Keywords: M&A, SEBI, Loopholes
(Kritika Ishwar is a B.B.A. L.LB (Hons.) student at Amity Law School, Noida)
INTRODUCTION
Mergers and Acquisitions (M&A) are consolidations, enhancement, and enlargement of scope of business. The unification of companies’ assets through various forms of financial transactions, including mergers, consolidations, tender offers and other such amalgamations related to purchase of assets and management acquisitions is generally used to brief the term M&A. It can happen organically or inorganically.
Organic growth of business refers to the growth of business in size and scale on its own. This can be done by surviving the existing clients, extending client pace, introducing new products or by getting into newer markets.. Inorganic growth is where M&A comes into the picture. It is assumed that by merging the businesses the cumulative value would be exponentially more than what they have individually. Untapped potential that can be tapped by these M&A activities.[1]
LOOPHOLES IN LAWS GOVERNING MERGERS AND ACQUISITIONS
M&A holds a very important and popular role in business strategy for companies looking to expand into new areas, markets or territories. There are five reasons why M&A has proved beneficial in growth strategies-
- Fills critical gaps in service offerings and or client lists
- Logical way to acquire talent and intellectual property
- Opportunity to leverage synergies
- New business models
- Save time and long learning curves
COMPANIES ACT, 2013 [3]
The Companies Act, 2013 is one of the most important M&A laws as it deals with the various procedural aspects. The 2013 act regulates the process of mergers, acquisitions and restructuring, facilitates domestic and cross border mergers and other such amalgamations.
Specifically sections 230-234 of Companies Act 2013 govern mergers and schemes of arrangements between a company, its shareholders and/or its creditors. It acknowledges a merger/reconstruction of a foreign company into an Indian company.
With all these provisions and regulations for the betterment and growth of this sector there are various issues or challenges that this act still holds.
1. The Act has failed to consider the practical difficulties which will be faced by the non-residents of foreign owned and controlled companies where 50% of the equity is held by a non-resident or where they have the power to appoint a majority of its directors in the company as a result of certain provisions.
2. The power to make exemptions for private companies has been shifted from the legislature to the executive, most commonly in taxation laws, which has led to uncertainty on the applicability of certain provisions in the future.
3. An important provision in the Act is the restriction on a company from making investments through more than two layers of investment companies. There is no guidance on determination of the principal business of a company. In the absence of any statutory clarity pertaining to this, deal structures would need to be looked into carefully to ensure compliance with this restriction.
4. Lack of Proper Structure- There is lack of awareness about various hindrances like quality and frequency of disclosures of financial as well as managerial aspects. There have been many situations of failure like collusion between the companies and their accounting areas, not so effective internal audits, lack of skills as well no compliance with the standards dealt with.
5. Insider trading- The corporate insiders have the ultimate access to the confidential information of the companies. They may misappropriate this information to earn profits. Although various laws have been regulated to deal with such situations but a lot more has to be gained. [4]
2. The power to make exemptions for private companies has been shifted from the legislature to the executive, most commonly in taxation laws, which has led to uncertainty on the applicability of certain provisions in the future.
3. An important provision in the Act is the restriction on a company from making investments through more than two layers of investment companies. There is no guidance on determination of the principal business of a company. In the absence of any statutory clarity pertaining to this, deal structures would need to be looked into carefully to ensure compliance with this restriction.
4. Lack of Proper Structure- There is lack of awareness about various hindrances like quality and frequency of disclosures of financial as well as managerial aspects. There have been many situations of failure like collusion between the companies and their accounting areas, not so effective internal audits, lack of skills as well no compliance with the standards dealt with.
5. Insider trading- The corporate insiders have the ultimate access to the confidential information of the companies. They may misappropriate this information to earn profits. Although various laws have been regulated to deal with such situations but a lot more has to be gained. [4]
SECURITIES AND EXCHANGE BOARD OF INDIA [5]
SEBI (Takeover Code) 2011, SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, SEBI (Prohibition of Insider Trading) Regulations 2015 are the key acts that provide laws and regulations for the stocks of the companies merging.
Insider Trading has been a major issue for SEBI to look after. The Indian Securities market regulator has been criticized since long for its failure to scrutinize the matters of insider trading. The following reasons persists-
1. Lack of full-fledged facility to tap devices - SEBI has insufficient basic investigative powers and tools which is a major reason for prosecution of insider trading cases. Even the power to call for phone records of suspects has been granted very late in the process.
2. Enforcement - SEBI has lacked in utilizing its powers to the fullest. It needs to strengthen its surveillance and enforcement functions. It should ensure that violations should not go unnoticed whether small or large.
2. Enforcement - SEBI has lacked in utilizing its powers to the fullest. It needs to strengthen its surveillance and enforcement functions. It should ensure that violations should not go unnoticed whether small or large.
Some other weaknesses include-
1. The Indian stock market suffers from poor liquidity. The market regulators have lacked the ability to develop a vibrant debt and scrutinize the market but these largely remain part of over the counter market.
2. With time, capital markets are growing and the scale of SEBI operations as compared to security markets is not sufficient to properly regulate the market. Like the US and UK market regulators, SEBI also needs to establish self-regulatory organizations which will lead to them matching up with the global standards.
3. Others- there is lack of professionalism, domination of financial institutions, domination by big operators and also less floating stocks.
2. With time, capital markets are growing and the scale of SEBI operations as compared to security markets is not sufficient to properly regulate the market. Like the US and UK market regulators, SEBI also needs to establish self-regulatory organizations which will lead to them matching up with the global standards.
3. Others- there is lack of professionalism, domination of financial institutions, domination by big operators and also less floating stocks.
CROSS BORDER MERGERS [6]
Cross border mergers and acquisitions have molded the industrial structure at the national level. They are referred to as deals between foreign firms and national firms in the target country. The assets and processes of the firms in different countries are combined to form a new legitimate entity.
Some of the issues faced with respect to cross border mergers are-
1. A lot of mergers have faced failure due to the cultural differences between countries. Due to the geographical scope of the deal there are intercultural disagreements. To manage such issues businesses should be aware of intercultural engenderment and should prepare their workforce for the same.
2. The tax and accounting considerations involve proportion of debt and equity and a clear understanding of such matters becomes significant. Due diligence plays a vital role here. If not regulated efficiently it could influence the deal and could also affect the price of the deal.
3. The not so stagnant laws in an economy may result in regulatory issues in the landscape of target sectors.
2. The tax and accounting considerations involve proportion of debt and equity and a clear understanding of such matters becomes significant. Due diligence plays a vital role here. If not regulated efficiently it could influence the deal and could also affect the price of the deal.
3. The not so stagnant laws in an economy may result in regulatory issues in the landscape of target sectors.
THE COMPETITION ACT, 2002 [7]
The Competition Act regulates M&A activities across the globe, focusing on promoting and maintaining competition as well as consumer welfare. The main concerns of this act are-
- Prevention of concentration of economic power
- Control of monopolies
- Forbidding monopolistic, restrictive and unfair trade practices
THE WAY FORWARD FOR M&A LAWS
A region’s legal and political environment is vital for multinational business enterprises when preparing various investment proposals pertaining to developing markets as a host. Indian Institutional laws, governance and its mechanism are weak compared to advanced countries like Brazil.
- It is worth mentioning that there should be reasonable congruence in the legal structures and fiscal policies. In fact, there is a need for a cross-border cash-flow tax regime for both national and global welfare maximization. In addition, an advice to both economic policy makers and regulatory authorities that a tax credit should be allowed in foreign transactions. It will let MNC’s to make more investment in prospective industries.
- Better economic governance, laws and procedures, effective bankruptcy laws, showing a strong commitment in the process of financial markets deregulation, enhancing participation in overseas investments in terms of trade, inflows and outflows of FDI and mergers and acquisitions.
- There must be second-phase economic and financial reforms towards internationalization and to strengthen the economy and financial system. Therefore foreign investment limits, equity laws, investment banking for mergers and such key reforms should be focused fairly.
- MNCs participating in an overseas acquisition should have access to better information relating to the host country’s business environment, local political party influence, economic and financial policies and performance.
- To overcome difficulties faced by small scale industries, the government may allow a certain percentage (%) of FDI through acquisition in order to enhance the performance of the country. A legal guideline or framework should benefit business in terms of employment, social security which will lead to growth of the economy. [8]
Mergers, acquisitions or any form of unifications are crucial for any developing country. It leads to various advantages like diversification of business, increased synergy, accelerated growth, tax benefit, improved profitability and other such aspects. They accelerate growth by enabling foreign collaboration through cross border mergers and enable companies to withstand global competition.
With such prospective benefits, they need ultimate regulation as they may lead to monopoly or create barriers to entry and similar anti-competitive practices. The efforts that have been made to make these provisions efficient have led to an appreciable state but has scope for a lot more in terms of its regulation. The legislations and regulations together hold the merger control regime and day by day efforts are being put in to make it successful.
[1] https://shodhganga.inflibnet.ac.in/bitstream/10603/103368/12/12_chapter-iv.pdf
[2] http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html
[3] https://www2.deloitte.com/be/en/pages/mergers-and-acquisitions/articles/growth-through-merger-and-acquisitions.html#
[4] http://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html
[5] https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-second-amendment-regulations-2018_40332.html
[6] https://www.lawctopus.com/academike/foreign-exchange-management-act-1999/
[7] http://www.cuts-international.org/pdf/challenges.pdf
[8] https://corporate.cyrilamarchandblogs.com/category/mergers-acquisitions/
[2] http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html
[3] https://www2.deloitte.com/be/en/pages/mergers-and-acquisitions/articles/growth-through-merger-and-acquisitions.html#
[4] http://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html
[5] https://www.sebi.gov.in/legal/regulations/sep-2018/securities-and-exchange-board-of-india-substantial-acquisition-of-shares-and-takeovers-second-amendment-regulations-2018_40332.html
[6] https://www.lawctopus.com/academike/foreign-exchange-management-act-1999/
[7] http://www.cuts-international.org/pdf/challenges.pdf
[8] https://corporate.cyrilamarchandblogs.com/category/mergers-acquisitions/
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