Bank of Rajasthan Merger.docx

8/9/2019 Bank of Rajasthan Merger.docx

1/75

ABSTRACT

Changing is the regulation of nature. Any business organization undergoes change

on a continuous basis, technically termed as Corporate Restructuring. It can be

defined as a strategy to achieve faster growth, desired capital structure and change

in the ownership and control of company. The reasons behind change may be

external or internal factors. In the present scenario, business organization

undertaes changes to increase their cutting edge over the competition and enhance

their leadership positions. It is a fundamental fact of finance that growth and

capital employed are two basic drivers of the value of an organization. !n the other

hand neither growth nor improvement in R!C" is possible unless the company is

under the control of competent, progressive and visionary management. The

present paper is an attempt to understand the strategic move of ICICI ban. The

case study will reveal the motives behind and synergies from such #$A activities.

An attempt has been made to analyze, %Is corporate restructuring a tool to enhance

the shareholders value&. 'hy ICICI (an has taen such a strategic move and

many more )uestions will be solved from the case study.

1


2/75


3/75

CAPTER - I

INTRODUCTION

3


4/75

1! INTRODUCTION

#erger has been identified as an important tool to achieve profitable growth of business and to

limit competition, and increase in income with less investment, to gain economies of large scale

to access foreign maret, to achieve diversification and utilize underutilized maret

opportunities.

The merger of ICICI (an and (an of Ra*asthan is substantially to enhance the networ of

ICICI (ans (ranch which is already the largest private sector ban in India which especially

strengthens its presence in northern and western India. To enhance the ability of the merged

entity to capitalize on the growth opportunities in the Indian economy it would combine (an of

Ra*asthan+s branch franchise with ICICI (an+s strong capital base. (an of Ra*asthan is the

third ac)uisition by ICICI (an. ICICI (an had earlier ac)uired (an of #adhura in -- and

(an of #aharashtra/based 0angli (an in --1.

N""# $% '(" )'*#+

. The main purpose of doing this pro*ect was to now about mutual fund and its functioning.

This helps to now in details about mutual fund industry right from its inception stage, growth

and future prospects.

. It also helps in understanding different schemes of mutual funds. (ecause my study depends

upon prominent funds in India and their schemes lie e)uity, income, balance as well as the

returns associated with those schemes. And how the fund managers diversify ris and obtain

maximum returns.

2. The pro*ect study was done to ascertain the asset allocation, entry load, exit load, associated

with the mutual funds.

S''"".' %$ '(" /%"

3rofitable growth constitutes one of the prime ob*ectives of the business firms. This can be

achieved 4internally5 either through the process of introducing6developing new products or by

expanding6enlarging the capacity of existing product 7s8. Alternatively, growth process can be

facilitated 4externally5 by ac)uisition of existing firms. This ac)uisition may be in the form of

4


5/75

mergers, ac)uisitions, amalgamations, taeovers, absorption, consolidation, and so on. The

internal growth is also termed as organic growth while external growth is called inorganic growt

There are strengths and weanesses of both the growth processes. Internal expansion apart from

enabling the firm to retain control with itself also provides flexibility in terms of choosing

e)uipment, mode of technology, location, and the lie which are compatible witits exaction

operations. 9owever internal expansion usually involves a longer implementations period and

also entails greater uncertainties particularly associated with development of new products.

Above all there might be sometimes problem of raising ade)uate finances re)uired for the

implementation of various capital budgeting pro*ects involving expansion. Ac)uisitions and

mergers obviates, in most of the situations, financing problems as substantial6full payments are

normally made in the form of the shares of the ac)uiring company. :urther it also expedites the

pace of growth as ac)uired firm already has the facilities or products and therefore saves time

otherwise re)uires in building up new facilities from scratch as in the case of internal expansion.

ICICI (an ;td5s taeover of (an of Ra*asthan ;td 7(oR8 will have to clear a new regulatory

hurdle before it can be completed, according to a senior official in the industry ministry. #ost

baning mergers can move ahead once they get a green signal from the Reserve (an of India

7R(I8, but the deal between India5s largest private sector lender and the troubled regional ban

will need to be cleared by the government as well because of the provisions of a controversial

policy that categorizes ICICI (an as a foreign/owned one< despite its local presence and Indian

management. %The merger needs the approval of the :I3( 7:oreign Investment 3romotion

(oard8 under 3ress =ote 2.

>nder the 3ress =ote 2 of --? series, if the ownership of an existing Indian company is

transferred to a non/resident entity, as a conse)uence of transfer of shares to nonresident entities

through amalgamation, merger or ac)uisition, then it would re)uire :I3( approval.

3rivate sector lenders ICICI (an and 9@:C (an ;td were defined as foreign/owned under the

new rules since more than half their e)uity is owned by foreign entities, including foreign

institutional investors, who have no board presence or say in company policy.

This regulation is applicable in sectors with foreign direct investment 7:@I8 caps, such as

defense production, private sector baning, broadcasting, commodity exchanges, insurance, print

media, telecommunications and satellites, according to the press note. Any foreign firm trying to

gain control of local companies needs the prior approval of :I3(.

5


6/75

A spoesperson for ICICI (an said the ban would not comment on any issue relating to (oR

till the conclusion of its board meeting on 2 #ay. The two bans agreed this wee to merge in a

deal that has met with a cold reception from investors and analysts. An analyst with a consulting

firm, who spoe on condition of anonymity, said either of the bans needs to approach :I3( for

approval. %It does not matter which ban approaches :I3(. !ne entity can also approach :I3(

on behalf of the other,% he said.

>nder the new regulations, ICICI (an, with another six bans, has become a foreign/ owned

lender as overseas entities hold more than -B of the company+s stae. The shareholding of

foreign institutional investors in ICICI (an as on 2 #arch was .2-B.

R(I had pointed out that the new norms will create a new set of bans that are %owned by

foreigners, but controlled by Indians%, thus creating a regulatory challenge for the central ban.

9owever, commerce and industry minister Anand 0harma recently said that no change in the

new :@I regulation was needed as it was woring *ust fine.

W(' 2) )("(%#" *"4

Dalue is a very sub*ective term. There are many factors, which influence a person to invest in a

particular company. :or some it may be capital appreciation, for some it may be consistency in

the earnings of the company, for some it may be the dividends that the company pays or it may

be the reputation of the company. (ut normally the maret price of the shares is prime

motivation factor behind an investment by an investor.

9ence we can say that a company has created wealth has created wealth when there is an

increase in the maret price of the shares. Theoretically also, the financial goal of a company is

to maximize the owner5s economic welfare. !wner5s economic welfare can be maximized when

shareholders wealth is maximized which is reflected in the increased maret value of the shares.

O"'2") %$ '(" S'*#+

It is seen that, most of the wors have been done on trends, policies $ their framewor, human

aspect which is needed to be investigated, whereas profitability and financial analysis of the

mergers have not give due importance. The present study would go to investigate the detail of

#erger and Ac)uisitions 7#$As8 sector. The ob*ective of the study is to mae a comparative

analysis of the pre and the post merger performance of the selected entity.

6


7/75

M"'(%#%%+ %$ '(" )'*#+

D' %"'2%.

To conduct a study properly designing of the process is essential because reliability and validity

of the outcomes of a study depends on the reliable data and information. In this connection some

activities has been carried out to collect data and information. :or the purpose of evaluation of

investigation data is collected from merger and Ac)uisition 7#EA s8 of Indian (aning Industry.

The data is collected from secondary sources such as/

o Annual Reports of (an of Ra*asthan and ICICI (an

o 'ebsite of the bans

o

Internet

M"'(%#%%+

To analyze the post and pre/merger financial performance of the bans various financial ratios

and common size financial statements are used for comparison.

RESEARC TOOLS

:inancial ratios, "conomic Dalue added and #aret Dalue Added. The above tools which are

used to evaluate whether mergers and ac)uisitions create any shareholder value or not signify thefollowingF

The financial ratios that are used in the study areF

. Return on capital employees

. Return on =et worth

2. Return on e)uity

G. "arnings per share

5! Cash earnings per share

R"'*. %. /2' "/%+"#

7


8/75

R!C" H 3(IT6 CA3ITA; "#3;!"@

3(IT H 3(@T J =on/ R"C>RRI=K "L3"=0"0 M =on recurring income

CA3ITA; "#3;!"@ H =et fixed assets J =et Current Assets M fictitious assets

R"'*. %. ."' 8%'(

R!=' H 3AT 6 ="T'!RT9

3AT H profit after tax

="T'!RT9 H e)uity share capital Jreserves and surplus M fictitious assets

E.2.) /" )("

"30 H 3AT 6 number of shares

C)( ".2.) /" )("

C"30 H 73AT J @"3RICIATI!=8 6 number of shares

E%.%2 V*" A##"#

"conomic value added 7"DA8 is the after/tax cash flow generated by business minus the cost of capital it has deployed to generate that cash flow. Representing real profit versus paper profit,

"DA underlies shareholder value, increasingly the main target of leading company5s strategies.

0hare holders are the players who the firm with its capital< they invest to gain a return on that

capital.

"DA can be defined as the net operating profit minus the charge of opportunity cost of all the

capital employed into the business. As such , "DA is an estimate of true % economic profit& that

means to say the amount that the shareholders or lenders would get by investing in the securities

of comparable ris.

The capital charge is an important and distinctive aspect of "DA. #any a times under traditional

accounting system many companies report profits but it is not so actually. According to 3eter.:

@rucer %unless a company is earning more than its cost of capital, it is operating at loss&.

8


9/75

Thus "DA is the profit as shareholders define it. To illustrate it, suppose a person invested Rs.--

in a company. The company is earning at the rate of -B that means to say the earnings of the

company is Rs - while its cost of capital is B that means to say that the company has to pay

Rs. to its shareholders . Thus the amount of profit in excess of the cost of capital that is Rs

7-/8 id the "DA

M'("'2+,

"DA H =!3AT M 7capital employed N weighted average cost of capital

(ut for (aning and :inancial sector,

"DAH=!3AT M 7net worth N cost of e)uity8

'here, =!3AT H net operating profit ad*usted to taxes

M9"' *" ##"# :MVA;

#DA H maret value added, is a measure of the value added by the company5s management over

and above the capital invested in the company by its investors. It is the value added in excess of

economic capital employed.

#DAHmaret value of the firm/economic capital.

'here, #aret value of the firm/maret priceNnumber of shares.

"conomic capitalHcapital employed.

L22''2%.) %$ '(" )'*#+

Though humble attempt is made to analyze the pre and post merger financial performance of the

selected bans it is difficult to narrate all incidents and change brought up due to merger and

ac)uisitions.

0econdly, the study is based purely on secondary data which are taen from financial statement

of the case through Internet only and therefore cannot be denied for any ambiguity in the data

used for the analysis.

9


10/75

+/%'(")2)

9- 78F There is no significance difference in financial performance amongst the selected (ans

'ith respect to their pre and post #erger Analysis.

9 78F There is a significante difference in financial performance amongst the selected (ans

with respect to their pre and post #erger Analysis.

9- 78F There is no significante difference in "arning per 0hare 7"308 amongst the selected

(ans with respect to their pre and post #erger Analysis.

9 78F There is a significante difference in "arning per 0hare 7"308 amongst the selected.

10


11/75

CAPTER – II

LITERATURE REVIEW

11


12/75


13/75

Calcutta @istrict Civil Court this deal also got lots of attention. In this case, an attempt has been

made to analyze the probable impact of strategic tools and features of the bans on pre and post

merger performance.

INTRODUCTION

#erger has been identified as an important tool to achieve profitable growth of business and to

limit competition, and increase in income with less investment, to gain economies of large scale

to access foreign maret, to achieve diversification and utilize underutilized maret

opportunities.

The merger of ICICI (an and (an of Ra*asthan is substantially to enhance the networ of

ICICI (ans (ranch which is already the largest private sector ban in India which especially

strengthen its presence in northern and western India. To enhance the ability of the merged entity

to capitalize on the growth opportunities in the Indian economy it would combine (an of

Ra*asthan+s branch franchise with ICICI (an+s strong capital base. (an of Ra*asthan is the

third ac)uisition by ICICI (an. ICICI (an had earlier ac)uired (an of #dhura in -- and

(.

A CASE STUDY ON MERGER OF TE BAN=

OF RA?ASTAN LTD! WIT ICICI BAN= LTD!3!

ABSTRACT

#erger is the primary growth and expansion strategy of present corporate world. "very

business always focuses to maximize profit as well as improve growth and improvement. In

this regard, merger can contribute as tremendous role model. #erger occurs when two or more

enterprises combine into one entity. !r one enterprise mixes its existence into another entity.

#erger activities having a very long history with more than -- years this section is full with

lot of research activities with )uantum suggestions. This research is also a brief attempt toanalyze the impact of merger with reference to successful movements of merger in between

two bans. The main ob*ective of this paper is to analyze the pre and post merger impact of

share price fluctuations on selected sample of study. This study is exploratory and descriptive

in nature. 0econdary source for data and information has been used in the study. As per the

re)uirements of the research, data are taen from the website of =0" 7=ational 0toc

13


14/75

"xchange8.(asically< this paper investigates the impact of merger on ICICI (an ;td. The

analysis of the collected data is based on appropriate statistical methods6tools.

INTRODUCTION(usiness environment of business is changing so rapidly, the present corporate scenario

hastotally changed< during this changing scenario it is very difficult for every businessorganization to achieve its ob*ectives lie as maximize its profit and improve growth and

development of the entity. Association along with the changing scenario of the business is a

primary activity of every concern to achieve its goal. Krowth potentiality drives every business

organization for internal and external changes. 'ith internal changes an organization go for

new product development or expand the maret of existing product, but it s not much‟

sufficient way to run business organization with maret for a long time. Today s business‟

world is *ust lie a global village, therefore external changes are the main re)uirement to

maintain and improve the position of the business it can be possible through mergers,

ac)uisitions, amalgamations and taeovers activities. These are the basic growth and

improvement strategies which eliminate the wea points of businesses and mae them

attainable many benefits Qsynergy effect is one of them.‟This study concerned with merger activity of managing the business environmental in changesscenario. #erger activities full with a great history of more than -- years. It s also full with a‟lot of research wors which provides a huge )uantum suggestion for this sub*ect matter.

#ergers are increasing in every section of the corporate sector. :inancial sector i.e. bans

mergers activities are also one of them. #erger is the combination of two or more firms, in

other words it can be state that when two or more firms which are in same or in different

product or service line decide to carry their wor simultaneously in future. It is also resulted

from a various number of studies, although mergers also having some failure results in some of

industries. (ut now a days it is very popular growth oriented strategy especially in developing

countries lie as India. There are various motives behind #ergers, which force this activity

very rapidly, these courses of actions done to expand business, to get synergic advantages, to

minimize costs, to maintain strong distribution chain, Tax planning, new product developmentand to face rapid competition, etc. The news of #ergers are very sensitive, it influence the

companies involved as well as customers, investors, share prices and other part of an economy

in positive or negative way, in form of financial as well as non/financial point of view.

14


15/75

9ere, the main focus of study is to discuss about impacts of the #erger in baning sector with

special, reference the study of The (an of Ra*asthan ;td. with ICICI (an ;td. This study

contains information about effect of merger announcement by board of both bans on share

price 7@aily Closing 3rices and turnover8 prices of ICICI (an ;td. and effect of merger permission by R(I on the share prices 7@aily Closing 3rices and turnover8 of ICICI (an ;td.

(oth effects are studied through share price performance of ICICI (an ;td. in former case

before 7 @ays8 and after 7 @ays8 and ? days 7pre/post effect8 in lateral case of the above

shown activities as well as to study of few financial report related data. :or the re)uirement of

the study, data are taen from the website of =0".

R"2"8) of literature always play a very significant role in every research study. This can be

treated as the bac/support of the study. Tour on historical literature helps the researcher to

explore and develop his ideas on the concerned topic. This chapter deals with the historical

bacground on the concerned research topic. It provide base to the researcher to conduct a

successful research study. 9istorically, mergers and ac)uisition activity started way bac in

?- when the imperial (an of India was born when three presidency bans 7(an of (engal,

(an of (ombay and (an of #adras8 were reorganized to form a single baning entity, which

was subse)uently nown as 0tate (an of India 7#or, et al., -8. 3ra*apati 7--8 analysis

was based on around G bans< data for study were taen from public sector bans, private

sector bans and foreign bans in India. 9is study resulted mergers performed a very well tas in access to new marets for business and operations. 9e founds many bans attained a number

of benefits lie reduction in cost of funds, diversification of loan portfolio and expansion of

range of services available to the public. Koyal and Ooshi s study about mergers in baning‟

sector initiated from the merger case of the (an of Ra*asthan ;td. and ICICI (an ;td. The

main ob*ective of their study was to test the motives of bans for mergers and ac)uisition with

15


16/75

special reference to Indian baning Industry. :or this purpose sample of 1 mergers 7post

liberalization8 of (ans has been taen. The results of their study founds small and local bans

face difficulty in bearing the impact of global economy therefore, they need support and it

covered as one of the main reason for merger. @ue to huge potential in rural marets of India,

the tas of mergers also taes place. Oayadev and 0ensarma analysis of this great attempt to

construct results on the merger trends in Indian baning with study of impacts on shareholders

and managers. They founded after that study both ac)uiring and merged ban s share value in‟

maret showed negative impact on the immediate announcement of mergers. 3autler 7--8

analysed on the basis of event study for research. This research study showed #$As

significantly beneficial to target6merging firm s shareholders and not much beneficial for ‟

ac)uiring firm s shareholders. 0inha, aushi and Chaudhary 7--8 pointed in their study‟

Indian #$A cases show a positive correlation between financial performance and the #$A

deal. !n the basis of studied sample financial sector in India showed more than half of the

merging firms improved financial performance after the merger.‟

16


17/75

CAPTER – III

COMPANY & INDUSTRY PROFILE

PROFILE OF ICICI BAN=

17


18/75

ISTORY

In ?, ICICI ;imited was incorporated with the collective efforts of the ma*or 2, named 'orld

(an, Kovernment of India and Indian Industry s representatives. The establishment has been‟

taen place with a view to aid Indian businesses by acting as a source of finance to medium and

long term pro*ects. In ??- s, the ICICI institution started diversifying its operations, and end up‟

at the wholly owned subsidiary called ICICI (an. The (an was established in ??G and

became the first ban listed on =0" 7=ew or 0toc "xchange8.

:ew merger related detailsF/

Y") P'2*)


19/75

An extensive range of 3roduct and services offered by ICICI though diverse delivery channels

are personal baning, corporate baning, =RI baning, finance and insurance, retail baning,

commercial baning, mortgages, credit cards, asset management, investment baning

PROFILE OF BAN= OF RA?ASTAN

ISTORY

The ban of Ra*asthan was established as Ooint 0toc (an by #ansinga brothers at >daipur on

Pth #ay, ?G2.The (an served The Kovernment of Ra*asthan as 0cheduled ban for more than

G years starting from ?GP. The founder Chairman of (an of Ra*asthan was an industrialist

named ;ate 0eth 0hri Kovind Ram 0esaria who started the ban with initial investment of Rs.

- lacs.

Ties up @etailsF/

Y" P'2*)


20/75

CORPORATE PROFILE

The (an of Ra*asthan with the asset base of Rs. 1,2--.- crores incurred the net loss after

provisions and taxes remained at Rs. -.2 crores for the year ended 2st #ar --. The ban

operates through all over India as a private sector ban with G2 branches wors as networ. It

includes 1 onsite and ? offsite AT#s in 2- cities along with specialized Industrial and forex

branches.

The ban provided a broad range of products and services includes commercial baning,

3ersonal baning ,merchant baning, auxiliary services, consumer baning, deposit and money placement services, trusts and custodial services, international baning, private sector baning

and depository, Credit facilities to 0#"s ,gold facilities internet baning mobile baning, life

insurance, mutual fund services, western union money transfer services and many more. The

above mentioned products and services can be divided into 2 segments called treasury

operations, (aning operations and residuals.

A GLIMPSE OF TE BAN=S

S! N%! ="+ R'2%." ICICI B.9 B.9 %$ R)'(.

. Type 3rivate sector 3rivate sector

, Industry (aning financial services (aning, ;oan, Capitalmaret and alliedindustries

2 ear of Incorporation ??G 7promoted by ICICI8 ?G2, >daipur

G Traded as =0"F ICICI(A= =0"F (A=RAOA0(0"F 21G =0"F I(= (0"F ---? =A0@ASF I(=

20


21/75

A 3roducts

:inance and insurance

Corporate or

wholesale baning,

Retail (aning

3ersonal baning ,

Commercial (aning

Commercial baning,

#ortgages

Retail baning,

Credit Cards

:inance and

3rivate (aning insurance,

Asset #anagement

Investment (aning,

Investment (aning

Auxiliary services,

#erchant baning,

Trust and custodial

services,

6 (usiness presence ? countries All over India

1 =umber of offices 11N G1PN

P =umber of employees 2N 2?P2N

? Total Income 2,???.2NN ,GP?.GPNN

.- 3rofit G,-G.?PNN 7-.28NN

.. Total Assets 22,2??.1NN 1,2--.-NN

., CRAR 7Capital to Ris Asset ?.GN 1.N

Ratio8

.2 =et =3A Ratio .N .-N

ICICI B.9 B%# //%") "" %$ B.9 %$ R)'(.

21


22/75

The (oard of @irectors of ICICI (an ;imited 7=0"F I(=8 has at its #eeting held in #umbai

today granted its approval for the amalgamation of The (an of Ra*asthan ;imited 7(an of

Ra*asthan8 with ICICI (an. The proposed amalgamation is sub*ect to the approval of

shareholders of both bans and Reserve (an of India 7R(I8.

The (oard considered the results of due diligence covering advances, investments, deposits,

properties $ branches and employee/related liabilities, and the valuation report of 9aribhati $

Co., Chartered Accountants. 9aribhati $ Co. have recommended a share exchange ratio range

of one share of ICICI (an for G.1-/G.P- shares of (an of Ra*asthan.

The (oard has approved a share exchange ratio of shares of ICICI (an for P shares of

(an of Ra*asthan, which wors out to one ICICI (an share for every G.1 (an of Ra*asthan

shares, and falls within the range recommended by 9aribhati $ Co.

The proposed amalgamation would substantially enhance ICICI (an5s branch networ, already

the largest among Indian private sector bans, and especially strengthen its presence in northern

and western India. It would combine (an of Ra*asthan5s branch franchise with ICICI (an5s

strong capital base, to enhance the ability of the merged entity to capitalize on the growth

opportunities in the Indian economy.

O# :inancial Consultants 3rivate ;imited and ICICI 0ecurities ;imited were the financial

advisers to ICICI (an on the proposed merger. Amarchand $ #angaldas $ 0uresh A. 0hroff $

Co. were the legal advisers to ICICI (an.

"xcept for the historical information contained herein, statements in this Release which contain

words or phrases such as +would, +will5, 4see to5, 4growth5 etc., and similar expressions or

variations of such expressions may constitute +forward/looing statements+. These forward/

looing statements involve a number of riss, uncertainties and other factors that could cause

actual results to differ materially from those suggested by the forward/looing statements. ICICI(an undertaes no obligation to update forward/looing statements to reflect events or

circumstances after the date thereof. Information on (an of Ra*asthan contained in this release

is based on its annual report and other public sources.

22


23/75

The proposed amalgamation would be governed by the provisions of 0ection GGA of the (aning

Regulation Act, ?G?. The proposed amalgamation needs the approval of the respective (oards

of ICICI (an and (an of Ra*asthan and to become effective, re)uires the consent of a ma*ority

in number representing two/thirds in value of the shareholders of ICICI (an and (an of

Ra*asthan, present in person or by proxy, at their respective meetings called for this purpose, the

sanction of Reserve (an of India by an order in writing and sanction or approval, if re)uired,

under any law or regulation, of the Kovernment of India, or any other authority, agency,

department or persons concerned.

There can be no assurance that these approvals will be obtained or of the time involved therein.

This release does not constitute an offer of securities. The terms of the proposed amalgamation

would be contained in the scheme of amalgamation once approved by the respective (oards of

ICICI (an and (an of Ra*asthan and re)uires approval by the shareholders of ICICI (an and

(an of Ra*asthan and Reserve (an of India. Reserve (an of India may modify the scheme

approved by the shareholders. There can be no assurance that terms of the scheme will not have

an adverse impact on ICICI (an. The proposed amalgamation and any future ac)uisitions or

mergers may involve a number of riss, including deterioration of asset )uality, diversion of our

management5s attention re)uired to integrate the ac)uired business and the failure to retain ey

ac)uired personnel and clients, leverage synergies or rationalise operations, or develop the sills

re)uired for new businesses and marets, or unnown and nown liabilities, some or all of which

could have an adverse effect on our business. :or further press )ueries please call Charudatta

@eshpande at ?//2 P-P or e/mailF

(*#''!#")(/.#"222.9!%!

F% 2.")'% *"2") /")" A.2.#+ B.""" ' 1-


24/75

the yield on advances, where as total income was declined by .B from : --? to Rs.

G?.1 crores as on year ended --.

The 3rofit after tax for the year --P and --? were remained at similar levels due to increase

in provision of =on/3erforming Assets. The ban of Ra*asthan reported net loss at the year ended

-- 7after provisions and taxes8 stood at Rs. -.2 crore against the net profir of Rs. 1.1

crores for the previous year.

As (an of Ra*asthan was facing losses during the year --?/--, the shareholders were not

proposed for any dividend.

BALANCE SEET

The ban of Ra*asthan has been showing increasing trend but at a low pace. It has

increased by -.G?B from Rs. 12.-? crores as on year ended --?, and grow by P.??B

over the previous year.

The )uality of assets at (an of Ra*asthan have been continuously deteriorating since

from --1 stood at Rs. ?2.P crores as on year ended -- as compared to Rs. -.?

crores at the year ended --?.

Although investment at (an of Ra*asthan has been shown positive sign from the year

-- to --P but it got off trac to Rs. 1. crores as on year ended -- which is

.1B reduced from previous year.

The balance sheet showing the freeze of e)uity capital infusion to the (an of Ra*asthan

remained at Rs. .2 crores as on year ended --. The ban also has not issued fresh

shares to the maret.

The growth in deposits at (an of Ra*asthan was moderate during --P to --? as per

industry trend line but got hurdled in : -- stood at Rs. -.2 crores, which is

-.PB down the line.

(orrowings at (an of Ra*asthan have shown good sign for the ban as it has been

continuously decreasing since from : --. Currently the ban s borrowings stood at‟

24


25/75

Rs. -. crores as on year ended --.

Continuous growth in other liabilities and provisions over the years reported Rs. 2-.1

crores amount as on year ended --.

CURRENT SCENARIO


26/75

>nion strie by 2 ma*or employee union of (an of Ra*asthan i.e., AI(!R":,

AI(!R!A and A((!R.

=otice by Ra*asthan high court.

www.zenithresearch.org.in 0ourceF Asian C"RC 7Amount in Crores8

PROCESSION OF MERGER

I. FIRST CALL

GENERAL STATE OF ICICI BAN=

The ICICI (an has become a drawing card in insurance and asset management through its

subsidiaries. The strategic focus of the ban has shifted to balance sheet growth and maret share

heighten in order to improvise returns and profitability index. The merger with (an of

Ra*asthan could be one of the strategic moves of ICICI ban to attain its vision.

26


27/75

GENERAL STATE OF BAN= OF RA?ASTAN

The condition of (an of Ra*asthan had been seeing in under pressure after a series of probes

continued by R(I. Irregular performance of the ban gave rise to several investigations along

with the order of R(I for a special audit. The decision of audit had been taen when (an of

Ra*asthan corresponded to give prominent intraday overdraft which was beyond the limit to the

0ahara Kroup, ;ucnow based. The Central (aning Institution of India had appointed @eloitte

9asin $ 0ells to loo after the ban s lending policies and information security system.‟

!n th :eb --, Reserve (an of India has imposed a pecuniary penalty of Rs. lah7Rupees

Twenty :ive ;ah only8 on The (an of Ra*asthan ;td. in exert of powers enthroned under the

provisions of 0ection G1A787b8 of the (aning Regulation Act, ?G?. !n the following grounds

the penalty were imposedF/

i. Ac)uisition of Immovable properties/ Diolation the R(I s guidelines6directions issued‟

under 0ection 2A of the (aning Regulation Act, ?G?.

ii. (lue/penciled the records ban s IT system‟

iii. =on/adherence of guidelines related to now our Customers and anti money laundering

in opening and conduct of accounts.

iv. Irregular account s conduct of a corporate group‟

v. #isrepresentation of facts/ unable to produce documents sought by the Reserve (an of

India.

The issue of Corporate Kovernance 0tandards was also one of the ey areas which acted as a

loophole for the merger. 3ast from several years the ban has been in the eyeshot of R(I.

@uring the annual inspection of (oR, R(I found out unconventional disclosure of 0hareholding

patterns of the promoter group. The shareholding pattern had been declined from B to P.B

between Oune --1 and --? revealed by #aret watchdog, 0"(I.

The Tayals, Controllers of the (an of Ra*asthan started their search for suitable deal with

heading ban in order to enter into merger deal after the series of probes.

27


28/75

The discussions were held with many leading bans named ICICI (an, 9@:C (an, Axis (an

etc. The 9@:C (an has not shown any positive concern in this preposition. The officials of

Axis ban have denied the deal as they were not ready to pay demanded price. 0omehow The

ICICI ban becomes ready to pay the price higher than the maret valuation of (an of

Ra*asthan. 9owever, the deal would mean little dilution for ICICI, as the maret capitalization of

ICICI registered at Rs. , --,11 crore whereas, (oR had Rs. 22 crore only.

AI. SECOND CALL> - A non/cash merger deal was approved by the board of directors of

the India s second largest private sector ban. It was estimated that the merger would‟

further flourish the ICICI s branch networ by percent approximately.‟

It was decided that the report will be presented to (oard of @irectors after the approval of

independent valuer and further to 0hareholders $ Reserve (an of India. The deal in its

intermediation decided that the swapping ration will be at FG.1 which will inferred as The

ICICI (an would allot shares for every P shares of (an of Ra*asthan.

The deal was based on the internal analysis of the proposed amalgamation which certainly be

calculated considering the followingsF/

i. 0trategic value of the deal

ii. #aret capitalization per branch of the former private sector bans

iii. And comparison of deal with the relevant precedent transactions.

!n #ay Pth --, (an of Ra*asthanQs closing price mounted /wees high at ??.- while the

benchmar 0"=0"L grew only by -.G percent whereas ICICI (an closed at .G percent

lower at PP?.2. Along with 0hare prices the A@R trading of ICICI ban has also fell down by

.P percent at E 2P. on the =ew or 0toc "xchange 7=0"8.

After consideration of share prices the swap deal indicated that ?- percent premium has been

given by ICICI ban to (an of Ra*asthan.

28


29/75

The (an of Ra*asthan cost to ICICI ban at nearly Rs. 2-G crore on the basis of internal

valuation. In elaborated form, ICICI ban have to pay about . croreN for each of the (oR

(ranch.

NvaluationH Rs. 2-G6 G2 branches 7Rs. . crore at an average rate8

In line with maret capitalization of the (oR s branches, an implied valuation by the exchange‟

ratio was scheduled to be decided but due diligence, freelance valuation and approvals will be

considered as the finale valuation.

Although valuation in monetary terms does have a strong impact in any merger but without

consideration of about 2- lah customers and approx. G--- employees, the deal might turned to a

big failure. 9aribhati $ co. has been appointed as an independent valuer by both the bans to

evaluate the valuation.

(I. FINAL DAY

!n th of August --, Alpana illawala, CK#, department of communication, R(I has

published a press release that %All branches of (an of Ra*asthan ;td. will function as branches

of ICICI (an ;td. with effect from August 2, --. This is conse)uent upon the Reserve (an

of India sanctioning the 0cheme of Amalgamation of (an of Ra*asthan ;td. with ICICI (an

;td. The 0cheme has been sanctioned in exercise of the powers contained in 0ub/section 7G8 of

0ection GGA of the (aning Regulation Act, ?G?. The 0cheme will come into force with effect

from close of business on August , --&.

PRE-POST MERGING CALLENGES

At the time, when the Tayal :amily decided to undergo for change through merger with ICICI

ban, lots of problems were already aroused which acted as the strong base to merger. The (an

of Ra*asthan was facing following challenges before amalgamationF/

P" "2. (".") P%)' "2. (".")

29


30/75

Regulatory Concerns Corporate governance

Asset Suality #anagement Ris of asset )uality deterioration

;egal Issues related to "K# Oustify operations or leverage synergy

>nion 0trie and violation of Company ;aw

REGULATORY CONCERNS

;ots of litigation was charged on (an of Ra*asthan related to misrepresentation of promoter s‟

stae which was unveiled by 0ecurity and "xchange (oard of India on the pointers of Reserve

(an of India. !thers were distortion of documents and violation of regulatory norms pertaining

to accounts of the corporate group. :or these regulatory proceedings, R(I had imposed lacs as

a penalty on (oR for concealing the necessary facts.

ASSET UALITY MANAGEMENT

In a merger asset )uality always being a ma*or concern for both the parties as the factor can turn

out the profitability or synergy. The ICICI ban raised its )uarterly profit GGB by showing a

downfall in bad loans provisions and in the retail lending. It infers that ICICI ban s =on/‟

3erforming Assets 7=3A8 Ratio improved to -.?G from .P1B in previous year.

In contrast the =3A ratio in (an of Ra*asthan has been showed increasing trend since from

--1 as shown in graph above.

(efore amalgamation ICICI ban has assess the ris by (or s loan portfolio, @eposit base staff ‟

liabilities and Investments. In the deal Amarchand $ #angaldas $ 0uresh A 0hroff $ Co were

acting as the legal advisors whereas ICICI securities and O# :inancials were the :inancial

Advisors for valuation purpose.

30


31/75

LEGAL ISSUES RELATED TO EGM

The issue rose of legal binding of 0hareholder s decision on the (oR. The "xtraordinary Keneral‟

#eeting was cancelled by olata civil court as the shareholders of (oR got the stay order

against the meeting. The reason found behind the merger was that the employees at (oR were

filed a complaint against the holding of "K# as they were opposed of the amalgamation.

UNION STRI=E AND VIOLATION OF COMPANY LAW

Around G2-- employees of (oR in all G2 branches across the country announced union strie to

protest against the proposed deal. The three ma*or employees unions participated in the same

were All India (an of Ra*asthan "mployees :ederation 7AI(!R":8, All India (an of

Ra*asthan officers Association 7AI(!R!A8 and Ahil (hartiya (an of Ra*asthan aramchari

0angh 7A((!R08. The act performed by the employees in fear of thousands of *ob losses and

incompatible wor cultures.

According to Companies Act ?, -B of the shareholders can re)uisition a meeting with the

permission of the (oard of the company. After that the board has to hold the meeting within 2

wees of the re)uisition. The decision of appointment of own chairman by the shareholders of

(oR was continued after nowing the fact of void as per company Act ?.

POST MERGING CALLENGES

The amalgamation of ICICI ban with (an of Ra*asthan came in to effect on August 2, --

when R(I approved the deal. The ey issues that hindered the proposed merger have been

discussed earlier, now the focus of ICICI ban should be on followingsF/

R ISSUES

9uman capital has always being a ma*or concern for the merging firms. The integration of

human resource of both the entities sets the path of growth through synergy. 'or cultures have

always differed from organization to organization. To cope up with the change depends on the

ability of the organization and its problem solving approach.

31


32/75

In the amalgamation of ICICI ban and (oR, the issue related to the fear in the minds of

employees of being saced by the transferee ban should be considered as ma*or challenge after

merger. It was already assured by #s. Chanda ochhar, C"! and #anaging @irector of ICICI

ban that no employee will lose *ob after merger.

RIS= OF DETERIORATION OF UALITY OF ASSET

As (an of Ra*asthan have members of branch in the interior and rural area of Ra*asthan,

number of loans disbursed to agricultural worers and the low profile people of the rural areas.

In future, there may be problem of recovery and chances of delin)uency of such pre merge loans

by (an of Ra*asthan. It may increased the of =3A in the near future.

LEVERAGE AND SYNERGY

(efore the deal announcement the share price of the ICICI ban was Rs. PP? where the swap

ratio implied substantial premium to the (an of Ra*asthan s present price which was almost‟

P?B higher. @o this high amount paid for synergyU The ma*or challenge before this merger deal

would be to gain synergies which could be in any flow such as cost optimization through better

negotiation with vendors, economies of scale, eliminating overlaps and many more. 0econdly,

through revenue enhancement this infers new maret access 7as ICICI ban will be able to get

readymade access to (an of Ra*asthan s wide branch networ in north and west India8. Thirdly,‟

by way of technological leverage and forth could be forward and bacward integration.

'e have been learning about the companies coming together to from another company and

companies taing over the existing companies to expand their business.

'ith recession taing toll of many Indian businesses and the feeling of insecurity surging over

our businessmen, it is not surprising when we hear about the immense numbers of corporate

restructurings taing place, especially in the last couple of years. 0everal companies have been

taen over and several have undergone internal restructuring, whereas certain companies in the

same field of business have found it beneficial to merge together into one company.

32


33/75

In this context, it would be essential for us to understand what corporate restructuring and

mergers and ac)uisitions are all about.

All our daily newspapers are filled with cases of mergers, ac)uisitions, spin/offs, tender offers, $

other forms of corporate restructuring. Thus important issues both for business decision and

public policy formulation have been raised. =o firm is regarded safe from a taeover possibility.

!n the more positive side #ergers $ Ac)uisition5s may be critical for the healthy expansion and

growth of the firm. 0uccessful entry into new product and geographical marets may re)uire

#ergers $ Ac)uisition5s at some stage in the firm+s development. 0uccessful competition in

international marets may depend on capabilities obtained in a timely and efficient fashion

through #ergers $ Ac)uisition+s. #any have argued that mergers increase value and efficiency

and move resources to their highest and best uses, thereby increasing shareholder value.

.

To opt for a merger or not is a complex affair, especially in terms of the technicalities involved.

'e have discussed almost all factors that the management may have to loo into before going for

merger. Considerable amount of brainstorming would be re)uired by the managements to reach a

conclusion. e.g. a due diligence report would clearly identify the status of the company in respect

of the financial position along with the networth and pending legal matters and details about

various contingent liabilities. @ecision has to be taen after having discussed the pros $ cons of

the proposed merger $ the impact of the same on the business, administrative costs benefits,

addition to shareholders+ value, tax implications including stamp duty and last but not the least

also on the employees of the Transferor or Transferee Company.

M"">

#erger is defined as combination of two or more companies into a single company where

one survives and the others lose their corporate existence. The survivor ac)uires all the assets as

33


34/75

well as liabilities of the merged company or companies. Kenerally, the surviving company is the

buyer, which retains its identity, and the extinguished company is the seller.

#erger is also defined as amalgamation. #erger is the fusion of two or more existing companies.

All assets, liabilities and the stoc of one company stand transferred to transferee company in

consideration of payment in the form ofF

• ")uity shares in the transferee company,

• @ebentures in the transferee company,

• Cash, or

• A mix of the above modes.

A*2)2'2%.>

Ac)uisition in general sense is ac)uiring the ownership in the property. In the context of

business combinations, an ac)uisition is the purchase by one company of a controlling interest in

the share capital of another existing company.

Methods of Acquisition:

An ac)uisition may be affected by

7a8 agreement with the persons holding ma*ority interest in the company management lie

members of the board or ma*or shareholders commanding ma*ority of voting power<

7b8 purchase of shares in open maret<

7c8 to mae taeover offer to the general body of shareholders<

34


35/75

7d8 purchase of new shares by private treaty<

7e8 Ac)uisition of share capital through the following forms of considerations viz. means of

cash, issuance of loan capital, or insurance of share capital.

T9"%">

A 4taeover5 is ac)uisition and both the terms are used interchangeably.

Taeover differs from merger in approach to business combinations i.e. the process of taeover,

transaction involved in taeover, determination of share exchange or cash price and the

fulfillment of goals of combination all are different in taeovers than in mergers. :or example,

process of taeover is unilateral and the offeror company decides about the maximum price.

Time taen in completion of transaction is less in taeover than in mergers, top management of

the offeree company being more co/operative.

D"-"" % %/%'" )/2') % #22)2%.>

@e/merger or split or divisions of a company are the synonymous terms signifying a

movement in the company.

What will it take to succeed?

:unds are an obvious re)uirement for would/be buyers. Raising them may not be a problem for

multinationals able to tap resources at home, but for local companies, finance is liely to be the

single biggest obstacle to an ac)uisition. :inancial institution in some Asian marets are banned

from leading for taeovers, and debt marets are small and illi)uid, deterring investors who fear

that they might not be able to sell their holdings at a later date. The credit s)ueezes and the

depressed state of many Asian e)uity marets have only made an already difficult situation

worse. :unds apart, a successful #ergers $ Ac)uisition growth strategy must be supported by

35


36/75

three capabilitiesF deep local networs, the abilities to manage uncertainty, and the sill to

distinguish worthwhile targets. Companies that rush in without them are liely to be stumble.

Assess target quality:

To say that a company should be worth the price a buyer pays is to state the obvious. (ut

assessing companies in Asia can be fraught with problems, and several deals have gone badly

wrong because buyers failed to dig deeply enough. The attraction of nocdown price tag may

tempt companies to sip crucial checs. Concealed high debt levels and deferred contingent

liabilities have resulted in large deals destroying value. (ut in other cases, where buyers have

undertaen detailed due diligence, they have been able to negotiate prices as low as half of the

initial figure.

@ue diligence can be difficult because disclosure practices are poor and companies often lac the

information buyer need. #oreover, most Asian conglomerates still do not present consolidated

financial statements, leaving the possibilities that the sales and the profit figures might be bloated

by transactions between affiliated companies. The financial records that are available are often

unreliable, with different pro*ections made by different departments within the same company,

and different pro*ections made for different audiences. (ans and investors, naturally, are liely

to be shown optimistic forecasts.

The purpose for an offeror company for ac)uiring another company shall be reflected in the

corporate ob*ectives. It has to decide the specific ob*ectives to be achieved through ac)uisition.

The basic purpose of merger or business combination is to achieve faster growth of the corporate

business. :aster growth may be had through product improvement and competitive position.

!ther possible purposes for ac)uisition are short listed belowF /

:1;P%*"".' %$ )*//2")>

. to safeguard the source of supplies of raw materials or intermediary product<

. to obtain economies of purchase in the form of discount, savings in transportation costs,

overhead costs in buying department, etc.<

36


37/75

3! to share the benefits of suppliers economies by standardizing the materials.

:

. to achieve economies of scale by amalgamating production facilities through

more intensive utilization of plant and resources<

. to standardize product specifications, improvement of )uality of product,

expanding

2. maret and aiming at consumers satisfaction through strengthening after sale

G. services<

. to obtain improved production technology and now/how from the offeree

company

. to reduce cost, improve )uality and produce competitive products to retain and

1. improve maret share.

:3; M9"' "/.)2%. .# )''"+>

. to eliminate competition and protect existing maret<

. to obtain a new maret outlets in possession of the offeree<

2. to obtain new product for diversification or substitution of existing products and to

enhance the product range<

G. strengthening retain outlets and sale the goods to rationalize distribution<

. to reduce advertising cost and improve public image of the offeree company<

6! strategic control of patents and copyrights.

:H; F2..2 )'".'(>

. to improve li)uidity and have direct access to cash resource<

37


38/75

. to dispose of surplus and outdated assets for cash out of combined enterprise<

2. to enhance gearing capacity, borrow on better strength and the greater assets

bacing<

G. to avail tax benefits<

5! to improve "30 7"arning 3er 0hare8.

:5; G"." 2.)>

. to improve its own image and attract superior managerial talents to manage its affairs<

:6; O8. #""%/".' /.)>

The purpose of ac)uisition is baced by the offeror company5s own developmental plans.

A company thins in terms of ac)uiring the other company only when it has arrived at its own

development plan to expand its operation having examined its own internal strength where it

might not have any problem of taxation, accounting, valuation, etc. but might feel resource

constraints with limitations of funds and lac of sill managerial personnel5s. It has to aim at

suitable combination where it could have opportunities to supplement its funds by issuance of

securities< secure additional financial facilities eliminate competition and strengthen its maret

position.

:7; S''"2 /*/%)">

The Ac)uirer Company view the merger to achieve strategic ob*ectives through alternative type

of combinations which may be horizontal, vertical, product expansion, maret extensional or

other specified unrelated ob*ectives depending upon the corporate strategies. Thus, various types

of combinations distinct with each other in nature are adopted to pursue this ob*ective lie

vertical or horizontal combination.

:@; C%/%'" $2".#2."))>

38


39/75

Although it is rare but it is true that business houses exhibit degrees of cooperative spirit despite

competitiveness in providing rescues to each other from hostile taeovers and cultivate situations

of collaborations sharing goodwill of each other to achieve performance heights through business

combinations. The combining corporate aim at circular combinations by pursuing this ob*ective

:; D")2"# "" %$ 2.'"'2%.>

#ergers and ac)uisition are pursued to obtain the desired level of integration between the two

combining business houses. 0uch integration could be operational or financial. This gives birth to

conglomerate combinations. The purpose and the re)uirements of the offeror company go a long

way in selecting a suitable partner for merger or ac)uisition in business combinations.

#erger or ac)uisition depends upon the purpose of the offeror company it wants to achieve.

(ased on the offerors5 ob*ectives profile, combinations could be vertical, horizontal, circular and

conglomeratic as precisely described below with reference to the purpose in view of the offeror

company.

:A; V"'2 %2.'2%.>

A company would lie to taeover another company or see its merger with that company to

expand espousing bacward integration to assimilate the resources of supply and forward

integration towards maret outlets. The ac)uiring company through merger of another unit

attempts on reduction of inventories of raw material and finished goods, implements its

production plans as per the ob*ectives and economizes on woring capital investments. In other

words, in vertical combinations, the merging undertaing would be either a supplier or a buyer

using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the ac)uirer company i.e.

78 it gains a strong position because of imperfect maret of the intermediary products,

scarcity of resources and purchased products<

78 9as control over products specifications.

:B; %2%.' %2.'2%.>

39


40/75

It is a merger of two competing firms which are at the same stage of industrial process. The

ac)uiring firm belongs to the same industry as the target company. The mail purpose of such

mergers is to obtain economies of scale in production by eliminating duplication of facilities and

the operations and broadening the product line, reduction in investment in woring capital,

elimination in competition concentration in product, reduction in advertising costs, increase in

maret segments and exercise better control on maret.

:C; C2* %2.'2%.>

Companies producing distinct products see amalgamation to share common distribution and

research facilities to obtain economies by elimination of cost on duplication and promoting

maret enlargement. The ac)uiring company obtains benefits in the form of economies of

resource sharing and diversification.

:D; C%.%"'" %2.'2%.>

It is amalgamation of two companies engaged in unrelated industries lie @C# and #odi

Industries. The basic purpose of such amalgamations remains utilization of financial resources

and enlarges debt capacity through re/organizing their financial structure so as to service the

shareholders by increased leveraging and "30, lowering average cost of capital and thereby

raising present worth of the outstanding shares. #erger enhances the overall stability of the

ac)uirer company and creates balance in the company5s total portfolio of diverse products and

production processes.

#ergers and taeovers are permanent form of combinations which vest in management

complete control and provide centralized administration which are not available in combinations

of holding company and its partly owned subsidiary. 0hareholders in the selling company gain

from the merger and taeovers as the premium offered to induce acceptance of the merger or

taeover offers much more price than the boo value of shares. 0hareholders in the buyingcompany gain in the long run with the growth of the company not only due to synergy but also

due to %boots trapping earnings&.

40


41/75

Motivations for mergers and acquisitions

#ergers and ac)uisitions are caused with the support of shareholders, manager5s ad

promoters of the combing companies. The factors, which motivate the shareholders and

managers to lend support to these combinations and the resultant conse)uences they have to bear,

are briefly noted below based on the research wor by various scholars globally.

:1; F% '(" )'.#/%2.' %$ )("(%#")

Investment made by shareholders in the companies sub*ect to merger should

enhance in value. The sale of shares from one company5s shareholders to another and holding

investment in shares should give rise to greater values i.e. the opportunity gains in alternative

investments. 0hareholders may gain from merger in different ways viz. from the gains and

achievements of the company i.e. through

7a8 realization of monopoly profits<

7b8 economies of scales<

7c8 diversification of product line<

7d8 ac)uisition of human assets and other resources not available otherwise<

7e8 (etter investment opportunity in combinations.

!ne or more features would generally be available in each merger where

shareholders may have attraction and favour merger.

:


42/75

better deals in raising their status, pers and fringe benefits. #ergers where all these things are

the guaranteed outcome get support from the managers. At the same time, where managers have

fear of displacement at the hands of new management in amalgamated company and also

resultant depreciation from the merger then support from them becomes difficult.

:3; P%%'"J) 2.)

#ergers do offer to company promoters the advantage of increasing the size of their company

and the financial structure and strength. They can convert a closely held and private limited

company into a public company without contributing much wealth and without losing control.

:H; B"."$2') '% "." /*2

Impact of mergers on general public could be viewed as aspect of benefits and costs toF

7a8 Consumer of the product or services<

7b8 'orers of the companies under combination<

7c8 Keneral public affected in general having not been user or consumer or the

worer in the companies under merger plan.

:; C%.)*")

The economic gains realized from mergers are passed on to consumers in the form of lower

prices and better )uality of the product which directly raise their standard of living and )uality of

life. The balance of benefits in favour of consumers will depend upon the fact whether or not the

mergers increase or decrease competitive economic and productive activity which directly affects

the degree of welfare of the consumers through changes in price level, )uality of products, after

sales service, etc.

:; W%9") %*.2'+

The merger or ac)uisition of a company by a conglomerate or other ac)uiring company may

have the effect on both the sides of increasing the welfare in the form of purchasing power and

other miseries of life. Two sides of the impact as discussed by the researchers and academicians

areF $2)'+, mergers with cash payment to shareholders provide opportunities for them to invest

42


43/75

this money in other companies which will generate further employment and growth to uplift of

the economy in general. S"%.#+, any restrictions placed on such mergers will decrease the

growth and investment activity with corresponding decrease in employment. (oth worers and

communities will suffer on lessening *ob opportunities, preventing the distribution of benefits

resulting from diversification of production activity.

:; G"." /*2

#ergers result into centralized concentration of power. "conomic power is to be understood as

the ability to control prices and industries output as monopolists. 0uch monopolists affect social

and political environment to tilt everything in their favour to maintain their power ad expand

their business empire. These advances result into economic exploitation. (ut in a free economy a

monopolist does not stay for a longer period as other companies enter into the field to reap the

benefits of higher prices set in by the monopolist. This enforces competition in the maret as

consumers are free to substitute the alternative products. Therefore, it is difficult to generalize

that mergers affect the welfare of general public adversely or favorably. "very merger of two or

more companies has to be viewed from different angles in the business practices which protects

the interest of the shareholders in the merging company and also serves the national purpose to

add to the welfare of the employees, consumers and does not create hindrance in administration

of the Kovernment polices.

#ergers and taeovers are two different approaches to business combinations. #ergers

are pursued under the Companies Act, ? vide sections 2?62?G thereof or may be envisaged

under the provisions of Income/tax Act, ? or arranged through (I:R under the 0ic Industrial

Companies Act, ?P whereas, taeovers fall solely under the regulatory framewor of the 0"(I

Regulations, ??1.

Minority shareholders rights

0"(I regulations do not provide insight in the event of minority shareholders not agreeing to the

taeover offer. 9owever section 2? of the Companies Act, ? provides for the ac)uisition of

shares of the shareholders. According to section 2? of the Companies Act, if the offerer has

43


44/75

ac)uired at least ?-B in value of those shares may give notice to the non/accepting shareholders

of the intention of buying their shares. The ?-B acceptance level shall not include the share held

by the offerer or it5s associates. The procedure laid down in this section is briefly noted below.

. In order to buy the shares of non/accepting shareholders the offerer must have reached

the ?-B acceptance level within G months of the date of the offer, and notice must have

been served on those shareholders within months of reaching the ?-B level.

. The notice to the non/accepting shareholders must be in a prescribed manner. A copy of a

notice and a statutory declaration by the offerer 7or, if the offerer is a company, by a

director8 in the prescribed form confirming that the conditions for giving the notice have

been satisfied must be sent to the target.

2. !nce the notice has been given, the offerer is entitled and bound to ac)uire the

outstanding shares on the terms of the offer.

G. If the terms of the offer give the shareholders a choice of consideration, the notice must

give particulars of options available and inform the shareholders that he has six wees

from the date of the notice to indicate his choice of consideration in writing.

. At the end of the six wees from the date of the notice to the non/accepting shareholders

the offerer must immediately send a copy of notice to the target and pay or transfer to the

target the consideration for all the shares to which the notice relates. 0toc transfer forms

executed on behalf of the non/accepting shareholders by a person appointed by the

offerer must also be sent. !nce the company has received stoc transfer forms it must

register the offerer as the holder of the shares.

. The consideration money, which is received by the target, should be held on trust for the

person entitled to shares in respect of which the sum was received.

1. Alternatively, if the offerer does not wish to buy the non/accepting shareholder5s shares,

it must still within one month of company reaching the ?-B acceptance level give such

shareholders notice in the prescribed manner of the rights that are exercisable by them to

re)uire the offerer to ac)uire their shares. The notice must state that the offer is still open

for acceptance and specify a date after which the right may not be exercised, which may

44


45/75

not be less than 2 months from the end of the time within which the offer can be

accepted. If the offerer fails to send such notice it 7and it5s officers who are in default8 are

liable to a fine unless it or they too all reasonable steps to secure compliance.

P. If the shareholder exercises his rights to re)uire the offerer to purchase his shares the

offerer is entitled and bound to do so on the terms of the offer or on such other terms as

may be agreed. If a choice of consideration was originally offered, the shareholder may

indicate his choice when re)uiring the offerer to ac)uire his shares. The notice given to

shareholder will specify the choice of consideration and which consideration should

apply in default of an election.

?. !n application made by an happy shareholder within six wees from the date on which

the original notice was given, the court may mae an order preventing the offerer from

ac)uiring the shares or an order specifying terms of ac)uisition differing from those of

the offer or mae an order setting out the terms on which the shares must be ac)uired.

In certain circumstances, where the taeover offer has not been accepted by the re)uired ?-B in

value of the share to which offer relates the court may, on application of the offerer, mae an

order authorizing it to give notice under the Companies Act, ?P, section G?. It will do this if it

is satisfied thatF

a. the offerer has after reasonable en)uiry been unable to trace one or more shareholders to

whom the offer relates<

b. the shares which the offerer has ac)uired or contracted to ac)uire by virtue of acceptance

of the offerer, together with the shares held by untraceable shareholders, amount to not

less than ?-B in value of the shares sub*ect to the offer< and

c. the consideration offered is fair and reasonable.

The court will not mae such an order unless it considers that it is *ust and e)uitable to do so,

having regard, in particular, to the number of shareholder who has been traced who did accept

the offer.

Alternative modes of acquisition

45


46/75

The terms used in business combinations carry generally synonymous connotations and can be

used interchangeably. All the different terms carry one single meaning of %merger& but each term

cannot be given e)ual treatment in the discussion because law has created a dividing line

between 4tae/over5 and ac)uisitions by way of merger, amalgamation or reconstruction.

3articularly the taeover Regulations for substantial ac)uisition of shares and taeovers nown

as 0"(I 70ubstantial Ac)uisition of 0hares and Taeovers8 Regulations, ??1 vide section 2

excludes any attempt of merger done by way of any one or more of the following modesF

7a8 by allotment in pursuant of an application made by the shareholders for right issue

and under a public issue<

7b8 preferential allotment made in pursuance of a resolution passed under section P7A8

of the Companies Act, ?<

7c8 allotment to the underwriters pursuant to underwriters agreements<

7d8 inter/se/transfer of shares amongst group, companies, relatives, Indian promoters and

:oreign collaborators who are shareholders6promoters<

7e8 ac)uisition of shares in the ordinary course of business, by registered stoc broers,

public financial institutions and bans on own account or as pledges<

7f8 ac)uisition of shares by way of transmission on succession or inheritance<

7g8 ac)uisition of shares by government companies and statutory corporations<

7h8 transfer of shares from state level financial institutions to co/promoters in pursuance

to agreements between them<

7i8 ac)uisition of shares in pursuance to rehabilitation schemes under 0ic Industrial

Companies 70pecial 3rovisions8 Act, ?P or schemes of arrangements, mergers,

amalgamation, @e/merger, etc. under the Companies Act, ? or any other law or

regulation, Indian or :oreign<

46


47/75

7*8 ac)uisition of shares of company whose shares are not listed on any stoc exchange.

9owever, this exemption in not available if the said ac)uisition results into control of

a listed company<

78 such other cases as may be exempted from the applicability of Chapter III of 0"(I

regulations by 0"(I.

The basic logic behind substantial disclosure of taeover of a company through

ac)uisition of shares is that the common investors and shareholders should be made aware of the

larger financial stae in the company of the person who is ac)uiring such company5s shares. The

main ob*ective of these Regulations is to provide greater transparency in the ac)uisition of shares

and the taeovers of companies through a system of disclosure of information.

Escrow account

To ensure that the ac)uirer shall pay the shareholders the agreed amount in redemption of his

promise to ac)uire their shares, it is a mandatory re)uirement to open escrow account and

deposit therein the re)uired amount, which will serve as security for performance of obligation.

The "scrow amount shall be calculated as per the manner laid down in regulation P78.

AccordinglyF

:or offers which are sub*ect to a minimum level of acceptance, and the ac)uirer does want to

ac)uire a minimum of -B, then -B of the consideration payable under the public offer in cash

shall be deposited in the "scrow account.

Payment of consideration

Consideration may be payable in cash or by exchange of securities. 'here it is payable in cash

the ac)uirer is re)uired to pay the amount of consideration within days from the date of

closure of the offer. :or this purpose he is re)uired to open special account with the baners to an

issue 7registered with 0"(I8 and deposit therein ?-B of the amount lying in the "scrow Account,

if any. 9e should mae the entire amount due and payable to shareholders as consideration. 9e

can transfer the funds from "scrow account for such payment. 'here the consideration is

47


48/75

payable in exchange of securities, the ac)uirer shall ensure that securities are actually issued and

dispatched to shareholders in terms of regulation ? of 0"(I Taeover Regulations.

Kenerally, a company with the trac record should have a less profit earning or loss maing but

viable company amalgamated with it to have benefits of economies of scale of production and

mareting networ, etc. As a conse)uence of this merger the profit earning company survives

and the loss maing company extinguishes its existence. (ut in many cases, the sic company5s

survival becomes more important for many strategic reasons and to conserve community interest.

The law provides encouragement through tax relief for the companies that are profitable but get

merged with the loss maing companies. Infact this type of merger is not a normal or a routine

merger. It is, therefore, called as a R"")" M""!

The allurement for such mergers is the tax savings under the Income/tax Act, ?. 0ection 1A

of the Act ensures the tax relief which becomes attractive for amalgamations of sic company

with a healthy and profitable company to tae the advantage of carry forward losses. Taing

advantage of the provisions of section 1A through merger or amalgamation is nown as reverse

merger, which gives survival to the sic unit by merging it with the healthy unit. The healthy unit

extincts loosing its name and the surviving sic company retains its name. Companies to tae

advantage of the section follow this route but after a year or so change their names to the one of

the healthy company as were done amongst others by irlosar 3neumatics ;td. The company

merged with irlosar Tractors ;td, a sic unit and initially lost its name but after one year it

changed its name as was prior to merger.

R"")" M"" *.#" T L8)

0ection 1A of the Income/tax Act, ? is meant to facilitate re*uvenation of sic industrial

undertaing by merging with healthier industrial companies having incentive in the form of tax

savings designed with the sole intention to benefit the general public through continued

productive activity, increased employment avenues and generation of revenue.

:1; B9%*.#

>nder the existing provisions of the Income/tax Act, so much of the business loss of a year as

cannot be set off by him against the profits of the following year from any business carried on by

48


49/75

him. If the loss cannot be so wholly set off, the amount not so set off can be carried forward to

the next following year and so on, up to a maximum of eight assessment years immediately

succeeding the assessment year for which the loss was first computed. The benefit of carry

forward and set off of business loss is, however, not available unless the business in which the

loss was originally sustained is continued to be carried on by the assessee. :urther, only the

assessee who incurred the loss by his predecessor. 0imilarly, if a business carried on one assessee

is taen over by another, the unabsorbed depreciation allowance due to the predecessor in

business and set off against his profits in subse)uent years. In view of these provisions, the

accumulated business loss and unabsorbed depreciation allowance of a company which merges

with another company under a scheme of amalgamation cannot be carried forward and set off by

the latter company against its profits.

The very purpose of section 1A is to revive the business of an undertaing, which is financially

non/viable and to bring it bac to health. 0icness among industrial undertaings is a matter of

grave national concern. "xperience has shown that taing over of such units by Kovernment is

not always the most satisfactory or the most economical solution. The more effective course

suggested was to facilitate the amalgamation of sic industrial units with sound ones by

providing incentives and removing impediments in the way of such amalgamation. To save the

Kovernment from social costs in terms of loss of production and employment and to relieve the

Kovernment of the uneconomical burden of taing over and running sic industrial units is one

of the motivating factors in introducing section 1A. To achieve this ob*ective so as to facilitate

the merger of sic industrial units with sound one, the general rule of carry forward and set off of

accumulated losses and unabsorbed depreciation allowance of amalgamating company by the

amalgamated company was statutorily related. (y a deeming fiction, the accumulated loss or the

unabsorbed depreciation of the amalgamating is treated to be the loss or, as the case may be,

allowance for depreciation of the amalgamated company for the previous year in which

amalgamation was affected.

There are three statutory conditions which are to be fulfilled under section 1A 78 for the

benefits prescribed therein to be available to the amalgamated company, namely M

49


50/75

7i8 The amalgamating company was, immediately before such amalgamation, financially

non/viable by reason of its liabilities, losses and other relevant factors<

7ii8 The amalgamation is in the public interest<

7iii8 0uch other conditions as the Central Kovernment may by notification in the !fficial

Kazette specify, to ensure that the benefit under this section is restricted to amalgamation,

which would facilitate the rehabilitation or revival of the business of amalgamating

company.

:


51/75

. Amalgamation should be between companies and none of them

should be a firm of partners or sole/proprietor. In other words,

partnership firm or sole/proprietary concerns cannot get the benefit

of tax relief under section 1A merger.

. The companies entering into amalgamation should be engaged in

either industrial activity or shipping business. In other words, the

tax relief under section 1A would not be made available to

companies engaged in trading activities or services.

2. After amalgamation the %sic& or %financially unviable company&

shall survive and other income generating company shall extinct.

In other words essential condition to be fulfilled is that the

ac)uiring company will be able to revive or rehabilitate having

consumed the healthy company.

G. !ne of the merger partner should be financially unviable and have

accumulated losses to )ualify for the merger and the other merger

partner should be profit earning so that tax relief to the maximum

extent could be had. In other words the company which is

financially unviable should be technically sound and feasible,

commercially and economically viable but financially wea

because of financial stringency or lac of financial recourses or its

liabilities have exceeded its assets and is on the brin of

insolvency. The second re)uisite )ualification associated with

financial unavailability is the accumulation of losses for past few

years.

. Amalgamation should be in the public interest i.e. it should not be

against public policy, should not defeat basic tenets of law, and

must safeguard the interest of employees, consumers, creditors,

customers and shareholders apart from promoters of company

through the revival of the company.

51


52/75

. The merger must result into following benefit to the amalgamated

company i.e. (a) carry forward of accumulated business loses of

the amalgamated company< (b) carry forward of unabsorbed

depreciation of the amalgamating company and (c) accumulated

loss would be allowed to be carried forward set of for eight

subse)uent years.

1. Accumulated loss should arise from %3rofits and Kains from

business or profession& and not be loss under the head %Capital

Kains& or %0peculation&.

P. :or )ualifying carry forward loss, the provisions of section 1

should have not been contravened.

?. 0imilarly for carry forward of unabsorbed depreciation the

conditions of section 2 should not have been violated.

-. 0pecified authority has to be satisfied of the eligibility of the

company for the relief under section 1 of the Income Tax Act. It is

only on the recommendations of the specified authority that

Central Kovernment may allow the relief.

. The company should mae an application to a %specified

authority& for re)uisite recommendation of the case to the Central

Kovernment for granting or allowing the relief.

. 3rocedure for merger or amalgamation to be followed in such

cases is same as in any other cases. 0pecified Authority maes

recommendation after taing into consideration the court5s

direction on scheme of amalgamation.

Public announcement:

To mae a public announcement an ac)uirer shall follow the following procedureF

52


53/75

1! A//%2.'".' %$ "(.' .9">

The ac)uirer shall appoint a merchant baner registered as category M I with 0"(I to advise him

on the ac)uisition and to mae a public announcement of offer on his behalf.

3ublic announcement should be made within four days of finalization of negotiations or entering

into any agreement or memorandum of understanding to ac)uire the shares or the voting rights.

H! C%.'".') %$ ..%*."".'>

3ublic announcement of offer is mandatory as re)uired under the 0"(I Regulations. Therefore, it

is re)uired that it should be prepared showing therein the following informationF

78 3aid up share capital of the target company, the number of fully paid up and

partially paid up shares.

78 Total number and percentage of shares proposed to be ac)uired from public

sub*ect to minimum as specified in the sub/regulation 78 of Regulation

that isF

a8 The public offer of minimum -B of voting capital of the company to the

shareholders<

b8 The public offer by a raider shall not be less than -B but more than B

of shares of voting rights. Additional shares can be had V B of voting

rights in any year.

728 The minimum offer price for each fully paid up or partly paid up share<

7G8 #ode of payment of consideration<

53


54/75

78 The identity of the ac)uirer and in case the ac)uirer is a company, the identity

of the promoters and, or the persons having con

Documents

Bank of Rajasthan Merger.docx