A conglomerate merger is when two companies from different, unrelated industries combine to form one entity, often for diversification and risk reduction.Under Indian law, conglomerate mergers are regulated by the Companies Act, 2013, particularly Sections 230-240, which cover all mergers. The National Company Law Tribunal (NCLT) must approve the merger, and if it meets certain thresholds, the Competition Commission of India (CCI) under the Competition Act, 2002, reviews it for competition impact. There’s no specific legal treatment for conglomerate mergers, suggesting they follow the same process as other mergers. The process involves drafting a merger scheme, getting stakeholder approvals, and securing NCLT sanction. If applicable, CCI approval is needed. This article answers what is a conglomerate merger with its legal framework and step by step procedure of this merger.
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Conglomerate Mergers Under Indian Law
A conglomerate merger happens when two companies from completely different industries join together to form one single company. This is done to spread out risks, enter new markets, or grow in new areas. In India, these mergers are controlled by the Companies Act, 2013, and sometimes by the Competition Commission of India (CCI) if the merger is big enough to affect competition. This guide explains what conglomerate mergers are, the laws that govern them, the steps involved, examples, and some challenges.
What is a Conglomerate Merger?
A conglomerate merger is a type of business combination where two companies from unrelated industries or business activities merge to form a single entity. This is distinct from horizontal mergers (between competitors) or vertical mergers (between companies in the same supply chain). Conglomerate mergers are typically pursued for diversification, risk reduction, and access to new markets. There are two subtypes:
Pure Conglomerate Merger: The companies have nothing in common. For example, a company making chemicals merges with a retail store chain.
Mixed Conglomerate Merger: The companies are still unrelated but aim to expand their products or markets. For example, a tech company merges with a food company to reach new customers.
A famous Indian example is the merger of Brooke Bond and Lipton (tea companies) with Hindustan Lever (now Hindustan Unilever), a company selling soaps, shampoos, and other products. This helped Hindustan Lever grow into new areas. Globally, companies like W.R. Grace has merged with over 150 businesses in different industries to diversify.
Learn about the Principles of Corporate Governance.
Laws Governing Conglomerate Mergers in India
In India, conglomerate mergers follow the same rules as other mergers, mainly under the Companies Act, 2013. This law replaced the older Companies Act, 1956, and made the process more modern. Here are the key laws:
Companies Act, 2013:
Sections 230-240: These sections explain how all mergers work, including conglomerate ones. They cover how to plan the merger, get approvals, and get final permission from the National Company Law Tribunal (NCLT), a special court for company matters.
Section 234: This allows Indian companies to merge with foreign companies, but they need approval from the Reserve Bank of India (RBI) and must follow foreign exchange rules under the Foreign Exchange Management Act (FEMA).
Section 233: This offers a faster process for small companies or mergers between a parent company and its fully owned subsidiary. It doesn’t need NCLT approval if no one objects, but this is rare for conglomerate mergers because they’re usually large.
Competition Act, 2002:
The Competition Commission of India (CCI) checks if a merger could harm competition in the market. If the companies involved are big enough (based on their assets or sales), they must notify the CCI and get approval.
Conglomerate mergers are less likely to cause competition problems because the companies are in different industries, but the CCI still reviews them if they meet the size thresholds.
Other Laws:
Income Tax Act, 1961: This law offers tax benefits, like carrying forward losses from one company to reduce taxes, but there are conditions.
SEBI Regulations: If the companies are listed on the stock market, they must follow rules set by the Securities and Exchange Board of India (SEBI), like getting shareholder approvals through voting.
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Step-by-Step Process for Conglomerate Mergers in India
Mergers in India are overseen by the NCLT, and the process involves several clear steps:
Creating a Merger Plan:
The companies work together to write a detailed plan (called a “scheme of amalgamation”). This plan explains how the merger will work, including how shares will be exchanged and how assets will be transferred. A professional (called a registered valuer) prepares a valuation report to make sure the plan is fair and transparent.
Getting Approvals from Stakeholders:
The plan needs approval from shareholders (at least 75% of them, based on the value of their shares) and creditors (if required). These approvals usually happen in meetings organized under NCLT’s supervision. For companies listed on the stock market, shareholders can vote by mail (postal ballot), making it easier for more people to participate.
Notifying Regulators:
The companies must send notices about the merger to shareholders, creditors, and government bodies like the Ministry of Corporate Affairs (MCA), RBI, SEBI, CCI, and any industry-specific regulators. These regulators have 30 days to respond. If they don’t reply, it’s assumed they approve, which makes the process faster than under the old 1956 law.
NCLT Approval:
The NCLT reviews the merger plan to ensure it’s fair and benefits stakeholders. They can change or reject the plan if needed. Only shareholders owning at least 10% of the company or creditors owed at least 5% of the debt can object, which prevents small or unreasonable complaints (unlike the 1956 law).
CCI Approval (if needed):
If the merger involves large companies (based on assets or sales, as per the CCI’s rules in 2024), it must be reported to the CCI. The CCI checks if the merger could harm competition. Conglomerate mergers are usually seen as harmless because the companies don’t compete, but the CCI may still look closely, especially if the merger could affect related markets.
Final Implementation:
Once all approvals are received, the merger is completed. The two companies become one, and the company being absorbed (called the transferor) dissolves without needing to shut down formally.
Summary
Conglomerate mergers are a powerful way for Indian companies to diversify and grow by combining businesses from unrelated industries. They are governed by the Companies Act, 2013, and reviewed by the CCI if they’re large enough. The process involves creating a merger plan, getting approvals from stakeholders and regulators, and securing NCLT permission. Examples like Hindustan Unilever’s merger with Brooke Bond and Lipton show how these mergers work in practice. While challenges like regulatory compliance and business integration exist, conglomerate mergers play a big role in India’s economic growth, especially since the country opened up its markets in the 1990s.
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What is a Conglomerate Merger: FAQs
Q1. What is a conglomerate merger with an example?
A conglomerate merger is when two companies from unrelated industries combine to form one entity, often to diversify or reduce risk. Example: Brooke Bond (tea) merging with Hindustan Lever (FMCG) in India.
Q2. What is a congeneric merger?
A congeneric merger is when two companies in related industries, but not direct competitors, merge to share resources or markets, like a bank merging with an insurance company.
Q3. What is an example of a conglomerate?
Hindustan Unilever, which operates in diverse sectors like food, personal care, and household products.
Q4. What are the two types of conglomerate?
Pure Conglomerate: Companies with no business overlap (e.g., a chemical firm merging with a retail chain) and Mixed Conglomerate: Companies in unrelated industries but aiming to expand products or markets (e.g., a tech firm merging with a food company).
Q4. Is Disney an example of a conglomerate?
Yes, Disney is a conglomerate, operating in unrelated sectors like media (ABC), theme parks, films (Marvel), and streaming (Disney+).
