Mergers And Acquisitions In Telecom Sector

This blog is inscribed by Nishant Srivastav.

Introduction:

A business may grow over time as the utility of its products and services is recognized[1]. It may also grow through an inorganic process, symbolized by an instantaneous expansion in work force, customers, infrastructure resources and thereby an overall increase in the revenues and profits of the entity[2]. Mergers and acquisitions are manifestations of an inorganic growth process[3].

 Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as critical tool of business strategy[4]. They are widely used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional business to gain strength, expand the customer base, cut competition or enter into a new market or product segment[5]. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity[6].

The telecom sector of our country is also increasing day by day[7]. With the increasing population, the demands in the telecom sector have also increased[8]. Earlier there used to one old fashioned phone in one society or colony for use by all but in today’s era, a child even of 14 years of age is given a mobile phone and even the lower or poor class can afford a mobile phone too[9]. Today mobile phones have been a necessity more than a luxury where we can keep in touch with our near ones easily[10]. Mergers and Acquisitions are seen even in this sector of the country[11]. Thus, while going through this blog you will come to know about mergers and acquisition in telecom sector with respect to Vodafone and Idea case.

What is Mergers And Acquisition And Their Types?

Mergers:

Merger may be defined as, “ A combination of two or more companies into one. They are usually considered as a means to a long-term business strategy[12].” ‘Merger’ as a term is not explicitly defined in neither Companies Act, 2013 nor Income Tax Act, 1961[13]. However, the Income Tax Act defines an analogous term[14] – ‘amalgamation‘. Amalgamation refers to the merger of one or more entity with another entity, or merger of two or more entities to form one entity[15].

Types Of Mergers:

  1. Horizontal Mergers – These types of mergers takes place when two companies identical selling products and services, come together in order enhance their reach to people at large.
  2. Vertical Mergers – Vertical mergers happen between two companies producing different goods or services for a particular product or service[16]. This type of merger mostly occurs between two companies within a production or a distribution process of a particular industry. [17]The purpose behind this kind of a merger is to have high-quality control and gain more command over the supply chain, giving the merged firms a better competitive edge in the industry[18].
  3. Concentric Merger – Similar to horizontal mergers, concentric mergers occur when one company merges with another company to sell products to the same customer, even though they sell different products[19].
  4. Conglomerate Mergers – A conglomerate merger happens between two unrelated companies[20]. Conglomerate mergers are of two types:
  5. Pure Conglomerate Mergers – happens between companies selling completely unrelated products and who are operating in different markets[21].
  6. Mixed Conglomerate Mergers – It occurs between companies with the aim to expand product lines or target markets[22].

Acquisition:

An acquisition is where one company takes control of another by purchasing its assets or the majority of its shares[23]. There are five main types of acquisitions:

  • Value Creating – Value creating is where a company acquires another company, improves its performance and then sells it again for a profit[24].
  • Consolidation – This is where a company acquires another company to remove competition from an over-supplied market[25].
  • Acceleration – Accelerating is when a larger company acquires a smaller company and uses its greater resources to accelerate market access for the smaller company’s products[26].
  • Resource Acquiring –  This is where a company acquires other companies to gain resources, skills, intellectual property, technologies or market positioning they need, because it is more cost effective than developing their own.[27]
  • Speculating – Speculating is when a larger company acquires a smaller company with a new product, with the aim of cashing in on its future growth potential[28].

Laws By Which Mergers And Acquisitions Are Governed India:

The key legislations by which Mergers And Acquisitions are governed in India are:

  • Companies Act, 2013 – The primary legislation by which mergers and acquisition shall be governed is the Companies Act, 2013. All  corporate transactions whether mergers, acquisition, private equity funding shall be governed in accordance with provisions of the Act.
  • Foreign Exchange Management Act(1999) – The foreign exchange laws relating to issuance and allotment of shares to foreign entities are contained in The Foreign Exchange Management (Transfer or Issue of Security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR no. 406(E) dated 3rd May, 2000[29]. These regulations provide general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording in its books any transfer of security from or to such person. [30]RBI has issued detailed guidelines on foreign investment in India vide “Foreign Direct Investment Scheme” contained in Schedule 1 of said regulation[31].
  • The Competition Act, 2002 – Below are the provisions of the Competition Act, 2002 deals with the mergers of the companies  :-
    (1) Section 5 of the Competition Act, 2002 deals with “Combinations” which defines combination by reference to assets and turnover[32].
    (a) exclusively in India and
    (b) in India and outside India.
  • The Securities And Exchange Board Of India – SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to 55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the target company in any financial year[33]. [Regulation 11(1) of the SEBI Takeover Regulations] However, acquisition of shares or voting rights beyond 26% would apparently attract the notification procedure under the Act[34]. It should be clarified that notification to CCI will not be required for consolidation of shares or voting rights permitted under the SEBI Takeover Regulations[35]. Similarly the acquirer who has already acquired control of a company (say a listed company), after adhering to all requirements of SEBI Takeover Regulations and also the Act, should be exempted from the Act for further acquisition of shares or voting rights in the same company[36].
  • The Income Tax Act, 1961 – Sec 2 (1B) of the Income Tac Act, 1961 defines the ‘amalgamation’ as merger of two or more companies[37].  Let us suppose  two companies X Ltd and Y Ltd:

(a)   X Ltd Merges with Y Ltd. Thus X Ltd goes out of existence. Here X Ltd is Amalgamating Company and Y Ltd is Amalgamated Company[38].

(b) X Ltd and Y Ltd both merges and form a new company say, Z Ltd. Thus both X Ltd and Y Ltd goes out of existence and form a new company Z Ltd. Here X Ltd and Y Ltd are Amalgamated Company and Z Ltd is Amalgamated Company[39].

Rationale Behind Behind Mergers And Acquisition:

Given below are numerous reasons which compels mergers and acquisition:

“Financial synergy for lower cost of capital, For improvement of company’s performance, Economies Of Scale, Improving company’s performance and accelerate growth, Economies of scale, Diversification for higher growth products or markets, To increase market share and positioning giving broader market access, Strategic realignment and technological change, Tax considerations, Under valued target, Diversification of risk, Principle behind any[40].” 

Mergers And Acquisitions Procedure For Telecom Sector:

The current M&A rules allow the amalgamation of companies not exceeding 50% market share in a service area[41]. The rule limits the total spectrum held by the merged entity to 35% of the total spectrum assigned for access services and 50% of the spectrum assigned in a given band in the concerned service area[42]. The combined spectrum holding in the sub-1 GHz bands – 700 MHz, 800 MHz, and 900 MHz bands -by the resultant entity shall not exceed 50% of the total spectrum assigned in the sub-1 GHz bands, by way of auction or otherwise, in the concerned service area[43]. The other important guidelines are as follows:

  • License dues to be cleared by either of the two licensees: 

All dues relating to the license of the merging entities will have to be cleared by either of the two licensees before the issue of the permission for the merger of licenses[44]. This shall be as per the demand raised by the government or licensor. It should be based on the returns filed by the company notwithstanding any pending legal cases or disputes[45].

  • Rules for the resultant entity:

The resultant entity should be entitled to only one block of 6.2 MHz/ 5MHz (GSM/CDMA) for the paid entry fee[46]. Either of the parties to be merged should pay the Spectrum price and this shall not apply in case of the spectrum obtained through an auction, if any[47].

  • Duration of the license: 

The duration of a license of the Resultant entity will be equal for the two periods from the date of the merger[48]. The paper also said that the spectrum transfer charge should be paid before permission is granted[49].

The Merger Of Vodafone And Idea:

The merger will give a higher stake to the promoters of Idea as compared to Vodafone India so that in the long run both the companies are able to gain access to equal hold[50].

1. The first step for AB group would be the acquisition of 4.9 percent of shares from Vodafone[51]. This would amount to a total of Rs. 3874 crore wherein each share is worth Rs. 108[52]. This would be helpful in increasing the share holding capacity of Idea to 26 percent[53].

2. While Vodafone holds 45.1 percent of the shares in the merger, Idea would be allowed to buy another 9.6 percent but at a cost of Rs. 130 per share in the period spread over next four years[54]. However, if Idea is unable to come up equal to the shareholding percentage of Vodafone, it can go forward and buy the number of shares required further but at the price prevailing in the market.[55]

Conclusion

Talking in much simpler words the Merger and Acquisition is weapon to strengthen the economy of any particular nation. In the recent years we have seen the merger of TATA Steel with Corus, Sterlite with Asarco and may more. Government has taken many steps to ignite the storm of merger in the nation. But more of the efforts are needed to shape the laws for mergers and acquisition in India. A proper statute should e designed by the Parliament of our nation so that the merger and acquisition policy strenghthned in India. By formulating the proper policies related to the M&A the government can also invite world’s best cross border mergers. Further I would like to put forward five question for the readers:


[1] Data & Reports, Mergers And Acquisition, Ministry Of Corporate Affairs, Government Of India, (September 23rd  2019), http://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html

[2] ibid

[3] ibid

[4] ibid

[5] ibid

[6] ibid

[7] Mr. Naman, Mergers And Acquisition In Telecom Sector In India, Indian Legal Solutions Journal Of Criminal And Constitutional Law(October 15 2019), https://journal.indianlegalsolution.com/2019/10/15/mergers-and-acquisition-in-telecom-sector-in-india-naman/

[8] ibid

[9] ibid

[10] Mr. Naman, Mergers And Acquisition In Telecom Sector In India, Indian Legal Solutions Journal Of Criminal And Constitutional Law(October 15 2019), https://journal.indianlegalsolution.com/2019/10/15/mergers-and-acquisition-in-telecom-sector-in-india-naman/

[11] ibid

[12] Nishtha Jain, Rationale Behind Mergers And Acquisition, I Pleaders, (June 11, 2019), https://blog.ipleaders.in/rationale-mergers-acquisitions/

[13] ibid

[14] ibid

[15] ibid

[16] Vertis, A Guide Through M&A – Types of Mergers and Acquisitions, Vertis Transcend, (March 15 2019), https://www.veritis.com/blog/a-guide-through-ma-types-of-mergers-and-acquisitions/

[17] ibid

[18] ibid

[19] Vertis, A Guide Through M&A – Types of Mergers and Acquisitions, Vertis Transcend, (March 15 2019), https://www.veritis.com/blog/a-guide-through-ma-types-of-mergers-and-acquisitions/

[20] ibid

[21] ibid

[22] ibid

[23] An Overview Of Different Types Of Mergers And Acquisition, Johnson Corporate, https://johnsonscorporate.com.au/an-overview-of-the-different-types-of-mergers-and-acquisitions/

[24] ibid

[25] ibid

[26] ibid

[27] ibid

[28] ibid

[29] Prabhanshu, Laws Regulating Mergers And Acquisition In India, Legal Services India,

http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html

[30] ibid

[31] ibid

[32] ibid

[33] ibid

[34] ibid

[35] ibid

[36] ibid

[37] CMA.CA. Sanjay Gupta, Taxation Aspect of Mergers and Amalgamation, CA Club India(May 3, 2011), https://www.caclubindia.com/articles/taxation-aspect-of-mergers-and-amalgamation-9630.asp
 

[38] CMA.CA. Sanjay Gupta, Taxation Aspect of Mergers and Amalgamation, CA Club India(May 3, 2011), https://www.caclubindia.com/articles/taxation-aspect-of-mergers-and-amalgamation-9630.asp

[39] ibid

[40] Mergers And Acquisition, EduPristine, (June 16, 2015), https://www.edupristine.com/blog/mergers-acquisitions

[41] https://www.medianama.com/2019/09/223-mergers-acquisitions-telecom-trai/

[42] ibid

[43] https://www.medianama.com/2019/09/223-mergers-acquisitions-telecom-trai/

[44] ibid

[45] ibid

[46] ibid

[47] ibid

[48] ibid

[49] ibid

[50] Idea And Vodafone Merger – A saga off becoming India’s Largest Telocom Company, https://www.jagranjosh.com/articles/idea-and-vodafone-merger-a-saga-of-becoming-indias-largest-telecom-company-1490598696-1

[51] ibid

[52] ibid

[53] ibid

[54] ibid

[55] ibid

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