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Chapter -1

Chapter -1


1.1. Statement of Problem

This research work is basically focused to examine the Merger and Amalgamation
of Companies in India. Nowadays Merger and Amalgamation have become a common
phenomenon and it can be considered as an important mechanism of corporate growth.
The formation of WTO which has an impact on the national laws of all the developing
countries and also has effected the provisions relating to Merger and Amalgamation and
the Companies Act, 1956 in India. India has, in the pursuit of globalization, responded to
opening up its economy, removing controls and resorting to liberalization. As a natural
consequence of this the Indian market has to be geared to face competition from within
the country and outside. Various laws have been amended and repealed including the
Monopolies and Restrictive Trade Practices Act, 1969 which has became obsolete in the
light of international economic developments relating more particularly to competition
laws and there was a need to shift the focus from curbing monopolies to promoting
competition. After India became signatory to the WTO the number of Mergers and
Amalgamations have increased in India as different size companies with same or
different line of business started to amalgamate among themselves and the small size
companies have a compulsion to amalgamate with the bigger companies because they
were scared of the competition to be faced from their foreign counterparts. Number of
other factors like framing of Corporate law, competition law, protection of rights of the
share holders and employees during Amalgamation were creating various complications
in the field of Merger and Amalgamation. As such it has became imperative to examine
this problem on Merger and Amalgamation of Companies in India under the WTO
regime in the present context. The Tenth Lok Sabha came into existence under the grim
economic condition of the country coupled with the minority government. Inspite of these
constraints, the Tenth Lok Sabha completed its full tenure and adopted a new path of
development based on economic liberalization and thus, shifted its tilt from
nationalization to privatization.1

India is growing big and with it our markets are also growing big as a result of
which many companies are trying hard to get control over Indian market by purchasing
new companies or by merging with emerging companies.

According to Oxford Dictionary2 Merger means “Combining, especially of two

commercial companies into one”. In other words Merger is a combination of two
companies wherein one loses its corporate existence. The surviving company, which is
also called the amalgamated company acquires both the assets and liabilities of the
merged company, which is also called the amalgamating company. A Merger may be
distinguished from a consolidation, which is a combination of two companies whereby an
entirely new company is formed. Both the old companies cease to exist and shares of
their common stock are exchanged for shares in the new company. When two
companies of approximately the same size combine the term consolidation applies and
when two companies differ significantly in size then merger is the more appropriate
term.3 Now it is important to note that in practice the terms ‘merger1 and ‘consolidation’
tend to be used interchangeably to describe the combination of two companies. Mergers
are called amalgamation in legal parlance. The word ‘Amalgamation’ or ‘Merger* is not
defined anywhere in the Companies Act, 1956. However, it is defined under the Income-
Tax Act, 1961.4 But the definition of ‘amalgamation’ in the Income-Tax Act 1961 is for

1 Matilal, A.N. (Dr.); Perspective and Performance of Lok Sabha in India; Kuppa Publications;
Varanasi; 2002; p.2.

2 Elliott Julia & Others; Oxford Dictionary & Thesaurus, Oxford University Press 2009 at p. 469.
According to Black’s Law Dictionary “Merger means the fusion or absorption of one company by
another, the dtter retaining Its own name and identity and acquiring assets, liabilities, franchises and
powers of former, and the absorbed company ceasing to exist as a separate entity. It differs from a
consolidation wherein all the corporations terminate their existence and become parties to a new

3 See generally, Shinde S.R.; “Takeovers and Mergers - As Means of Industrial Restructuring”; in
Mergers And Acquisition of Companies-, P. Mohana Rao (Ed.); Deep & Deep Publications Pvt. Ltd.,
New Delhi; 2D04: p.150.

4 S.2(1 B) of the Income Tax Act, 1961 defines "amalgamation’ as follows : “Amalgamation in relation to
companies, means the merger of one or more companies with another company or the merger of two
or more comoanies to form one company (the company or companies which so merge being referred

the purposes of that enactment only. It is limited in scope and may not be lifted and read
in the companies Act, 1956.5 Thus, an amalgamation is an organic unification or
amalgam of two or more legal entities or undertakings or a fusion of one with the other.
There is no bar to more than two companies being amalgamated under one scheme.6

There are generally three common ways in which companies can amalgamate for
gaining advantage in the market like (1) Horizontal (2) Vertical and (3) Conglomerate.

(1) Horizontal

It is an amalgamation which takes place between two companies in the same line
of business and which increases companies share in the market.

(2) Vertical

It is an amalgamation which takes place when a company amalgamates with a

supplier. Both strengthen the amalgamated Company’s competitive position in the

to as amalgamating company or companies and the company with which they merge or which Is
formed as result of the merger, as the amalgamated company), in such a manner that -

(I) all the property of the amalgamating company or companies immediately before the amalgamation
becomes the property of the amalgamated company by virtue of the amalgamation;

(ii) all the liabilities of the amalgamating company or companies Immediately before the amalgamation
becomes the liabilities of the amalgamated company by virtue of the amalgamation;

(iii) shareholders holding not less than three-fourth in value of the shares in the amalgamating company
or companies (other than shares already held there in Immediately before the amalgamation by or by
a nominee for, the amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of
the property of one company by another company pursuant to the purchase of such property by the
other company or as a result of the dlstrfoution of such property to the other company after the
winding up of the first mentioned company. Thus, for a merger to qualify as an 'amalgamation’ for the
purpose of the Income Tax Act, the above three conditions have to be satisfied. This definition is
relevant Inter alia for sections 35(5), 35A(6), 35E(7), 41(4) Explanation 2, 43(1) Explanation 7, 43(6)
Explanation 2, 43C, 47(vi) & (vii), 49(1) (iil)(e), 49(2), 72A of Income Tax Act. Transfer of assets to
the transferee company pursuant to a scheme of amalgamation Is not a ‘transfer’ and does not attract
capital gains tax under section 47(vi)., Likewise, shares allotted to shareholders of the transferor
company is not a transfer attracting capital gains tax under section 47 (vii).

5 Companies Act 1956, S. 394(4)(b).

6 Re. Patrakar Prakashan Pvt. Ltd± (1997) 33 SCL13 (MP).

(3) Conglomerate

It is an amalgamation which takes place when the amalgamating companies are

in totally unrelated lines of business. The main purpose of conglomeration is
diversification of risks.

Amalgamation is based on the concept of synergy.7 It is a relationship in “2+2=5

effect,” where the whole is greater than the sum of the parts. Synergetic benefits can
arise, where two companies can achieve more in combination than in their individual
parts.8 The value of the amalgamated company is expected to be greater than the sum
of the independent values of the amalgamating companies because of cost saving and

Reasonable motive for amalgamation is to provide economic gains in the form of

increased economies.9 The main motives for amalgamation are firstly, the amalgamated
company can have operative cost advantage, in effect, lower average cost of production.
Secondly, financial economies can be in the form of higher debt capacity, lower rates of
borrowing and less flotation of shares and debentures, etc. Thirdly, it can be used as a
mode of inorganic growth. Fourthly, in an amalgamation, risk of the company can be
lowered by diversifying into two or more industries. Diversification is a situation in which
a company takes new lines of business to reduce the degree of risk and finally
effectiveness is the degree of attainment of a predetermined goal so management
effectiveness can be availed of through superior management talent or research

Merger and Amalgamation have played an important role in the transformation of

the industrial sector of India since the Second World War. The economic and political

7 The word ‘Synergy’ has its origin from the Greek word ‘Sunergos’yih\ch means "Working together’.

8 The concept of synergy can be explained symbolically as follows : V(AB)> V(A) + V(B) where, V(AB)
is the value of the amalgamated company AB, V(A) is the independent value of the amalgamating
company A before amalgamation, and V(B) is the independent value of the amalgamating company B
before amalgamation.

9 Mukherjee Amitabh and Hanif Md.; Corporate Accounting; Tata MC Graw-Hlll publishing company
Ltd., New Delhi; 2006 P. 9.2.

conditions during the Second World War and post war periods including several years
after independence gave rise to a spate of Merger and Amalgamations.

A new merger wave across India's corporate scenario tends to show that
companies want to avoid stiff and unequal competition. In fact, different sized firms in
the same industry having survived together suggest that economies of scale are
relatively unimportant over a wider range of industries and mergers are taking place
because economies of scale are increasingly difficult without them. That is why merger
movement has gathered a new momentum. Of late new businesses are reshaping
India’s largest industries, with consequences for all. It is likely to affect not only business
strategies and job prospects but also the prices of daily necessities as competitors
become fewer and more powerful. It is apprehended that shareholders are going to be
the big losers in as much as sick companies are finding merger a good panacea.

Several major merger movements have occurred in the United States and each
was more or less dominated by a particular type of merger. All of the merger movements
occurred when the economy experienced sustained high rates of growth and conceded
well particular development in business environments. The growth of International trade
firmly buttressed by the international institution of long standing, has further been
accelerated with the establishment of WTO creating a commercial environment more
conducive to multilateral exchange of goods and services.

The WTO is the only international body dealing with the rules of trade between
nations. The WTO began its life on 1st January 1995, but its trading systems is half a
century older. Since 1948, the General Agreement on Tariffs and Trade (GATT) had
provided the rules for the system. At its heart are the WTO agreements negotiated and
signed by the bulk of the worlds trading nations. These documents provide the legal
ground rules for international commerce. They are essentially contracts binding
governments to keep their trade policies within agreed limits.

Although negotiated and signed by governments the goal is to help producer of

goods and services, exporters and importers conduct their business and its purpose is to
help flow of trade as freely as possible so long as there are no undesirable side effects

whereas GATT had mainly dealt with trade in goods the WTO and its agreements now
cover trade in services and in trade inventions, creations and designs.

India becoming signatory to the WTO has an effect on all the sectors of the Indian
economy as well as the corporate sector. Therefore the present study has highlighted
the impact of WTO on amalgamation and merger of companies in India with reference to
socio-legal perspective.

1.2. Review of Literature

While a number of commendable works dealing with the Corporate Mergers and
Amalgamation in general are available but no serious attempt appears to have been
made to conduct an inquiry to study the Corporate Merger and Amalgamation under
WTO regime and its impact on developing country like India.

A book edited by Mr. P. Mohana Rao, on Mergers and Acquisitions of Companies

contains articles on mergers and amalgamations but none of them has touched this

Most of the books on Company Law like Ramaiya’s Guide to the Companies Act,
Johari’s Commentaries on Companies Act, Sanjiv Agarwal and others Commentary on
the Companies Act have covered the issues relating to the statutory framework and
judicial pronouncement of various High Courts and Supreme Court on merger and
amalgamation. The works of Sridharan and Pandian and Ramanujam have not touched
on this specific issue. Prof. R.N. Kar in his book Corporate Mergers and Acquisition has
focused on international experiences and has mainly emphasized on Indian Context,
and has not examined the issue of merger and amalgamation under WTO. Bharat’s
Corporate Mergers Amalgamations and Takeover has covered a number of aspects
relating to merger and amalgamation but has not covered this issue. Some of the books
on competition laws like T. Ramappa on Competition Law, D.P. Mittal on Competition
Law and Universal’s guide to Competition Law have only emphasized on effect of
Merger and Amalgamation on Competition but have not touched this issue.

None of the aforementioned works and other works in the area of Mergers and
Amalgamations attempts a comprehensive and in depth study dealing with the impact of
WTO on Merger and Amalgamation in India. The present endeavour tries to make a
comprehensive study of the Amalgamation and Merger of Companies in India under
WTO regime with reference to socio-legal perspective.

1.3. Objective of the study

The broad objective of the research is to explore the impact of WTO on

Amalgamation and Merger of Companies in India, whereas specific objectives of the
research are historical context and evolution of merger and amalgamation, statutory
framework and legal entitlement within the prevailing circumstances, implementation of
Governance, interpretation of the High Courts and Supreme Court in certainty and
predictability of law and implication of merger and employees on shareholders under
social and humanitarian aspects.

The research seeks to meet the above mentioned objectives through a set of
explorative research questions:

(i) To know about the current status of Amalgamation and Merger of Companies in

(ii) To what extent liberalized economic policies have exposed Indian companies to
resort to merger and amalgamation for facing global challenges.

(iii) To find out the effect of Globalization on the existing legislative framework with
respect to legal entitlement in the present societal context.

(iv) To explore the impact of WTO importantly on Amalgamation and Merger of

Companies in India.

(v) To examine the role of Superior Courts as to what extent they are compatible with
the existing legislative framework and if there is any gap found then how it has

been filled up by judicial pronouncement evolving a new Merger and
Amalgamation jurisprudence.

(vi) To find out the role of Governance, its impact on maintaining transparency and
accountability during Merger and Amalgamation of Companies.

(vii) To what extent rights of shareholders and employees are protected during Merger
and Amalgamation of Companies under the liberalized economic regime.

1.4. Hypothesis

Hypothesis in any research study provides direction to research. It generally

directs a researcher to identify the procedures and methods to be followed in solving the
problem. The hypothesis of the present research study is that “Globalization has been a
popular buzzword for more than a decade and under WTO today Amalgamations and
mergers are being increasingly used throughout the world and in India as a strategy for
achieving a larger size asset base, faster growth in market share and for becoming more
competitive through economies of scale”.

1.5. Methodology of the Study

Before the framework of the study is described, it is necessary to state that both
primary and secondary sources of data are taken into account within limited resources
and data on number of companies being merged are collected from Centre for
Monitoring Indian Economy (CMIE) Prowess. The research study is partly empirical and
partly doctrinal.

1.6. Framework of the Study

Keeping in view the objective, hypothesis and methodology of the present study
as delineated above, the work is proposed to be divided into seven more chapters.
Matters to be discussed in these chapters are briefly enumerated below.

Chapter-2 Merger and Amalgamation of Companies In India : A historical

This chapter will be divided into three parts. Part one will discuss about Evolution
of Company Law in English perspective whereby emphasis will be given on sources of
English Mercantile law, Growth of Company Law under Royal Charter and Bubble Act,
Rise of Joint stock company and Mergers under the English Companies Act. Part two
will discuss about Evolution of Company law in Indian perspective whereby it will
emphasize on relation between Indian Companies Act and English Corhpanies Act
during colonisation, Prevailing Socio, Economic and Political Conditions, Promulgation
of the Companies Act, 1956 and various reforms made in Industrial Policy after
independence. Part three will discuss about Amalgamation and Merger of Companies
before and After Independence and its gradual development post 1990s.

Chapter - 3 Legal Aspects of Merger and Amalgamation

This chapter will be divided into four parts. Part one will be devoted to
International Laws governing Merger and Amalgamation emphasizing upon advance
countries like U.K. and U.S.A. Part two will deal with Laws governing Amalgamation and
Merger in Indian Perspective like statutory framework, confirmation required from
various authorities and procedural compliances. Part three will be devoted on
Emergence of Competition Law as a regulator a new dimension in Merger and
Amalgamation and Part four will discuss about the Mergers and Amalgamations under
Companies Bill, 2009.

Chapter - 4 Impact of WTO on Merger and Amalgamation

This chapter will be divided into three parts. Part one will discuss about
Emergence of Globalization and liberalization in Indian Economy whereby globalization
its concept and nature, its effect on Indian economy and importance of liberalization will
be discussed. Part two will discuss about various aspects of GATT and WTO and Part
three of this chapter will examine the effects on the Merger and Amalgamation under
WTO regime.

Chapter - 5 Role of Governance In Merger and Amalgamation

This chapter will be divided into five parts. Part one will discuss about Emergence
of Governance in International and Indian Perspective. Part two will be devoted to the
General overview with respect to importance of Governance in Corporate sector. Part
three will discuss about Corporate Governance and globalization. Part four of this
chapter will stress on changing design of Corporate Governance in Indian perspective.
Part five of this chapter will be devoted on impact of Corporate Governance on Mergers
and Amalgamation emphasizing upon Managerial challenges, Role of auditors and
mechanism for whistle-blowing during Merger and Amalgamation.

Chapter - 6 Judicial Approach to Merger and Amalgamation

This chapter will be divided into three parts. Part one will be devoted to the Role
of Supreme Court on Merger and Amalgamation jurisprudence whereby jurisdiction of
court and valuation of shares will be emphasized. Part two of this chapter will be
devoted to the Role of High Courts on Merger and Amalgamation jurisprudence whereby
various issues like eligibility criteria, role of share capital, convening of meeting, report of
the official liquidator and registrar, piercing of corporate veil, duties of the court,
significance of appointed date or transfer date and effect of amalgamation will be
discussed. Part three of this chapter will make an analysis of High Court versus tribunal.

Chapter - 7 Social and Humanitarian Aspects of Merger and Amalgamation

This chapter will be divided into two parts. Part one will be devoted to important
issues relating to protection of Employees in Amalgamation whereby its effect, role of
human resource development and judicial perception on employees protections under
social and humanitarian perspective will be discussed. Part two will be devoted to
protection of shareholders in Amalgamation and will emphasize upon shareholder’s
activism, minority shareholders rights and judicial response in shareholder's protection.

Chapter -8 Concluding observations and Suggestions

In this chapter necessary suggestions will be made on the basis of the

observations made in the research work.