker to realize the value of such escrow account by sale or otherwise

provided that if there is any deficit on realization of the value of the securities, the

merchant banker shall be liable to make good any such deficit.

7) In case the escrow account consists of bank guarantee or approved securities, these

shall not be returned by the merchant banker till after completion of all obligations under

the Regulations.

8) In case there is any upward revision of offer, consequent upon a competitive bid or

otherwise, the value of the escrow account shall be increased to equal at least 10% of the

consideration payable upon such revision.

9) Where the escrow account consist of bank guarantee or deposit of approved securities,

the acquirer shall also deposit with the bank a sum of at least 1% of the total

consideration payable, as and by way of security for fulfillment of the obligations by the

acquirers.

10) The Board shall in case of non-fulfillment of obligations by the acquirer forfeit the

escrow account either in full or in part. In case of failure by the acquirer to obtain

shareholders' approval for issue of securities as consideration within 21 days from the

date of closure of offer.


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11) The escrow account deposited with the bank in cash shall be released only in the

following manner, -

(a) the entire amount to the acquirer upon withdrawal of offer upon certification by the

merchant banker;

(b) for transfer to the special account provided the amount so transferred shall not exceed

90% of the cash deposit made under escrow account.(25% of the total consideration

payable in public offer upto and including Rs. 100 crores and 10% of the consideration in

excess of Rs. 100 crores)

(c) to the acquirer, the balance of 10 per cent of the cash deposit made on completion of

all obligations under the Regulations, and upon certification by the merchant banker;

(d) the entire amount to the acquirer upon completion of all obligations, upon

certification by the merchant banker, where the offer is for exchange of shares or other

secured instruments;

(e) the entire amount to the merchant banker, in the event of forfeiture for non-fulfillment

of any of the obligations under the Regulations, for distribution among the target

company, the regional stock exchange and to the shareholders who had accepted the offer

in the following manner, after deduction of expenses, if any, of the merchant banker and

the registrars to the offer, -

(i) one third of the amount to the target company;

(ii) one third of the amount to the regional stock exchange for credit of the investor

protection fund or any other similar fund for investor education, research, grievance

redressal and similar such purposes as may be specified by the Board from time to time;


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(iii) residual one third to be distributed pro-rata among the shareholders who have

accepted the offer.

12) In the event of non-fulfillment of obligations by the acquirer, the merchant banker

shall ensure realization of escrow amount by way of foreclosure of deposit, invocation of

bank guarantee or sale of securities and credit proceeds thereof to the regional stock

exchange of the target company, for the credit of the Investor Protection Fund or any

other similar fund.

12. Payment of consideration

1. For the amount of consideration payable in cash, the acquirer shall, within a period of

21 days from the date of closure of the offer, open a special account with a Bankers to an

Issue registered with the Board and deposit therein, such sum as would, together with

90% of the amount lying in the escrow account, if any, make up the entire sum due and

payable to the shareholders as consideration for acceptances received and accepted in

terms of these Regulations and for this purpose, transfer the funds from the escrow

account.

2. The unclaimed balance lying to the credit of the account referred in sub-regulation (1)

at the end of 3 years from the date of deposit thereof shall be transferred to the investor

protection fund of the regional stock exchange of the target company


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Chapter 3

Accounting For Mergers & Acquisitions

3.1 Introduction

The Accounting standard 14 of the Institute of Chartered Accountants of India deals with

the Financial Accounting of Mergers as defined within the scope of definition of

Amalgamations and the treatment of any resultant goodwill or reserves. This statement is

directed principally to companies although some of its requirements also apply to

financial statements of other enterprises.

This statement does not deal with cases of acquisitions. The distinguishing feature of

acquisitions is that the acquired company is not dissolved and its separate entity

continues to exist.

3.2 Definitions

The following terms are used in this statement with the meanings specified:

1. Transferor company means the company which is amalgamated into another

company.

2. Transferee company means the company into which a transferor company is

amalgamated.

3. Reserve means the portion of earnings, receipts or other surplus of an enterprise

(whether capital or revenue) appropriated by the management for a general or a specific


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purpose other than a provision for depreciation or diminution in the value of assets or for

a known liability.

4. a) Amalgamation in the nature of mergeris an amalgamation which satisfies all the

following conditions.

(i) All the assets and liabilities of the transferor company become, after amalgamation,

the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the

transferor company (other than the equity shares already held therein, immediately before

the amalgamation, by the transferee company or its subsidiaries or their nominees)

become equity shareholders of the transferee company by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholders of

the transferor company who agree to become equity shareholders of the transferee

company is discharged by the transferee company wholly by the issue of equity shares in

the transferee company, except that cash may be paid in respect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after the

amalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets and liabilities of

the transferor company when they are incorporated in the financial statements of the

transferee company except to ensure uniformity of accounting policies.

4 b) Amalgamation in the nature of purchase is an amalgamation which does not satisfy

any one or more of the conditions specified in sub-paragraph (e) above.


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5. Consideration for the amalgamation means the aggregate of the shares and other

securities issued and the payment made in the form of cash or other assets by the

transferee company to the shareholders of the transferor company.

6 Fair Value is the amount for which an asset could be exchanged between a

knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length

transaction.

3.3 Methods of Accounting for Amalgamations

There are two main methods of accounting for amalgamations:

1. The pooling of interests method

2. The purchase method.

1. The Pooling of Interests Method

Pooling of interestsis a method of accounting for amalgamations the object of which is to

account for the amalgamation as if the separate businesses of the amalgamating

companies were intended to be continued by the transferee company. Accordingly, only

minimal changes are made in aggregating the individual financial statements of the

amalgamating companies.

Under the pooling of interests method, the assets, liabilities and reserves of the transferor

company are recorded by the transferee company at their existing carrying amounts.

Incase of any conflicts in the Accounting Policies followed by the two companies, a

uniform Accounting Policy should be adopted for the merged entity. The effects on the

financial statements of any changes in accounting policies are reported in accordance


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with Accounting Standard (AS) 5, 'Prior Period and Extraordinary Items and Changes in

Accounting Policies'.

The use of the pooling of interests method is confined to circumstances which meet the

criteria for an amalgamation in the nature of merger as explained previously.

2. The Purchase Method

Under the purchase method, the transferee company accounts for the amalgamation either

by incorporating the assets and liabilities at their existing carrying amounts or by

allocating the consideration to individual identifiable assets and liabilities of the

transferor company on the basis of their fair values at the date of amalgamation. The

identifiable assets and liabilities may include assets and liabilities not recorded in the

financial statements of the transferor company.

Where assets and liabilities are restated on the basis of their fair values, the determination

of fair values may be influenced by the intentions of the transferee company. For

example, the transferee company may have a specialised use for an asset, which is not

available to other potential buyers. The transferee company may intend to effect changes

in the activities of the transferor company which necessitate the creation of specific

provisions for the expected costs, e.g. planned employee termination and plant relocation

costs.

3.4 Treatment of Reserves on Amalgamation

1. In case of Amalgamation in the nature of merger

If the amalgamation as an amalgamation in the nature of in merger, the identity of the

reserves is preserved and they appear in the financial statements of the transferee


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company in the same form in which they appeared in the financial statements of the

transferor company.

Thus, for example, the General Reserve of the transferor company becomes the General

Reserve of the transferee company, the Capital Reserve of the transferor company

becomes the Capital Reserve of the transferee company and the Revaluation Reserve of

the transferor company becomes the Revaluation Reserve of the transferee company. As

a result of preserving the identity, reserves which are available for distribution as

dividend before the amalgamation would also be available for distribution as dividend

after the amalgamation. The difference between the amount recorded as total

consideration, (share capital issued plus any additional consideration in the form of cash

or other assets) and the amount of share capital of the transferor company is adjusted in

reserves in the financial statements of the transferee company.

2. In case of Amalgamation in the nature of Purchase

If the amalgamation is an 'amalgamation in the nature of purchase', the identity of the

reserves, other than the statutory reserves such as Development Allowance Reserve,

Investment Allowance Reserve etc. is not preserved. Basically such reserves are created

by companies in pursuant to the requirements of the Income Tax Act, 1961. The Act

requires that the identity of these reserves should be preserved for a specified period.

These statutory reserves are recorded in the financial statements of the transferee

company by a corresponding debit to a suitable account head (e.g., 'Amalgamation

Adjustment Account') which is disclosed as a part of 'miscellaneous expenditure' or other

similar category in the balance sheet. When the identity of the statutory reserves is no


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longer required to be maintained, both the reserves and the aforesaid account are

reversed.

The amount of the consideration is deducted from the value of the net assets of the

transferor company acquired by the transferee company. If the result of the computation

is negative, i.e. if the consideration exceeds the value of the net assets of the transferor

company, the difference is debited to goodwill arising on amalgamation. If the result of

the computation is positive, the difference is credited to Capital Reserve.

3.5 Treatment of Goodwill Arising on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of future

income and it is appropriate to treat it as an asset to be amortised to income on a

systematic basis over its useful life. Due to the nature of goodwill, it is frequently

difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore,

made on a prudent basis. Accordingly, it is considered appropriate to amortise goodwill

over a period not exceeding five years unless a somewhat longer period can be justified.

Factors which may be considered in estimating the useful life of goodwill arising on

amalgamation include:

The foreseeable life of the business or industry;

The effects of product obsolescence, changes in demand and other economic factors;

The service life expectancies of key individuals or groups of employees;

Expected actions by competitors or potential competitors; and


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Legal, regulatory or contractual provisions affecting the useful life.

3.6 Balance of Profit and Loss Account

In the case of an 'amalgamation in the nature of merger', the balance of the Profit and

Loss Account appearing in the financial statements of the transferor company is

aggregated with the corresponding balance appearing in the financial statements of the

transferee company. Alternatively, it is transferred to the General Reserve, if any.

In the case of an 'amalgamation in the nature of purchase', the balance of the Profit and

Loss Account appearing in the financial statements of the transferor company, whether

debit or credit, loses its identity.

3.7 Treatment of Reserves Specified in a Scheme of Amalgamation

The scheme of amalgamation sanctioned under the provisions of the Companies Act,

1956 or any other statute may prescribe the treatment to be given to the reserves of the

transferor company after its amalgamation. Where the treatment is so prescribed, the

same is followed.

3.8 Disclosures

For all amalgamations, the following disclosures are recommended in the first financial

statements following the amalgamation:

(a) Names and general nature of business of the amalgamating companies.

(b) Effective date of amalgamation for accounting purposes.

(c) The method of accounting used to reflect the amalgamation.

(d) Particulars of the scheme sanctioned under a statute.


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For amalgamations accounted for under the pooling of interests method, the following

additional disclosures are recommended in the first financial statements following the

amalgamation:

(a) Description and number of shares issued, together with the percentage of each

company's equity shares exchanged to effect the amalgamation;

(b) The amount of any difference between the consideration and the value of net

identifiable assets acquired, and the treatment thereof.

For amalgamations accounted for under the purchase method, the following additional

disclosures are recommended in the first financial statements following the

amalgamation:

(a) Consideration for the amalgamation and a description of the consideration paid or

contingently payable.

(b) The amount of any difference between the consideration and the value of net

identifiable assets acquired, and the treatment thereof including the period of amortisation

of any goodwill arising on amalgamation.

3.9 Amalgamation after the Balance Sheet Date

When an amalgamation is effected after the balance sheet date but before the issuance of

the financial statements of either party to the amalgamation, disclosure is made in

accordance with AS 4, 'Contingencies and Events Occurring after the Balance Sheet

Date', but the amalgamation is not incorporated in the financial statements. In certain

circumstances, the amalgamation may also provide additional information affecting the


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financial statements themselves, for instance, by allowing the going concern assumption

to be maintained.


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Chapter 4

The Indian Cement Sector

4.1 Background of the Indian Cement Industry

The Indian cement industry with an installed capacity of 150 million tones per annum and

production of 120 million tones per annum is the second largest in the world after China.

The sector has an average capacity utilization of 82 %. China has a total production of

700 million tones per annum. While China accounts for 1/6 th of the total world cement

production, Indias share is about 6 %. India has moved from the 4 th place in 1996 to the

2nd position. This is despite the fact that Indias per capita consumption of cement is only

around 108-110 kg compared to Chinas 300 kg and world average of approximately 280

kg. This only goes on to show the future potential of this sector.

The cement industry with a total turnover of about Rs. 25,000 crore contributes nearly 1

percent of Indias GDP in

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