Type of Transactions in M&A - Part 2
DEMERGER
It is a business restructuring strategy in which a single company is split into separate components.
These components may be:
Operated as independent businesses.
Sold to other companies or investors.
Dissolved if no longer viable.
OBJECTIVES AND BENEFITS OF A DEMERGER
A demerger allows a large company or conglomerate to separate its different brands or business divisions.
Companies may demerge to invite or prevent an acquisition, depending on strategic objectives.
Demergers help in raising capital by selling off non-core or underperforming business units.
It enables the company to focus on its core product line or core operations.
Separate businesses created through demerger can operate with independent management and strategies.
A demerger also creates separate legal entities to manage different operations more efficiently.
KEY FEATURES OF A DEMERGER
A demerger is an arrangement in which a specific part or undertaking of an existing company is transferred to another company.
The transferred undertaking becomes part of a separate and independent company.
After the demerger, the new company operates completely independently from the original company.
The original company continues to exist, but without the demerged business unit.
Shareholders of the original company are generally given an equivalent or proportionate ownership stake in the new company.
The arrangement helps in separating business operations, allowing each company to focus on its own objectives and growth.
TRANSFER OF CONTRACTS IN A DEMERGER
All contracts relating to the demerged undertaking are automatically transferred to the resulting company.
Such automatic transfer applies unless the contract itself contains specific restrictions or prohibitions on transfer or assignment.
The company whose undertaking is split and transferred is known as the demerged company.
The company to which the undertaking is transferred is called the resulting company.
DEFINITION OF DEMERGER
Demerger under Section 2(19AAA) of the Income-tax Act, 1961 refers to the transfer of one or more undertakings of a company.
Demerger is defined as:
A demerged company is the company whose undertaking is transferred.
The transfer takes place as part of a demerger arrangement.
The undertaking is transferred to another company, known as the resulting company.
The transfer must take place pursuant to a scheme of arrangement.
Such a scheme is required to be framed and approved under Sections 230 to 232 of the Companies Act.
The transfer must be carried out in a prescribed manner, satisfying specific statutory conditions laid down below:
(i).Automatic Transfer of Assets in a Demerger
All assets and property that belong to the undertaking being demerged are identified before the demerger.
These assets include both tangible and intangible property, such as land, buildings, machinery, contracts, licenses, and intellectual property.
Immediately before the demerger, such property legally belongs to the demerged company.
Upon the demerger taking effect, the ownership of these assets automatically shifts to the resulting company.
This transfer happens by operation of law, meaning no separate sale deed or transfer agreement is required.
The resulting company becomes the lawful owner of the transferred property from the effective date of the demerger.
(ii). Automatic Transfer of Liabilities in a Demerger
All liabilities and obligations that relate specifically to the undertaking being demerged are identified before the demerger.
These liabilities may include debts, loans, contractual obligations, employee-related dues, and statutory liabilities.
Immediately before the demerger, such liabilities are the responsibility of the demerged company.
Upon the demerger taking effect, these liabilities are automatically transferred to the resulting company.
The transfer occurs by virtue of the demerger itself, without the need for separate agreements or creditor consent, unless otherwise required by law or contract.
The resulting company becomes fully responsible for discharging these liabilities from the effective date of the demerger.
(iii). Transfer of Assets and Liabilities at Book Value
The assets and liabilities of the undertaking being demerged are identified as on the date immediately before the demerger.
These assets and liabilities are transferred to the resulting company at the same values recorded in the books of account of the demerged company.
No revaluation or re-pricing of assets or liabilities is carried out for the purpose of the demerger.
The transfer is done on a book value basis, not at market value.
It also helps the demerger qualify as a tax-neutral restructuring under the Income-tax Act.
(iv). Issue of Shares as Consideration in a Demerger
As consideration for the demerger, the resulting company issues its own shares.
These shares are issued directly to the shareholders of the demerged company, not to the demerged company itself.
The issue of shares is done on a proportionate basis, according to each shareholder’s existing shareholding in the demerged company.
Where the resulting company is already a shareholder of the demerged company, shares are not issued to itself.
This avoids duplication of ownership and maintains a clean shareholding structure
The mechanism preserves continuity of ownership while creating two separate corporate entities.
(v). Continuity of Shareholding in a Demerger
Shareholders of the demerged company must hold not less than three-fourths (75%) in value of its shares.
While calculating this three-fourths value, the following shares immediately before the demerger are excluded.
Shared held by the resulting company.
Shared held by a nominee of the resulting company.
Shared held by a subsidiary of the resulting company.
Such qualifying shareholders automatically become shareholders of the resulting company or companies.
This change in shareholding takes place by virtue of the demerger itself, without any separate transfer.
Demerger Not to be a Sale or Asset Purchase Transaction
The demerger should not take place by way of a simple sale or purchase transaction.
The resulting company must not buy the assets or property of the demerged undertaking for consideration like cash.
Instead, the transfer of assets should happen as part of a restructuring arrangement, not as an asset acquisition.
The ownership of the assets moves to the resulting company by operation of law through the demerger scheme.
This distinction separates a demerger from an ordinary asset sale or business purchase.
(vi). Transfer of Undertaking on a Going Concern Basis
The undertaking is transferred as a continuing and operating business, not as a closed or dismantled unit.
All essential elements of the business—such as assets, liabilities, employees, contracts, and operations—move together to the resulting company.
The business continues its activities without interruption before and after the transfer.
The resulting company steps into the shoes of the demerged company for running the undertaking.
(vii).Power of Central Government to Prescribe Conditions for Genuine Demergers
Demerger should be processed in accordance with the conditions notified under Section 72A(5) of Income Tax Act, 1961.
Section 72A(5) of the Income Tax Act states that:
The Central Government is given the authority to oversee demergers under the Act.
It may issue a notification in the Official Gazette specifying conditions related to demergers.
The objective is to prevent misuse of demerger provisions for tax avoidance or other improper purposes.
Companies must comply with the notified conditions for their restructuring to be recognised as a valid demerger under the Act.
UNDERSTANDING UNDERTAKING
The term Undertaking includes:
Any part of an undertaking.
A unit or division of an undertaking.
A business activity taken as a whole.
An undertaking refers to a going concern, capable of being operated independently.
It involves a combination of assets, liabilities, employees, and operations that together constitute a business.
The term does not include individual assets or liabilities by themselves.
It also excludes any combination of assets or liabilities that does not amount to a complete business activity.
So, only functional business units qualify as an undertaking, and not mere asset transfers.
UNDERSTANDING LIABILITIES
The term Liabilities for the purpose of a demerger includes the following:
(a)
Liabilities that arise directly from the activities or operations of the undertaking being demerged.
These are operational liabilities such as trade payables, employee dues, and statutory obligations linked to the undertaking.
(b)
Specific loans or borrowings, including debentures, that were:
Raised , Incurred and Utilised exclusively for the activities or operations of the undertaking.
Such liabilities are clearly identifiable and directly attributable to the demerged undertaking.
(c).
This rule applies when specific borrowings cannot be directly linked to the demerged undertaking under clause (a) or clause (b).
In such cases, general or multipurpose borrowings of the demerged company are considered.
A proportionate part of these borrowings is transferred to the resulting company.
The proportion is calculated based on the value of assets transferred in the demerger.
This value is compared with the total value of assets of the demerged company.
Both values are taken as they exist immediately before the demerger.
The same ratio is applied to the general borrowings to determine how much debt moves to the resulting company.
THE TREATMENT OF ACCUMULATED LOSSES AND UNABSORBED DEPRECIATION OF THE DEMERGED COMPANY
In accordance Section 72A(4) of the Income Tax Act, 1961, the treatment is as follows:
This provision overrides all other sections of the Act.
It applies specifically in the case of a demerger.
The accumulated losses of the demerged company can be dealt with separately.
The unabsorbed depreciation of the demerged company is also covered.
Such losses and depreciation are allowed to be transferred in accordance with the demerger scheme in the following ways:
(a). Treatment of Losses and Unabsorbed Depreciation in a Demerger
If the loss or unabsorbed depreciation is directly related to the business (undertaking) that is transferred,
Such loss or depreciation moves along with the undertaking to the resulting company,
The resulting company is allowed to carry it forward,
And can set it off against its future income, just as if it were its own loss or depreciation.
(b). Apportionment of Non-Attributable Losses and Unabsorbed Depreciation
When the loss or unabsorbed depreciation cannot be directly linked to the undertaking that is transferred then:
Such loss or depreciation is split between the demerged company and the resulting company.
The split is done in the same ratio as the assets retained and the assets transferred &
Each company may carry forward its respective share of the loss or depreciation, and set it off against its own future income, as applicable.
TYPES OF DEMERGER
DIVESTITURE
Divestiture refers to the sale or disposal of assets of a company.
It may involve the sale of:
The entire business, or a specific undertaking or division of the company.
Divestiture is usually carried out in exchange for cash.
In some cases, the consideration may be a combination of cash and assumption of debt.
The objective is often to raise funds, reduce debt, or exit non-core or underperforming businesses.
Unlike demerger, divestiture results in a direct transfer of ownership to a third party.
SPIN-OFFS
In a spin-off, a new entity is created by separating a business or division from the parent company.
The shares of the new entity are distributed to the existing shareholders of the parent company on a pro-rata basis.
As a result, shareholders receive shares in the spun-off company in proportion to their existing shareholding in the parent company.
The parent company may retain an ownership stake in the spun-off entity, depending on the structure of the transaction.
There are two approaches through which spin-offs can be carried out.
(a). Pro-Rata Distribution of Shares in a Demerger
In the first approach, the parent company distributes all the shares of the new entity to its existing shareholders on a pro-rata basis.
This results in the formation of two separate companies.
Shareholders hold the same proportion of equity in both companies as they previously held in the single company.
Thus, ownership remains unchanged, while business operations are separated into distinct corporate entities.
(b). Spin-Off through Initial Parent Ownership and Subsequent Sale
In the second approach to a spin-off, a new entity is floated as a separate company.
The entire or majority equity of the new entity is initially held by the parent company.
Unlike the first approach, shares are not immediately distributed to the existing shareholders of the parent company.
The parent company continues to exercise control and ownership over the spun-off entity in the initial stage.
Subsequently, the parent company sells the assets or the business of the spun-off company to another company.
This sale may be carried out for cash or a combination of cash and other consideration.
The approach allows the parent company to monetize the separated business at a later stage.
It provides flexibility in timing and structuring the exit from the spun-off business.
STRATEGIC REASONS FOR UNDERTAKING A SPIN OFF
A spin-off may be undertaken for multiple strategic reasons by a company
One key reason is to focus resources and management attention on business divisions with greater long-term potential.
By separating businesses, management can better plan, control, and allocate resources to high-growth areas.
Companies often use spin-offs to streamline operations and improve organizational efficiency.
Less productive, non-core, or unrelated subsidiary businesses may be separated through spin-offs.
Mature business units with limited or no growth prospects are commonly spun off.
This allows the parent company to concentrate on products or services with higher growth potential.
Spin-offs help create clearer strategic focus for both the parent company and the new entity.
SPIN-OFF DUE TO STRATEGIC MISALIGNMENT OR FAULED SALE
A business division may be spun off when it is moving in a different strategic direction from the parent company.
Such a division may have distinct goals, markets, or priorities that are not aligned with the parent’s overall strategy.
Spinning off the division allows it to operate independently and pursue its own strategic objectives.
Independence can help the business unlock its true value, which may not be fully recognized within the larger parent company.
A spin-off may also be used when the parent company has attempted to sell the business unit but has been unsuccessful.
Potential buyers may offer unattractive prices or unfavourable terms for the unit.
In such cases, the parent company may determine that a spin-off creates greater value for shareholders than a direct sale.
Shareholders then benefit by holding shares in both the parent company and the newly spun-off entity.
MECHANISM AND SHAREHOLDER IMPACT OF A SPIN-OFF
A corporation creates a spin-off by distributing 100% of its ownership interest in a business unit to its existing shareholders.
This distribution is usually done in the form of a stock dividend, so shareholders receive shares of the new company without paying cash.
As a result, shareholders continue to hold shares in the parent company and also become shareholders of the spun-off company.
Alternatively, the company may allow shareholders to exchange their parent company shares for shares of the spin-off.
Such exchanges are often offered at a discount or incentive to encourage participation.
Example:
A shareholder may be allowed to exchange Rs. 100 worth of parent company shares for Rs. 110 worth of spin-off shares.
This provides immediate value to shareholders who choose to participate in the exchange.
Spin-offs generally enhance shareholder returns over time.
Once independent, each company can focus more effectively on its own products, services, and strategy.
Improved focus and accountability often lead to better operational performance and market valuation for both companies.
DOWNSIDE OF SPIN-OFFS
One downside of spin-offs is that their share prices tend to be more volatile, especially in the early period after separation.
Spin-off shares often underperform during weak or bearish market conditions.
Conversely, they may outperform in strong or bullish markets, leading to fluctuating returns.
Spin-offs frequently face high selling pressure immediately after listing.
Many shareholders of the parent company may not want to hold the spin-off shares, as the new business may not align with their investment strategy or risk profile.
This mismatch in investor preference leads to large-scale selling of spin-off shares.
As a result, the share price may decline in the short term, even when the company’s fundamentals remain strong.
Such short-term price drops are often driven by market behaviour rather than business performance.
Despite temporary underperformance, spin-offs may still have positive long-term growth prospects.
SPLITS AND DIVISION
Splits refer to a form of corporate restructuring where a company is divided into two or more separate parts.
The primary objective of a split is to maximize profitability and efficiency.
This is achieved by separating stagnant, non-performing, or unrelated units from the core or mainstream business.
Splits help management focus better on viable and growth-oriented businesses.
They also allow each separated unit to operate independently with clearer strategies.
By removing underperforming units, the overall financial and operational performance of the businesses may improve
Splits are broadly classified into two types: Split-ups, and Split-offs.
SPLIT UPS
Split-up is a method of corporate reorganization.
Under a split-up, the entire capital stock and assets of an existing company are transferred or exchanged.
These assets are exchanged for the shares of two or more newly established companies.
As a result, the original or parent corporation ceases to exist.
The parent company is liquidated after the transfer of its assets and capital stock.
Shareholders of the original company become shareholders of the newly formed companies.
Each new company operates as an independent legal entity.
The objective is to separate businesses completely so they can function independently and efficiently.
Example:
ABC Industries Ltd. operates three distinct businesses:
Manufacturing.
Logistics.
Renewable energy.
The company decides that each business requires independent management and strategy to grow efficiently.
Under a split-up, ABC Industries Ltd. transfers all its assets and capital stock to three newly formed companies:
ABC Manufacturing Ltd.
ABC Logistics Ltd.
ABC Renewables Ltd.
In exchange, shareholders of ABC Industries Ltd. receive shares in all three new companies in a predetermined ratio.
After the transfer, ABC Industries Ltd. is liquidated and ceases to exist.
Each of the three new companies functions as a separate and independent legal entity, with its own management, finances, and operations.
SPLIT-OFFS
Split-off is a method of corporate reorganization involving the separation of a division or subsidiary from the parent company.
In this process, the capital stock of a division, subsidiary, or newly affiliated company is transferred to certain stakeholders of the parent company
The transfer is made in exchange for a part of the shares held by those stakeholders in the parent company.
Unlike a spin-off, not all shareholders participate in a split-off.
Only some shareholders of the parent company choose to exchange their parent company shares.
These shareholders receive shares of the separated division or subsidiary instead.
After the exchange, the participating shareholders cease to be shareholders of the parent company to the extent of the shares exchanged.
The parent company continues to exist, but with a reduced shareholder base and without the split-off division.
The separated division becomes a distinct and independent company, owned by the exchanging shareholders.
Example:
XYZ Corporation Ltd. operates two businesses:
Electronics manufacturing.
Consumer finance.
The company decides to separate the consumer finance division due to different risk profiles and regulatory requirements.
Under a split-off, XYZ Corporation offers its shareholders an option:
They may exchange some or all of their shares in XYZ Corporation for shares in a newly formed company, XYZ Finance Ltd.
Only shareholders who choose to participate exchange their parent company shares for shares of XYZ Finance Ltd.
These participating shareholders receive ownership in XYZ Finance Ltd. and, to that extent, cease to be shareholders of XYZ Corporation.
Shareholders who do not participate continue to hold their shares in XYZ Corporation.
After the transaction:
XYZ Corporation continues to exist but no longer owns the consumer finance business.
XYZ Finance Ltd. becomes an independent company, owned only by the shareholders who opted into the split-off.
This structure allows investors to choose which business they want to remain invested in.
SLUMP SALE
A slump sale refers to the transfer of an undertaking as a going concern.
In a slump sale, the entire business unit is sold as a whole, and not asset by asset.
The undertaking includes assets, liabilities, employees, contracts, and operations, enabling continuity of business.
The consideration for a slump sale is usually a lump sum price, without assigning individual values to assets and liabilities.
WHY COMPANIES PREFER SLUMP SALE
Slump Sale is preferred when a company wants to exit a business quickly and cleanly.
The selling company transfers the undertaking, while the buyer continues running the business as a going concern.
Slump sales are governed primarily by the Income Tax Act, 1961, especially for tax treatment.
Companies in India undertake slump sales mainly to:
It helps the business to improve its poor performance.
It helps to strengthen financial position of the company.
It eliminates the negative synergy and facilitates strategic investment.
It helps to seek tax and regulatory advantage associated with it.
DEFINITION OF SLUMP SALE
In accordance with Section 2(42C) of the Income Tax Act, 1961, slump sale is defined as follows:
Slump sale is recognized as a transfer of an Undertaking.
Slump sale involves the transfer of one or more undertakings.
The transfer takes place by way of sale.
The sale is made for a lump sum consideration.
No individual values are assigned to the separate assets and liabilities forming part of the undertaking.
The term Sale includes the transfer of assets from one person to another.
The consideration for such sale may be in cash or in kind.
This definition distinguishes a slump sale from a piecemeal asset sale, emphasizing the transfer of a business as a going concern.
DEFINITION OF UNDERTAKING
An undertaking refers to a distinct business unit or part of a company that can function independently.
An undertaking represents a going concern, capable of independent operation.
It does not include individual assets or individual liabilities taken separately.
It also excludes any combination of assets or liabilities that does not amount to a complete business activity.
THE MEANING OF SALE
Section 4 of the Sale of Goods Act, 1930 defines sale.
Under the Sale of Goods Act, a sale is a contract.
In a sale, the seller transfers the property in goods to the buyer.
The transfer is made for a price, which forms the consideration.
Thus, for a slump sale, the concept of sale implies a transfer of ownership for consideration, even though the Income Tax Act itself does not define the term.
Whether Consideration in a Slump Sale Can Be in the Form of Shares
In the case of CIT v. R.R. Ramkrishna Pillai (66 ITR 725), the Supreme Court clearly distinguished between a sale and an exchange.
In this case, the assessee was carrying on a business and transferred the business assets to a company.
The consideration for the transfer was the allotment of shares of that company.
The key issue before the Court was:
Whether this transaction amounted to a sale or an exchange, as this determination would decide whether it qualified as a slump sale.
The Supreme Court held that a transaction is a sale when:
Assets are transferred for a money consideration.
The liability to pay that money consideration is discharged by any mode, whether in cash or through other assets.
In such a situation, the Court observed that there are two distinct transactions:
Transaction of sale.
A separate contract under which shares are allotted in satisfaction of the liability to pay the sale price.
However, where assets are transferred in consideration of another asset, and not money, the transaction amounts to an exchange
Applying this distinction, the Court held that transfer of assets in consideration for allotment of shares is an exchange and not a sale
Consequently, such a transaction does not qualify as a slump sale, since a slump sale requires a sale for money consideration.
DEFINITION OF SLUMP SALE
The Companies Act does not expressly define Slump sale but it recognizes and regulates such transactions through Section 180(1).
Section 180(1) lays down the procedure and shareholder approval requirements for:
Selling, leasing, or otherwise disposing of the whole or substantially the whole of the undertaking of a company.
Where a company owns more than one undertaking, the provision applies to the disposal of any one or more undertakings, if the threshold is met.
Under this provision, prior approval of shareholders by a special resolution is mandatory.
For the purpose of Section 180(1):
Undertaking means:
An undertaking is considered important if the company has invested more than 20% of its net worth in it.
Net worth is taken from the last audited balance sheet.
An undertaking is also considered important if it earns 20% or more of the company’s total income.
The income is checked for the previous financial year.
If either condition is met, the undertaking falls under this category.
Substantially the whole of the undertaking means:
Substantially the whole of the undertaking” means 20% or more of the value of that undertaking.
This value is taken from the audited balance sheet of the immediately preceding financial year.
If a transaction involves this level of value, it is treated as a major business disposal.
Such thresholds exist to protect shareholders.
As a result, significant transactions (including slump sales) require shareholder approval before they can be carried out.
BUSINESS SALES AND DIVESTITURES
Divestiture refers to the sale or disposal of assets of a company.
It may involve the sale of:
The entire business.
A specific undertaking or division of the company.
Divestiture is usually carried out for cash.
In some cases, the consideration may be a combination of cash and debt assumption.
Divestiture is not done in exchange for equity shares of another company.
The primary objective is to achieve greater liquidity or reduce the company’s debt burden.
Companies use divestiture to mobilize financial resources.
The funds raised are generally redeployed into the company’s core business or strategic operations.
Divestiture also helps in realizing the value of non-core or underperforming assets.
REASONS FOR DIVESTITURES
Huge divisional losses
Certain divisions may consistently incur losses.
Continuing such divisions drains overall company profitability
Continuous negative cash flows from a particular division
Ongoing cash outflows weaken the company’s financial position.
Divestiture helps stop cash erosion and stabilize finances
Difficulty in integrating the business within the company
Some businesses may not align with the company’s strategy, culture, or operations.
Poor integration reduces efficiency and synergies.
Inability to meet competition
The division may be unable to compete due to market pressure or stronger rivals.
Divesting avoids further loss of market share and resources
Better alternative investment opportunities.
Capital locked in non-core divisions can be redeployed.
Funds may generate higher returns if invested elsewhere.
Lack of technological upgradation due to non-affordability
The division may require heavy investment to remain competitive.
The company may not have the financial capacity to support such upgrades.
Lack of integration between divisions
Poor coordination among divisions can reduce operational effectiveness.
Divestiture simplifies the corporate structure.
Legal or regulatory pressures
Regulatory requirements or legal constraints may force disposal.
Divestiture helps ensure compliance and reduce legal risk.
Example:
Nestlé decided to sell its U.S. chocolate business as part of a strategic divestiture.
The sale included well-known chocolate brands such as Baby Ruth, Butterfinger, and Crunch.
The business was sold to Ferrero.
The transaction value was approximately $2.8 billion, paid in cash.
This deal represents a divestiture of a non-core and underperforming business segment for Nestlé.
Nestlé undertook this sale to exit slower-growing chocolate brands in the U.S. market.
The objective was to refocus resources on healthier products and nutrition-oriented offerings.
Nestlé also aimed to concentrate on fast-growing global markets and product categories.
For Ferrero, the acquisition helped expand its presence in the U.S. confectionery market.
JOINT VENTURE
A joint venture (JV) is a business or contractual arrangement between two or more parties.
The parties agree to pool their resources for achieving a specific objective.
The objective may be: A new project or any other defined business activity.
Each participant in a joint venture contributes resources, such as capital, technology, expertise, or manpower.
In a JV, all participants share profits, losses, and costs arising from the venture.
The rights and obligations of each party are usually clearly defined in a joint venture agreement.
Companies often enter into a joint venture when they lack the required expertise or capacity to undertake a project alone.
This may include lack of:
Specialized knowledge.
Human capital.
Technology,
Access to a particular market.
A joint venture allows companies to reduce risk, share investment burden, and leverage complementary strengths.
TYPES OF JOINT VENTURES
Equity Based Joint Venture
It is a type of joint venture where two or more parties create a separate legal entity.
The newly formed company acts as the vehicle for carrying out the joint venture project.
This company has a distinct legal identity, separate from its parent or partner companies.
The new company is usually incorporated in the same country as one of the partner companies
The purpose is to jointly establish and operate a specific business activity.
Such activities may include:
Marketing and distribution.
Research and development.
Manufacturing, or other commercial operations.
The joint venture company operates with clearly defined objectives and business goals.
Both foreign and local parties may participate, making it useful for cross-border collaborations.
The arrangement allows participants to contribute capital, expertise, or resources.
It benefits private entities and, in some cases, the general public through capital investment, employment, and economic development.
Non-Equity Based Joint Ventures
Non-equity joint ventures, also known as cooperative agreements, do not involve the creation of a separate legal entity.
In these arrangements, parties collaborate without sharing ownership or equity.
Such joint ventures are usually structured through contractual agreements rather than shareholding.
Common forms of non-equity joint ventures include:
Technical service arrangements.
Franchising agreements.
Brand or trademark use agreements.
Management contracts.
Rental or leasing agreements,
One-time or project-specific contracts, such as construction projects.
These arrangements are typically preferred when companies require technical expertise, know-how, or technology, rather than capital investment.
They are often used for:
Modernizing existing operations.
Starting new production or business operations
Each party retains its independent legal identity and ownership
Risks, responsibilities, and rewards are allocated as per the contract, rather than through equity participation.
Example:
Vistara’s Joint Venture with Singapore Airlines
Vistara is an Indian joint venture with a foreign partner.
Vistara operates under the company Tata SIA Airlines Ltd.
It is a joint venture between Tata Sons and Singapore Airlines (SIA).
The joint venture combines Tata’s domestic market knowledge with Singapore Airlines’ global aviation expertise.
The objective was to establish a full-service airline in India with international service standards
Tata Sons Joint Venture with Starbucks
Tata Starbucks Pvt. Ltd is another example of a joint venture involving an Indian and a foreign company.
It is a joint venture between Tata Sons and Starbucks Corporation, USA.
The joint venture operates Starbucks-branded coffee stores across India.
Tata provides local sourcing, real estate strength, and market access, while Starbucks contributes brand value, retail expertise, and global processes.
This JV enabled Starbucks to enter and expand in the Indian market through a trusted local partner.
STRATEGIC ALLOWANCE
A strategic alliance is an arrangement in which two or more companies agree to cooperate for a specific purpose.
The companies share resources, such as technology, knowledge, distribution networks, or expertise.
The alliance is formed to undertake a mutually beneficial project while each company remains independent.
It is an effective way for companies to work together profitably without merging or forming a joint venture.
Strategic alliances help companies develop and leverage their unique strengths.
Each partner contributes what it does best, creating synergies.
Organizations gain an opportunity to expand or widen their customer base through the partner’s market reach.
Alliances also allow firms to utilize surplus or idle capacity more efficiently.
Risks, costs, and responsibilities are shared, reducing the burden on a single company.
Example:
Microsoft and Open AI are in a strategic alliance, not a merger or joint venture.
Microsoft provides cloud infrastructure (Azure), capital investment, and enterprise reach.
OpenAI contributes advanced AI research, models, and technical expertise.
Both companies remain independent legal entities, which is a key feature of a strategic alliance.
The partnership allows Microsoft to integrate AI capabilities into products like Office, Azure, and enterprise tools.
OpenAI benefits from scalable computing power and global deployment without building infrastructure on its own.
The alliance helps both parties leverage their core strengths technology platforms for Microsoft and AI innovation for OpenAI.
REVERSE MERGER
A reverse merger is a form of merger in which a private company becomes a public company.
Instead of going through the lengthy, costly, and complex process of an IPO, the private company acquires an already listed public company.
Through this acquisition, the private company effectively converts itself into a public company.
The public company is often treated as an investment vehicle, while control shifts to the private company.
This route helps the private company save time, cost, and regulatory compliance burdens associated with listing.
Reverse mergers are commonly used as an alternative method of accessing capital markets.
REVERSE MERGER BASED ON CAPITAL AND DOMINANCE
A reverse merger can also be understood from a control and strength perspective.
When a smaller or financially weaker company acquires a larger or stronger company, the transaction is termed a reverse merger.
Similarly, when a parent company merges into its subsidiary, instead of the subsidiary merging into the parent, it is treated as a reverse merger.
A loss-making company acquiring a profit-making company is also categorized as a reverse merger
In such cases, the term “reverse” highlights the unusual direction of control or absorption, rather than the legal form alone.
Thus, a reverse merger may arise either for listing advantages or due to unexpected dominance of the acquiring entity.
REASONS FOR REVERSE MERGER
Carry forward of tax losses
Allows the combined entity to utilize the accumulated losses of the smaller or loss-making company
Results in lower tax liability for the merged entity.
Tax benefits are available subject to conditions under the Income Tax Act, 1961.
Economies of scale of production.
Integration of operations leads to lower per-unit costs.
Better utilization of plant, machinery, and workforce.
Improves overall efficiency and profitability.
Access to established marketing network
The acquiring or merged company gains ready-made distribution and marketing channels.
Helps expand market reach without building networks from scratch.
Enhances sales growth and brand presence.
Protection of trademarks, licences, and assets
Safeguards valuable intellectual property and contractual rights of the smaller or loss-making company.
Prevents loss of licences, approvals, or brand value due to financial distress.
Example:
HDFC and HDFC Bank (2023)
In 2023, HDFC merged into its subsidiary HDFC Bank, which is a classic case of a reverse merger.
Although HDFC was the parent company, it was absorbed into its subsidiary, HDFC Bank.
The merger created a financial services giant with a combined valuation of over ₹41 lakh crore.
The objective was to achieve operational efficiencies, regulatory simplicity, and better capital utilization.
Cairn India and Vedanta Limited
Cairn India, an oil exploration company, was merged with its parent company Vedanta Limited.
This transaction is treated as a reverse merger because the operating subsidiary was merged into the parent in an unconventional manner.
The merger helped Vedanta simplify its corporate structure.
It also enabled better resource consolidation and tax efficiency within the group.
