M&A in IT Industry are strategic decisions aimed at maximizing a company’s growth potential by improving its production and marketing operations. In the realm of IT companies, the primary objectives of such transactions are:
- Expanding the reach of existing products to a larger consumer base.
- Extending the product line and geographic coverage while redeploying brand assets.
- Leveraging the technology and patents of one company to enhance the product offerings of another.
Companies in the IT industry are known to be highly acquisitive as they seek out fresh ideas, innovative products, skilled knowledge workers, strategic partnerships, and expanded market share. This sector is renowned for its constant technological evolution and frequently leads to significant changes in business practices across all other industrial sectors.
In recent years, India’s leading software companies have acquired foreign firms to strengthen their foothold in their primary markets of the US and Europe, as well as to gain access to employees with specific skill sets or enhance their capabilities in specific sectors.
This blog post will explore the significance of M&A in IT Industry and the obstacles encountered during the process.
Mergers & Acquisitions in IT Industry
A merger involves the consolidation of two or more IT businesses into a single entity. In India, the term “amalgamation” is commonly used to refer to a merger. As per the Income Tax Act of 1961 [Section 2(1A)], an amalgamation is defined as the union of one or more companies with another, or the amalgamation of two or more companies to create a new entity, in such a manner that all the assets and liabilities of the amalgamating firms become assets and liabilities of the amalgamated entity. Additionally, shareholders holding at least ninety percent of the value of shares in the amalgamating company or companies become shareholders of the amalgamated company.
Mergers or amalgamations may take two forms:-
1. Merger through Absorption:
An absorption involves the combination of two or more IT companies into an “existing company,” with all firms except one losing their individual identities in the merger.
2. Merger through Consolidation:
A consolidation involves the combination of two or more IT companies into a “new company,” where all the firms are legally dissolved, and a fresh entity is formed. In this type of merger, the acquired company transfers its assets, liabilities, and shares to the acquiring company in exchange for cash or shares.
One essential feature of a merger, be it through absorption or consolidation, is that the acquiring company, whether existing or new, takes over ownership of the other firms and integrates their operations with its own.
Regulations for Mergers & Acquisitions
The governing legislations regarding Mergers & Acquisitions mainly include the Indian Companies Act, 2013, The Income Tax Act 1961, the Securities and Exchange Board of India Act (SEBI) 1992, SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 2011, Reserve Bank Of India Act, 1935, The Competition Act, 2002, The Foreign Exchange Management Act, 1999.
The primary aims of any regulatory framework governing mergers and acquisitions are as follows:
(a) Safeguarding shareholders’ rights and interests,
(b) Providing adequate compensation to shareholders during open offers,
(c) Ensuring a free, fair, transparent, and equitable market for corporate control,
(d) Facilitating an honorable exit opportunity for shareholders in the event of buy-back schemes,
(e) Preventing malpractices in such transactions.
Conclusion
M&A in IT industry have gained widespread popularity in recent years, primarily due to globalization, liberalization, and technological advancements in an intensely competitive business landscape. These transactions are frequently leveraged to restructure business organizations.
Provision for tax allowances for mergers or de-mergers between two business identities is allocated under the Indian Income Tax Act. To qualify for the allocation, these mergers or demergers are required to fulfill the requirements related to section 2(19AA) and section 2(1B) of the Indian Income Tax Act as per the pertinent state of affairs.
Expert professionals at Ease Up will help you with the tax complications arising from the M&A dealings of your IT company. Ease Up will help your IT company to keep pace with the growth and evolution of your company through all stages of the M&A lifecycle.
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