Merger

Two companies decide that they are worth more together than apart. Instead of one simply buying the other's shares in the market, they combine into one entity, and at least one of them stops existing as a separate company. That is a merger.

The workbook calls it the "broader term". If one company absorbs the other, the absorbed company loses its identity. If both lose their identity, a new company is formed: the old companies' shares are surrendered and shares of the new company are issued in their place.

It is usually spoken of in one breath with acquisition and takeover, and the three are often used loosely. The distinction the workbook draws is about consent and control. A merger is a mutual decision of two companies. An acquisition or takeover is a purchase that does not have to be mutual — a larger company can make a hostile bid in the face of resistance from the target's management.

Merger, acquisition, takeover, consolidation (Chapter 7).

What the merchant banker does in a merger — five functions, handled by one or more merchant bankers: (i) preparing and circulating information memoranda; (ii) deal structuring and negotiations; (iii) valuation and due diligence; (iv) a fairness opinion on the valuation of assets or shares; and (v) a certificate on disclosure of any unlisted company involved in the scheme, in the abridged prospectus. Mergers also involve statutory compliances, an application to the Court/Tribunal, and liaison with accountants, lawyers and company secretaries.

The law. Mergers, amalgamations, de-mergers and acquisitions of business units are governed by the Companies Act, 2013. Acquisitions of shares or control in listed companies are governed by the SEBI (SAST) Regulations, 2011. The workbook's full list of governing laws and regulators runs to seven: the Companies Act 2013, SAST 2011, FEMA 1999, the RBI and RBI Act 1934, the Income Tax Act 1961, the Competition Act 2002, and SEBI's Master Circular of November 23, 2021.

When a merger does not trigger an open offer. SAST exempts an acquisition under a scheme of arrangement involving the target company as transferor or transferee (including amalgamation, merger or demerger) under an order of a court, tribunal or competent authority. Where the scheme does not directly involve the target company, the exemption holds only if (A) cash and cash equivalents are less than 25% of the consideration paid under the scheme and (B) after the scheme, persons holding at least 33% of the voting rights in the combined entity are the same persons who held the entire voting rights before it.

Illustrative figures. Sahyadri Holdings Pvt Ltd owns 45% of Konkan Cables Ltd, a listed company. Sahyadri is merged into Deccan Industries Ltd under an NCLT-sanctioned scheme. Konkan is not a party to the scheme — but after it, Deccan indirectly holds 45% of Konkan. Is an open offer to Konkan's public shareholders required?

The scheme does not directly involve the target, so both conditions must be met.

Version 1. Sahyadri's shareholders receive total consideration of ₹800 crore: ₹160 crore in cash and ₹640 crore in Deccan shares.

Cash share = 160 ÷ 800 = 20%   → less than 25%, condition (A) met

If condition (B) on the 33% voting rights is also met, the acquisition is exempt.

Version 2. The same ₹800 crore, but ₹240 crore in cash.

Cash share = 240 ÷ 800 = 30%   → not less than 25%, condition (A) fails

The exemption is lost regardless of condition (B), and the acquisition of an indirect 45% in Konkan has to be tested against the SAST open offer triggers.

Version 3. Konkan itself merges into Deccan as the transferor company under an NCLT order. The scheme now involves the target company, and the exemption applies without the 25% and 33% tests.

The lesson for the merchant banker structuring the deal: the mix of cash and shares in the consideration is not just a negotiation point. Eighty crore rupees of extra cash is the difference between a clean scheme and an open offer.

Chapter 7 (Other Merchant Banking Activities – Mergers, Acquisitions & Takeovers) opens with the merger definition, and its review questions test it directly: "Merger is necessarily amongst two equal or comparable stature companies. State whether True or False." — False. Another asks which activities a merchant banker is involved in — mergers, takeovers and acquisitions, all of the above.

The SAST scheme-of-arrangement exemption appears in both Chapter 2 (Introduction to the Merchant Banking) and Chapter 7. Expect the five merchant-banker functions as a "which of the following is not" question, and the 25% cash threshold as a number.

• "Merger is necessarily between equals" is False. The workbook says in terms that a merger is not necessarily amongst companies of equal or comparable stature.
• But the workbook also says that "in the pure sense of the term" a merger is a merger of equals, of firms "often of about the same size". The two statements sit a page apart in Chapter 7. For the True/False question, follow the definition: not necessarily equals.
• The workbook's opening definition is internally loose — it says one or both companies lose identity "and a new company is formed", then says a new company is formed when both lose identity. Read it as: absorption keeps the surviving company; a new company appears only when both disappear.
• Merger is mutual; a takeover need not be. A hostile bid is a takeover, never a merger.
• Acquisition and takeover are interchangeable in the workbook; takeover merely connotes hostility.
• Companies Act governs the merger; SAST governs acquisition of shares or control in a listed company. They work "in very different ways".
• The 25% cash and 33% voting-rights conditions apply only to schemes not directly involving the target company.
• Less than 25% — exactly 25% cash fails.