Deciphering the M&A Jurisprudence

Introduction

In simple words, mergers mean, when two or more companies merge to become a single entity, whereas acquisitions mean when one company acquires another company and then the acquired company becomes a subsidiary of this. The Companies Act of 2013 defines the term “merger” as the unification of two or more entities into a single entity. The objective is not merely to amass the assets and liabilities of the separate entities, but to reorganize them into a single, cohesive business structure. 

Mergers and Acquisitions (M&A) involve a series of financial transactions to take place along with several approvals from several regulatory bodies. This process involves due diligence to make sure every transaction taking place is being conducted within the legal framework. 

The rules and regulations which oversee M&A in India are mainly The Companies Act of 2013 and the Competition Act of 2002, however also include other guidelines issued by SEBI. However, the list is not exhaustive in nature thereby also including laws pertaining to Contracts and Foreign Merger and Acquisitions.

Legal Framework of M&A in India 

All the mergers and acquisitions are primarily possible due to the role of the Companies Act of 2013. This act ensures provisions ranging from fast-track mergers and cross-border mergers, to minority shareholders’ protection, and mandatory disclosures thereby ensuring that there is proper governance and transparency in the process. 

Unlike the 1956 Act, which required court approval for all mergers, the 2013 Act allows mergers between two or more small companies, or between a holding company and its wholly-owned subsidiary, without court approval. However, a notice must be issued to the Registrar of Companies (ROC) and the official liquidator, and any objections or suggestions must be presented to the members.

 Different Types of Mergers and Acquisitions

There are various types of M&A such as Horizontal mergers, Vertical mergers, Conglomerate mergers, and Cross-Border mergers. Fast Track Mergers, as outlined in Section 233 of the Companies Act, 2013, have streamlined the merger process in India. The 2013 Act facilitates fast-track mergers, subject to approvals from members holding ninety per cent of the total number of shares and a majority representing 9/10th in value of creditors. The provision of fast-track mergers accelerates the merger process, reduces time spent in court proceedings, and eliminates bureaucratic hurdles. 

However, there are multiple issues currently present including the lack of specific provisions pertaining to valuation by the registered valuer and also ambiguity about who is considered affected by the scheme for giving notice, the impact of any objections, and whether a merger between a small company in India and a small company in a foreign jurisdiction can avail the exemption. These issues highlight the need for further clarity in the legislation to ensure the smooth execution of fast-track mergers.

Section 234 of the Companies Act of 2013, provides the legal framework for cross-border mergers, along with facilitating global business expansion for Indian companies. This section defines the term ‘Foreign company’ as any company or body corporate incorporated outside India, regardless of whether it has a place of business in India. The Central government can make rules in consultation with the RBI for rules under this section.

CarTrade Technologies – An example of recent M&A transaction

Gearing up to compete with companies like Spinny, Cars24, CarDekho and Droom, CarTrade Technologies decided to leverage M&A to diversify its offerings and strengthen its position in the market thereby acquiring 100% stake in Sobek Auto India Private Limited, the consumer to business section of OLX India BV, for nearly six hundred crores. Highlighting the financial gain enjoyed by the organisation, Vinay Sanghi, the founder and chairperson of the group, disclosed how CarTrade Technologies was gearing to invest up to 7500 million INR on acquisitions in the coming five to seven years, while referring to the acquisition of OLX leading to increased volume and traffic on the platform.

CarTrade Technologies has embarked on its journey as an important player through three important acquisitions excluding the one in 2023, which further included the acquisition of Carwale in 2015, Adroit Technical Services in 2017 and SAMIL in 2018. However, what accompanies such acquisitions are various legal considerations and regulations, including due compliance to Companies Act 2013, and other relevant laws and regulations around Mergers and Acquisitions.

The laws around Mergers and Acquisitions are governed through a plethora of regulations including the Companies Act 2013, The SEBI Act 1992, The Contract Act 1872, The Competition Act 2002 which was recently amended in 2023 thereby enhancing competition enforcement, and lastly the Foreign Exchange Management Act 1999 including the Foreign Exchange Management Regulations, 2018 which deals with cross merger and acquisitions between foreign companies and Indian companies. Acquisitions can help the company expand into new sectors and areas, thereby strengthening itself and its market position by being up-to-date with consumer behaviour which ensures it has a better competitive edge over its peers.

Conclusion

Corporates using M&A to fast-track their expansion strategies exemplify the potential of the combination of different legislations, most importantly the Companies Act 2013, to facilitate business growth and expansion while also underscoring the importance of careful legal and financial planning in the execution of such strategies. While embarking on the journey to navigate the complexities of the M&A landscape, the application of existing regulations and policies to recent examples of acquisitions offers valuable insights for other companies looking to grow and expand through M&A. The tightening regulatory environments makes it further important for corporates envisaging to expand to duly comply with policies ranging from taxation to market listing and delisting, thereby traversing through the plethora of legal procedures that govern the exciting landscape of Mergers and Acquisitions in India.