Test: Merger and Amalgamation of a Company - UGC NET MCQ

A merger is an agreement that unites two existing companies into one new company. Mergers are a way for companies to expand their reach, expand into new segments, or gain market share. A merger is the voluntary fusion of two companies on broadly equal terms into one new legal entity.

Key points

ICICI Bank:

• ICICI Bank was established by the Industrial Credit and Investment Corporation of India (ICICI), an Indian financial institution, as a wholly-owned subsidiary in 1994 in Vadodara.
• The parent company was formed in 1955 as a joint-venture of the World Bank, India's public-sector banks, and public-sector insurance companies to provide project financing to the Indian industry.
• The bank was founded as the Industrial Credit and Investment Corporation of India Bank before it changed its name to ICICI Bank.
• The parent company was later merged with the bank.

IDBI Bank:

• The Industrial Development Bank of India (IDBI) was established in 1964 under an Act of Parliament as a wholly-owned subsidiary of the Reserve Bank of India.
• In 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting, and developing industry in India.

Important Point

• In September 2003 the company diversified its business domain further by acquiring the entire shareholding of Tata Finance Ltd in Tata Home finance Ltd.
• The fully-owned housing finance subsidiary was renamed 'IDBI Home Finance Ltd'.
• In October 2004 the company was transformed into a banking company to undertake all kinds of banking activities while continuing to play their secular Development Financial Institution role.
• Also, they changed their name to the Industrial Development Bank of India Ltd.
• In 2005 Industrial Development Bank of India Ltd merged their banking subsidiary IDBI Bank with themselves.

Thus, option 3 is the correct answer.

• The Assertion is true as the process of mergers and amalgamations in India does initiate with the submission of an application to the NCLT.
• The Reason is also true as the NCLT holds meetings involving shareholders and creditors to obtain approval for the proposed merger or amalgamation.
• However, Reason is not the correct explanation of the Assertion. Even though both statements are true, the direct filing of an application is a procedural step, while the NCLT's role in convening meetings represents a subsequent action in the process, not necessarily a direct explanation of the initial step.

In business, "amalgamation" refers to the process where two or more companies merge to form a single entity. This strategic move is often undertaken to gain market share, reduce costs, and achieve a competitive edge in the industry. Amalgamations can occur through absorption, where one company takes over another, or through consolidation, where two or more companies combine to establish a new entity.

A vertical merger occurs when companies at different stages of the supply chain combine. This type of merger allows companies to streamline their operations, reduce costs, and gain better control over the production process. An example would be a manufacturer merging with a distributor to create a unified entity with enhanced market presence and efficiency.

The correct answer is (c) and (d) only.

• Business acquisition occurs when one company (the acquirer) buys most or all shares in another company (the target) to assume control of its assets and operations. 
• Acquisitions are often amicable, meaning both companies are on-board with and negotiate the terms of the transaction.

Key Points

• Acquisitions either can be mutually agreed upon by the acquired and acquiring firm or completed through a hostile takeover. 
• An acquisition can be interchangeably used with the terms takeover and absorption. 
• In absorption, the absorbing company absorbs the other company and continues its existence. Acquired companies cease to exist and become part of acquiring companies. 
• A takeover occurs when one company makes a successful bid to assume control of or acquire another. Takeovers can be done by purchasing a majority stake in the target firm. 

Assertion: The Competition Act, 2002, playing a crucial role in regulating mergers and amalgamations in India, is correct.

Reason: The Competition Act, 2002, necessitating companies to notify the CCI if their merger exceeds specific thresholds, is also true.

Explanation: While both the Assertion and Reason are true, the Reason does not directly explain why the Competition Act, 2002, is crucial in governing mergers and amalgamations. The Act's significance lies in preventing anti-competitive practices rather than just mandating notifications.

Cultural clashes and integration challenges can be significant hurdles in the process of mergers. When two companies with differing corporate cultures come together, it can lead to conflicts, communication breakdowns, and disruptions in workflow. Resolving these clashes requires careful planning, effective communication, and strong leadership to ensure a smooth integration process and to achieve the desired synergies.

• The Assertion is true as SEBI indeed mandates that companies secure its approval before issuing securities during mergers or amalgamations.
• The Reason is true as SEBI plays a crucial role in regulating mergers and acquisitions in India, with a focus on safeguarding the interests of minority shareholders.
• The Reason is the correct explanation of the Assertion because the requirement for SEBI's approval stems from its regulatory role in ensuring fair practices and protection for shareholders during such financial transactions.

The primary difference between a merger and an amalgamation lies in the legal status of the original companies. In a merger, the original companies cease to exist and are replaced by a new entity, whereas in an amalgamation, the absorbing company continues to operate under its original legal identity. This distinction is crucial in understanding how these strategic business practices impact the structures and identities of the involved companies.

Assertion: Section 47 of the Indian Income Tax Act, 1961, dealing with tax implications of mergers and amalgamations, is accurate.

Reason: Section 47 indeed specifies that the transfer of assets under amalgamation is not subject to capital gains tax.

Explanation: Both the Assertion and Reason are true, and the Reason correctly explains why Section 47 is significant of tax implications for mergers and amalgamations in India.