ABSTRACT:
The Indian Companies Act 2013 has brought in significant changes in the merger and acquisitions (M&A) regime. With the introduction of new provisions allowing cross border mergers and global integration — both inbound and outbound, enhancing disclosure norms and fast track mergers, increasing protection to minority and investors, incorporating business friendly corporate laws, etc., India has not only improved its world ranking in the ease of doing business, but the changes have also been applauded by lawyers and corporate across the world.
The Author, through this research work tries to analyse the provisions of the Indian Companies Act, 2013 relating to M&A and their impact on the mergers and acquisitions. She further focuses on the famous acquisition in India of the year 2020, the merger of Uber eats with Zomato pursuant to the Companies Act 2013, for an all stock acquisition deal, to help Zomato gain competitive benefits from Swiggy and greater negotiating powers with the restaurants. She further ventures to analyse the impact of the acquisition on Zomato and its market share in the food-tech space in the presence of its biggest competition, Swiggy.
For this research paper, the Author will be adopting the doctrinal method to proceed with her research work. Primary resources the author will be referring to in the course of her research work will include books and journals. Other sources like articles and the like will be accessed online through the use of online databases. The author will limit her research work to the resources available on the internet. Also, since the merger of Uber Eats and Zomato is a recent event, the post merger data relates to only a few months and hence the study relates to a very short period after merger.
INTRODUCTION:
Merger and acquisition (M&A) is a technique which the organizations choose for achieving growth exponentially. Companies go for inorganic growths for many reasons such as avoidance of long gestation period of green-field projects, availing economies of scale, getting access to new technologies and markets, reducing dependence in the supply chain management through forward or backward integration, etc1.
The Companies Act, 2013 can be regarded as the first major change which has been introduced in the last sex decades in the merger and acquisition regime in the country, replacing the Companies Act, 1956. Many new provisions have been introduced and the old provisions have been modified for bringing enhanced transparency and making the process of mergers and acquisitions smooth. The Ministry of Corporate Affairs, on 7th December, 2016, notified certain provisions of the 2013 Act, relating to the compromises, arrangements and amalgamations, keeping in mind the practical problems that come in the process of mergers and acquisitions. However, the provision relating to the amalgamation of an Indian entity with a foreign company (Section 243) was pending. It was issued on 13th April, 2017, thus, completing the enforcement of all the provisions related to the compromises, arrangements and amalgamations. The Ministry of Corporate Affairs further inserted Rule 25A and annexure B in prescribing rules in the Companies (Compromise, Arrangements and Amalgamations) Rules 2016. The Rules became effective from 13th April, 20172.
PROVISIONS IN THE COMPANIES ACT, 2013 RELATING TO MERGERS AND ACQUISITIONS
Neither the 1956 Act nor the 2013 Act has defined the term ‘merger’. However, even without defining the term strictly, the 2013 Act has explained the meaning of the term. A ‘merger’ can be regarded as a combination of two or more entities into one, the desired result being the accumulation of assets
1 PSA, Merger Regime under the Companies Act, 2013, Mondaq, (16th March, 2021, 4:30 PM), https://www.mondaq.com/india/corporate-and-company-law/289180/merger-regime-under-the-companies-act- 2013
and liabilities of the distinct entities along with organization of such an entity into one single business. Even definition of the term ‘subsidiary’ has undergone a radical change; the term ‘control’ was earlier determined on the basis of just equity holding which now is determined on the basis of total share capital, taking within its ambit shares other than equity.
So, now there is a need for reconsidering the structuring of investments by the use of preference shares3. Some relevant provisions of the 2013 Act have been discussed below:
• Fast Track merger – This process has been introduced for the mergers taking place between two or more specified small companies; or a merger taking place between a holding company and its fully owned subsidiary, Such companies are not required to approach the NCLT, The only requirement is to get the only approval from the Regional Directors (powers of Central Government delegated to Regional directors vide notification No. S.O. 4090(E) dated 19th Dec 2016), Registrar of Companies, creditors shareholders, and Official liquidator.
• Cross border mergers – Out of all the changes brought in by the 203 Act, one of the most significant changes is the introduction of outbound merger (merger of an Indian company into a foreign company). While the 1956 Act allowed only inbound mergers (a foreign company merging with an Indian entity), the 2013 Act allows both inbound and outbound mergers. However, the Act lays down certain conditions for an outbound mergers to take place. They are:
a) Receiving prior approval of the RBI;
b) Foreign companies must belong to such overseas jurisdictions where cross border mergers and acquisitions are allowed.
• Demerger defined: The 2013 Act clearly defines the term ‘Demerger’. It has been specifically clarified that the term has to be included within the ambit of compromise and arrangements as defined in the 2013 Act. The rules, further lays down the provisions for accounting treatment for demergers.
3 Sylvine, Mergers under the Companies Act, 2013, ipleaders, (17th March, 2021, 6:30 PM), https://blog.ipleaders.in/mergers-companies-act-2013/
• Treasury shares: The 2013 Act imposes a restriction on a transferee company from holding treasury stocks in either its own name or in the name of any trust. For ensuring better transparency in the valuation process and for accounting considerations, any inter-company investment that is involved in mergers must be cancelled mandatorily.
• Mergers of listed companies with unlisted ones: According to the provisions of the 2013 Act, the merger of a listed company with an unlisted company will not convert an unlisted company into a listed company automatically. In case such mergers, the shareholders of the transferor company have to decide the exit that would be facilitated by the unlisted company having a pre-determined price formula in accordance with the SEBI regulations.
• Minority buy-out – For reducing the litigation related to the minority shareholders, the 2013 Act has granted the acquirer or such group of persons who become the registered shareholder of the 90% of the issued share capital of the targeted company (listed or unlisted) the access to buy the shares of the minority, after giving prior notification of their intention of doing so. In case of a listed company, the price mechanism needs to be carried out by a registered valuer only and would have to be as per the regulations of the SEBI. But in case of unlisted companies, other factors are required to be considered, such as the highest offered price in the last 12 months for acquisition, and the fair price has to be determined only after taking a note of these valuation parameters.
• Class Action Suit – For protecting the minorities’ interests, the 2013 Act allows a huge number of people having common interest to sue or be sued through their representatives as a group. This will allow the stakeholders to seek compensation, from both, the company and the directors, auditors, expert advisors for any unlawful conduct, though there is a minimum threshold for filing a suit.
OTHER CHANGES IN THE PROCESS OF ARRANGEMENT AND COMPROMISES:
• The 2013 Act provides that all the functions and the powers of the Company Court BIFR under the Sick Industries Companies Act and the Company Law Board will now be vested with
the National Company Law Tribunal (NCLT). This has been done for establishing a single forum for all the corporate matters.
• The 2013 Act has further introduced a minimum threshold for raising objections against any scheme of arrangements as persons holding a minimum outstanding debt of 5 percent or 10 percent of shareholders. This has been done with an intention of reducing delays and frivolous litigations.
• The 2013 Act furthermore, enables the NCLT, if 90 percent of the creditors have agreed to a scheme, to dispense with their meeting and confirm this by an affidavit.
• The 2013 Act also lays emphasis on the need of the valuation report. This report is required for the share swap ratio that is to be sent to the shareholders along with the notice for meeting, even if the company is an unlisted company4.
ACQUISITION
An acquisition can be defined as a process wherein a company purchases 50 percent or more than 50 percent shares of another company in order to gain control of the latter. In today’s times, acquisitions have turned out to be very common in business world5.
ACQUISITIONS: MOSTLY AMIABLE
Acquisitions are referred as friendly when the target firm agrees to be acquired; its employees, assets, board of directors, etc, for the mutual benefits of both the acquiring and the targeted companies. Both the targeted and the acquiring companies develop strategies for ensuring that the acquiring company purchases the appropriate assets after properly reviewing the financial statements along with other valuations for making itself aware of the obligations, if any that may come with the assets. After agreeing the terms and conditions of the purchase, the two parties meet for the purchase proceeds and other legal stipulations6.
WHY COMPANIES MAKE ACQUISITION?
5 Acquisition, Corporate Finance Institute, (19th March, 2021. 5:45 PM ), https://corporatefinanceinstitute.com/resources/knowledge/deals/acquisition/
There are many reasons which leads to the process of acquisitions between two companies7. Some of them are listed below:
i. Economies of scale
ii. Diversification
iii. Greater market share
iv. Increased synergy
Cost reductions, or new niche offerings.
Apart from the reasons mentioned hereinabove, there are others reasons as well8, such as:
v. As a Way to Enter into Foreign Market
Every company is interested in expanding its business across borders of one’s own nation. Therefore, an existing company acquires shares of another company because this is the simplest way for any company to enter into the foreign market. The acquired entity having its own brand name, personnel, along with other intangible assets, enables the acquiring company to start off with a solid base in a new market.
vi. As a Growth Strategy
The well established companies often look for acquiring young companies. This can help them to generate more revenue and enter into new markets for gaining profits.
vii. To Reduce Excess Capacity and Decrease Competition
In business world, there are many competitions in the market. Therefore, the companies are interested in acquiring other companies for reducing excess capacity, eliminating the competition, and focusing on the providers who are most productive.
viii. To Gain New Technology
At times, one company acquires another company which has already implemented a new technology successfully. It can be more cost-efficient for the acquiring company to acquire
7 Mergers and Acquisitions, Why do businesses merge with or acquire other businesses?, (19th March, 2021, 7:20 PM), https://www.carsonllp.com/businesses-merge-acquire- businesses/#:~:text=There%20are%20many%20reasons%20why,potential%20growth%20of%20the%20busines s.&text=They%20can%20reduce%20the%20costs,the%20supply%2Dchain%20pricing%20power.
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such a company rather than spending the time and money in developing the new technology itself.
IMPACT OF THE COMPANIES ACT, 2013 ON MERGERS AND ACQUISITIONS
Keeping in mind the drastic changes that has taken place in the organizational structure the companies have undergone over time the Companies Act 2013 was framed.
The provision of the 2013 Act, that enables a company to undertake outbound cross border merger, is expected likely to enhance cross border mergers and acquisitions. This will in turn also help the Indian companies in framing the global strategies for increasing market share worldwide.
The introduction of the process of fast track merger has certainly streamlined the process of merger, removed bureaucratic barriers and reduced timelines for the process. This has significantly boosted mergers and acquisition activities in the country.
The provision relating to the minority squeeze out and fixation of the exit price through a registered valuer has given the minority shareholders an alternative for enjoying liquidity and getting a fair price of the remaining shares.
The provision relating to the class action suit can be regarded as a positive step towards empowering the interest of the minorities. It is also expected to enhance the mergers and acquisition activities in the country.
According to Merger market, a global deal tracking firm, in India in the year 2016, approximately 421 deals of value worth $59.7 billion was registered. However, the numbers slightly showed a decrease in 2017 to 379 deals of value worth $54.7. The huge number of such deals itself is a proof that the merger and acquisition activities are enjoying an increasing trend in India
V. CASE STUDY FROM THE RECENT ACQUISITION OF UBER EATS BY ZOMATO
ABOUT UBER EATS
9 Bathiya & Associates, Mergers & Acquisitions – Companies Act Framework and Broad Process, (19th March, 2021, 5:00 PM), https://bathiya.com/mergers-and-acquisitions-companies-act-framework-and-broad-process/
In 2017, Uber entered into the food delivery business, which was dominated by the other two entities, Swiggy and Zomato. They had already made big restaurants as their exclusive partners. Uber started giving heavy discounts and offers for acquiring and retaining customers
Uber Eats entered the Indian market and scaled business in forty-one cities with approximately 65,000 riders who use to deliver food from 26,000 restaurant partners. The delivery market of India has always been hyper-competitive. Uber eats incurred losses as a result of steep discounts and low value orders10.
In India, Uber also deals with rides.
ABOUT ZOMATO
Zomato is a food delivery start-up and Indian restaurant aggregator. It was founded in the year 2008 by Mr. Deepinder Goyal. It has certain distinct features such as providing information, menus and reviews of restaurants by the users. Further, it has food delivery options in selected cities from partner restaurants. The service is available in approximately 24 countries and in more than 10,000 cities. Initially, Zomato was founded as Foodie-bay. It was later renamed as Zomato in 201011.
WHY UBER EATS SHUT DOWN?
Uber eats has had poor performance in the food-tech market. It was shuttering or downsizing its loss-making units and geographies. For the company, this business was one among the other low-priority businesses.
In its quarterly results announcement, Uber has disclosed that the Indian food delivery business has incurred immense loss for the company.
As per the regulatory disclosures the company made in India, Uber, in its food delivery business,for the five months through December 2019, had projected an operating loss of Rs 2,197 crore. This loss was larger than what the company had expected to incur by its core ride-
10 Dave Johnson, What is Uber Eats?, Business Insider, (19th March, 2021, 7:30 PM), https://www.businessinsider.in/tech/how-to/what-is-uber-eats-heres-what-you-need-to-know-about-the-ride- hailing-services-food-delivery-app/articleshow/77616986.cms
11 WP Business Reviews, What is Zomato?, (21st March, 2021, 7:00 PM), https://wpbusinessreviews.com/what- is-zomato-and-why-should-your-restaurant-use-it/
hailing business, which was Rs 1,645 crore.
In February 2019, Uber was planning to sell the business to Swiggy, but the deal never saw the light of the day. Rather the company started its cutbacks since early 2019. It had reduced its annual cash allocation to half for the food-delivery business to $90-120 million in India. This directly impacted the order numbers. In the meanwhile, Ola, the rival of Uber in India had also shifted its focus from its food-delivery business, Food Panda and had started selling private brands on market places12.
WHY ZOMATO ACQUIRE UBER EATS?
The acquisition signals towards a positive shift having taken place in the market. The acquisition has resulted in making the Indian food delivery market and food-tech, a two-horse race, that is Zomato and Swiggy. Zomato has taken over the business of Uber Eats’s 38 cities across the country.
On January 21st, 2020, in an all stock transaction, Zomato acquired Uber’s food delivery business in India. This gave the ride hailing business a 9.99 percent ownership in the company having headquarters in Gurugram. Uber Eats, however, continues to operate in Bangladesh and Sri Lanka.DeepinderGoyal had stated that in 2020, Zomato will be tested on how well it can execute and retain its market leadership in terms of operating efficiency, customer service and the business, in that order.
Throughout 2019, Uber Eats had been a marginal player in the market, while Swiggy and Zomato together dominated 90 percent of the market. Zomato had incentivized the customers of Uber Eats with a 50 percent discount on their subsequent three orders. This step was taken to convert those customers into transacting users, so that there can be a spike in volumes. After the acquisition, India had expected that more than 50 to 55 percent market would be cornered by Zomato in terms of value of orders and numbers. There will thus be on less competition for the company.
In the cities of Madhya Pradesh, Tamil Nadu and Kerala, Uber Eats had a stronger foothold than Zomato, about 30 percent market share. The acquisition, therefore, was expected to give
12 Sindhu Kashyap, What Zomato’s Acquisition Of Uber Eats means for india’s foodtech Ecosystem, Your Story, (21st March, 2021, 8:15 PM), https://yourstory.com/2020/01/zomato-uber-eats-acquisition-foodtech- deepinder-goyal-swiggy
more access to Zomato in specific micro-markets.
Zomato had acquired Uber Eats business in India with the intent to consolidate position:
• The deal between Zomato and Uber Eats had given Uber an ownership of 9.99% in Zomato.
• Uber Eats in India had discontinued its operations and thereby directedits restaurants, users and the delivery partners to the Zomato platform.
This acquisition has significantly strengthened the position of Zomato in the market. With Uber Eats, Zomato now collectively has a 55 percent share of the food delivery market and it competes majorly Swiggy. Zomato’s business is spread across 550 cities in the country. The delivery partners of the Uber Eats are now on-board Zomato’s fleet.
The significant impact of this acquisition was felt by the employees of Uber Eats. CXlose 245 employees were affected as they were not hired by Zomato as a part of the transaction13.
THE BIG WINS FOR ZOMATO
The battle in the food-tech business is currently about having more numbers of delivery partners, for ensuring greater reach. Today, the consumers desire to get the food delivered in short span of time. This means that there is a need of more people on the street, and not just one delivery person who becomes overburdened with many deliveries. Therefore, the real success is gaining the delivery partners.
Zomato has1.5 million restaurants across 24 countries as its partners. It is serving more than 70 million users every month. However, on the other hand, swiggy has 1.5 lakh delivery partners14.
UBER CONTINUE WITH LOCAL RIDES AND UBER EATS AFTER THIS DEAL
Uber still continues to focus on improving its ride-hailing business in the country where it has a competition with rival Ola.
India still remains to be an exceptionally important market to Uber in its ride hailing business15.
IMPORTANT STEPS TAKEN BY UBER EATS AFTER ACQUISTION
Uber Eats had approximately 80-100 full time employees on its India payroll. These executives were offered salaries till 3rd March, 2019, along with a month of severance for each year spent in the firm, along with paying a notice period of one month and shares till 3rd March, 2019. The firm further offered the employees two months of salary as closure bonus along with leave encashment as the firm used to acknowledge a performance review cycle which was due in two months16.
FINDINGS:
Zomato had acquired Uber Eats for Rs 2,485 crore. More than 100 employees faced uncertainty. Swiggy, on the other hand has been a step ahead of Zomato in the food delivery space. So, with Uber Eats coming onboard with Zomato, it will surely give Zomato more fire-power to stake on Swiggy. The newly formed entity will be able to capture 50-55 percent market automatically in food delivery business. Zomato had acquired Uber Eats in a deal of $350 Mn, which gave Uber a stake of 9.99 percent in Zomato.
According to the Ministry of Corporate Affairs Filings, it was expected for Uber Eats to post a loss of INR 762.5 Cr ($107.6 Mn) between August 2019 and December 2019. For the said period of five months, Uber had also projected higher operating losses valued at INR 2,197 Cr ($309.6 Mn) for its food delivery business.
Ubers’ food delivery business in India had seen a decline. This has said to have impacted the global numbers negatively. The CFO of Uber, Nelson Chai, in a meeting with analysts, had said that Uber Eats’ business in India had reduced the average net revenue of the food delivery arm’s. He further stated that, in the absence of India, the adjusted net revenue, would have been 11.1%, that in India’s presence was 10.7%,”
On a closer look towards the people being affected are the small restaurant owners, who were
Nandini Sharma, Zomato Acquires Uber Eats in India: a Critical Analysis, journal of Information and Computational Science, (22nd March, 2021, 9:25 PM), http://www.joics.net/images/full_pdf/1584616731_420.pdf15
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exclusively dependent on Uber Eats. They had complained about the abrupt shut down of the app without any prior communication17.
CONCLUSION
Food-tech is one of the fast-growing eco-system across the globe. Zomato acquiring Uber Eats would definitely prove to be a win-win situation for both the entities. It would convert the industry into a duopoly making Swiggy and Zomato the big players in the online food delivery industry in the country.
With multiple giants like Ola, Flipkart, and Amazon, experimenting in the food space, India has been able to establish a large market offers scope for various players to flourish. From the view point of the consumers, this acquisition would reduce their decision fatigue with a consolidated offering.
17 Sindhu Kashyap, What Zomato’s Acquisition Of Uber Eats means for india’s foodtech Ecosystem, Your Story, (25th March, 2021, 8:45 PM), https://yourstory.com/2020/01/zomato-uber-eats-acquisition-foodtech- deepinder-goyal-swiggy
Author 1 – Gaurav Singh
College – BA.LLB – 4th YEAR,( A 78)
New Law College Bharati Vidyapeeth, Pune
Author 2 – Ritesh Raj Mishra
College – BA.LLB – 4th YEAR, (A 60)
New Law College Bharati Vidyapeeth, Pune