The policy of liberalization



An Analytical study

The policy of liberalization, privatization and globalization in the economy has exposed the corporations to domestic and global competitions. Low-cost but good quality products have become a necessity for survival in competitive markets. Though various factors like low interest rate, cheap labour and liberal government policy, have helped the Indian corporations` cost-cutting measures, merger and technological advancement are being viewed as further means of cost reduction. This article seeks to explore the trends and progress in M&As India.

The Indian industry has been subjected to significant transformation in the nineties. The process of industrial policy aimed at creating a more competitive and challenging organizational environment. The structural changes have had a considerable impact on the generally robust industrial performance. The merger and acquisitions (M&As) in India have increased after the liberalization of Indian economy in 1990. Global liberalization and privatization of Indian economy exposed the Indian corporations to vast competitions both locally & globally. Low-cost and good quality products have become a necessity for survival. Mergers and technological advancement are being targeted as further measures for cost reduction. M&A activities in India started mainly during 1992-93 when economic reforms were initiated and norms and scope for corporate riders were relaxed by the government.


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M&A refers to the aspect of corporate finanacial strategy and management dealing with the merging and acquiring of different companies as well as other assets. A Merger is said to occur when two or more companies combine to form one company. One or more companies may merge with an existing company or they may merge to form a new company. According to The Institute of the Chartered Accountants (AS-14) - Accounting for Amalgamation - laws in India use the terms merger and amalgamation interchangeably. Merger and amalgamation may take two forms: (i) through absorption (ii) consolidation. Some time two or more companies are absorbed into an existing company, whereas tow or more companies form a new company through consolidation. The term acquisition refers to acquiring of effective working control by one company over another. The control may be acquired either through a purchase of shares carrying voting rights exercisable at a general meeting, or a control of the board of directors of the other company.


This article aims:

  1. To examine the presence of trends and progress of M&As in Indian corporation.
  2. To identify the factors behind M&As for various industries.
  3. To analyze year-wise and sector-wise variance in number and amount of M&A deals.
  4. To study the relation between manufacturing and service sectors by selecting the number and amount of deals of M&As.


To cover the above objectives following hypotheses have been formulated:

  1. There is no significant difference in number and amount of M&A deals in between years and between industries.
  2. There is no significant difference between M&A progress in manufacturing and service sector

Sector-wise Trends of M&As

Table 1 And Table 2 present the sector-wise trends in number and amount of M&A deals between 2000 and 2007 and the sector-wise trends and progress of M&As could be analysed on this basis.

Food and Beverages: The Indian food processing industry plays a significant role in diversification and commercialization of agriculture products, generates employment, enhance income of farmers and creates a surplus for export of agro-foods. Since the deregulation of the food industry in the industrial policy of 1991 entrepreneurs memoranda (IEM) in various sub-sectors of the food processing industry. The important reason of the M&A activity initiated in this industry are deregulation, restructuring disinvestment, restructuring by parent companies and presence of foreign players.

Textiles Industry: In this industry companies operating in cotton textiles sector, wool, silk, jute, vegetable fiber textile, and apparel products were taken into account. There are three sectors in this industry: mill, power loom, and handloom sectors. The latter two are considered as decentralized sector. The important reasons for the M&As in these sectors are: growth of power looms and handlooms sector at the cost of mill sector which has ultimately resulted in making them sick and unviable. This has given an opportunity for big players like Arvind mills to acquire these companies; textiles industry is overwhelmed with the problems of demand recession, financial crunch, spiraling costs and heavy duty imports. This has led to an increase in the closure of mills; in addition, continued and persistent use of old plant and machinery has led to low profitability in the mill sector and thereby forcing some of mills to closedowns.

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Chemicals, Drugs and Pharmaceuticals: Companies operating in the industrial groups of chemicals, drugs, pharmaceutical, cosmetics petrochemicals, rubbers, tyres and fertilizer industries have been taken into account for analyzing the trend and progress under this sector. The Indian chemical industry produces a large number of specialty chemicals of specific uses that are essential for increasing industrial production. Some important manufacturers of these chemicals are NOCIL, Bayer (India) ICI (India), Hyco products and Colors chemicals. Indian drugs and pharmaceutical industry is one of the largest and most advanced among the developing countries. Some of the companies in this category have developed into mini-giants in the Indian market, and most of them are into exports. Companies like Ranbaxy, Cipla, Sun pharma, Kopran, Dr. Reddy's laboratories and Cadila health care have all got US_FDA approvals, a prerequisite for access to the Us market. The factors that contributed to increase in M&A activity in these sectors are:

(i) Introduction of the process Patent Act in 1970, which required Indian companies to recognize international process patents. This has given an opportunity for the Indian companies to grow. This growth is associated with M&As.

(ii) Government of India passed Price Control Act, 1979 to control prices for drugs sold in its market. It restricted profit and growth opportunities for the drug companies. This has driven them to invest in research and development (R&D) and to restructure to compete in the global business. Hence, companies in this sector are interested to consolidate with their overseas counterparts to overcome this limitation.

(iii) Emergence of WTO has brought about fundamental changes in the pharmaceutical industry. Trade-related aspects of intellectual property rights (TRIPS) of WTO require all Indian companies to comply with international patents. This has mainly happened in the form of M&As.

Non-metallic Mineral Products: In this sector, cement and ceramics manufacturers are the primary players. The cement industry has been totally decontrolled since March 1989. Further, it was de-licensed in 1991. The significant development is due to the boom in housing and trends and progress in this sector provides the factors responsible for M&As are: before 1999 cement industry faced many problems like liquidity crisis, inadequate expenditure on infrastructure and costs of inputs. South-east Asian crisis brought narrowed profitability resulting to the bigger players withstanding the pressure of lower profitability and smaller and marginal players closing down or merging with big players and trying to appear favorable for a takeover. The other contributing factor here to is low valuation of companies. According to a report of Karvy Consultants, the cost of setting up a cement plant of one million tonne capacity requires an investment of Rs. to 3.5 billion, based on the replacement cost. However, it costs lesser to takeover a running cement plant. Hence, there is M&A in this sector. Housing and construction boom as a result of tax incentives given for owning houses and availability of cheaper financing options may have been instrumental in significant increase in M&As in 1999-2000. National Quadrilateral Road Project and State Government Policies to construct the irrigation projects could be other factors responsible for this boom.

Basic Metal, Alloy and steel: This is one of the oldest and traditional industry sectors in India. Companies operating in metals, alloy, steel and related concerns are grouped under this head. The government issued a new set of guidelines on June 1990 to liberalize and rationalize the manufacturing of steel and steel-based products, remove unnecessary restrictions and promote economics of scales of production. Subsequently iron and steel industry were removed from list of industries reserved for the public sector and exempted from compulsory licensing. The government also abolished price and distribution control on iron and steel manufactured by integrated steel plants effective from January 16, 1992. These developments inspired the steel industries to adopt merger and acquisition strategy for growth. The factors contributing to M&As in this sector are:

(i) Slowdown of the economy during the year 1996-97.

(ii) Capital markets, both primary and secondary, remaining depressed for the past couple of years, drying up sources of investment funds for industry.

(iii) Small and medium corporate finding it difficult to access institutional funds and banks cautiousness in lending due to high incidence of NPAs.

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(iv) Export growth subjected to competitive pressure from imports. These factors have restricted the companies to grow by squeezing the profit margin. As a result, some of the large companies looked for M&A strategies to grow.

Machinery, Electronics and Allied Industries: Companies manufacturing agricultural machinery, equipment and parts, machinery used by construction and mining sector prime movers, boilers, steam generating plants, machinery for food and textile industry, electrical products, electrical items, spares, electronic items and spares are clubbed under this group. The important factors for the increase in M&A activity in this sector are:

(i) This industry group had negative growth during 1991-92 to 1993-94 due to the balance of payment crisis which necessitated an important squeeze affecting availability of inputs and their costs.

(ii) Since 1991-96 the overall industrial growth has been slowing down squeezing the profit margins and restricting to grow externally only.

(iii) Proliferation of computer and telecom industry has effected many M&A in this sector.

(iv) Foreign giants entered the market and gradually adopted M&A strategy to expand that forced Indian enterprises to do the same.

Information Technology and Telecom: Companies operating in the IT, Software, telecom and convergence sector are clubbed in industry, the central government has formed an independent department of information technology. Fifteen state Governments have already announced their IT policy and formed high-level task forces. The Indian Software professionals have created a brand image in the global market. According to a NASSCOM survey, more than 37 per cent of the Fortune 500 companies, i.e. two out of every five, outsource their software requirements from India. The Indian telecom industry is among the fastest growing telecom markets in the world. It has come a long way from being a monopolistic and a highly regulated industry during 1980s to a highly competitive and firmly deregulated one in the 21st century. The success and grown of the telecom industry can be attributed to a number of factors like Telecom Regulatory Authority of India (TRAI), creation of a world class network infrastructure, introduction of innovative tariff plans and services and aggressive marketing by various operators. The Important factors for increasing M&As in this sector are:

(i) Consistent efforts were made by the department of telecom and its constituent organizations for upgrading and expanding the telecom networks and services;

(ii) Initiation of internet and web based developments and introduction of cell phone in India;

(iii) Presence of foreign players;

(iv) Positive growth and future potential of established companies diversified into this sector and gradually used M&As strategy to grow and expand their operations.

Automobiles and Automobile Ancillaries: Companies operating in automobile sector, locomotives, transport and spares have been included under this head. The current low penetration levels in India in all these segments of the industry, namely commercial vehicles, passenger cars and two wheelers and the gross under exploitation of the potential of this sector has resulted in relatively low (nearly 5%) share of industrial output in India compared to be the 8 to 10 per cent in other developing countries. The auto industry has shown greater advancements since the abolition of licensing in 1991 and successive liberalization of the sector over years. Liberalization of this industry from a restrictive environment has increased its contribution to overall industrial growth in the country. The Indian transport industry has been gradually playing a catalytic role for producing a wide variety of vehicles, passenger cars. Important factors responsible for an increase in M&As in this sector are:

(i) Freezing of industry from a restrictive environment has helped it to restructure, absorb newer technologies and align itself with global developments.

(ii) Globilalization is pushing global auto majors to consolidate, to upgrade technology, enlarge product range, access new markets and to cut costs.

(iii) Competitive pressure and presence of global players have resulted in a number of M&As in this sector.

Miscellaneous manufacturing: Companies operating in this sector are paper and paper products, printing, publishing and allied industries. Important factors responsible for an increase in M&As in this sector are.

(i) Pulp prices are increasing and there is scarcity in domestic supply of wood, yet the manufacturer cannot afford to increase prices as the downtrend in the international prices may have a similar effect in the domestic market.

(ii) Most of domestic large paper mills are faced with the problem of technological obsolescence and outdated processes and machinery.

(iii) Cut in import tarrifs and lower demand level at the global level may leave the Indian market open to more imports.

(iv) Increasing raw material prices, tighter environment norms and mature growth will lead to industry consolidation for shrinkage.

Diversified: Companies operating in the diversified field have been classified under this sector. Important factors responsible for an increase in M&As in this sector are:

(i) Reforms process has given new avenues for growth and expansion.

(ii) Established companies have used this opportunity through M&As-engineered growth strategies for diversification into new frontiers.

(iii) It is very difficult for small players to survive due to advancements in R&D and technological improvements which have been resulted in substantial reduction in costs and it lead to M&A.

Energy, Power, Gas and Oil: Companies operating in the field of energy, power, gas and oil are included in this group. According to study by NACER, (National Council of Applied Economic Research, September 2003) that per capita consumption of electricity in India is much lower than many other countries with comparable per capita income. The Electricity Act, 2003 has three distinct features: freeing generation and captive power plants from the need to get licensing or other approvals; provision of free entry to private companies into the transmission and distribution segments of the power sector; and deregulation of tariff if the company and the effected consumer segment can come to an agreement, obviously, the main purpose of the bill is to augment the generation, transmission and distribution of electricity. Important factors responsible for an increase in M&As in this sector are:

(i) Opening up and reforms initiated.

(ii) Low rate of growth in power generation depressed the growth rate of industrial production and this has necessitated immediate attention of big companies like Reliance Industries.

(iii) Due to unavailability of power and frequent disruptions have given an impetus to M&As in this sector.

Other Service Sector: This sector includes companies operating in tourism, travel, airlines and allied industries. Important factors responsible for an increase in M&As in this sector are:

(i) India's tourism performance has failed to match its potential.

(ii) The sector was mainly dominated by public sector enterprises in the pre-1991 period.

(iii) Disinvestment process of the public sector hotels and the augmented infrastructural developments may generate lot of M&As.

Financial Services: Companies operating in the field of finance, banking leasing and financial consultancy services are taken into account for this trends and progress analysis. Liberlization has created a more flexible, competitive and professional financial sector. The first phase of reforms was ushered in with the objective of reforming the Indian financial sector. The second phase has resulted in intensyfiying competition and to expand its business to overseas. Important factors responsible for an increase in M&As in this sector are:

(i) Boom in consumer spending.

(ii) Liberalization of the economy.

(iii) Narsimham committee recom-mendation had laid greater emphasis on corporate restructuring of financial sector resulting in M&As.

(iv) New ventures of large industrial houses.

(v) Greater liquidity of debt instruments, gradual opening up for direct investment by foreign pension/mutual funds in the Indian companies abroad. All these developments have contributed to the M&A activity in this sector.

Analysis of Variance of M&As

Two-way ANOVA examines the variation between rows and columns. In this study we have calculated the variation between years and between industries by selecting number and value of M&A deals in India and result have been presented in Table 3 and 4 respectively.

Number of Deals: We have selected the Null Hypothesis that there is no significant difference between years and between industries of number of deal of M&As in India. This hypothesis is accepted in the case of years and rejected in the case of industries (see table 3). Hence, it is concluded that the number of deals between years remained more or less similar but between industries the same is not true. Further, the growth in manufacturing and service sectors are studied by using correlation analysis to know the direction of change and the mean difference was examined among the same by selecting t-test.

Value of Deals: We have selected the same hypothesis for the value of deals. This hypothesis is rejected according to the result presented in Table 4. Year-wise mean of value of deal is increased tremendously from the last four years of the study. In the case of industry-wise analysis other services are contributing more amount of deals over the study period. Hence, we conclude that the value of deals between years and between industries is not similar, and there is a growth in the value of deals of M&As in India over the period. Further, the growth is studied by using the correlation and t-test by dividing the industry into manufacturing and service sectors for the identification of direction of change.

Press of M&As In Manufacturing and service-sectors

Broadly, sector-wise M&As are divided into manufacturing and service sectors for the analysis of trends and progress in number and value of deals and these results are presented in Table 1 and Table 2 respectively.

Number of Deals: The progress and trends are studied in number of deals of M&As by using the correlation analysis, t-test and regression analysis respectively. The correlation between manufacturing and service sector is very less (0.311) and this can also be proved by the t-test. The number of deals of manufacturing sector is higher than the service sector is the first four years of the study but it becomes reverse trend in the last three years of the study. Therefore, from this analysis we can conclude that there is no significant relationship between these two industries. We can can also understand that the number of M&A deals of the two sectors is not progressing in the same direction.

Value of Deals: The progress of these two sector is also examined by taking amount of deals. According to the correlation().953) analysis, there is a positive relationship between them and it can also be proved by the t-test (Table 2). We can deduce that the manufacturing sector recorded higher value in firs four years and lesser value in the last three years of study. The correlation is less in the case of number of deals and more in the case of amount of deals. We can conclude that the direction and degree of change in number and amount of M&A deal of manufacturing and service sectors are not one and the same. There is a contradiction in results with respect to the progress in number and amount of M&A deals between manufacturing and service sectors, since the size of all deals is not similar.


The above analysis warrants the following findings:

(i) The total number of M&A deals decreased from 1,320 to 1,077, i.e. decreased by 18.41 per cent, during 2001-07.

(ii) The number of M&A deals in manufacturing sector decreased from 842 to 442, i.e. decreased by 47.5 per cent, during 2001-07.

(iii) The number M&A deals in service sector increased from 478 to 635, i.e. increased by 32.85 per cent, during 2001-07.

(iv) The number of M&A deals in financial services was fluctuating.

(v) The total amount of M&A deals increased by 615 per cent during 2001-07.

(vi) The amount of M&A deals of manufacturing sector increased by 272 per cent during 2001-07.

(vii) The amount M&A deals of service sector increased tremendously by 1,218 per cent during 2001-07.

(viii) The amount of M&A deals of financial services increased from Rs. 1375 crore to Rs. 17205 crore during 2001-07.


The above analysis warrants the following conclusions:

(1) Chemicals and financial services contributed highest number and amount of M&A deals.

(2) Number of deals is more or less similar between years and varied between industries.

(3) The value of deals is not similar between years and between industries. There is a growth in the value of deals of M&As in the India over the study period.

(4) The manufacturing sector has accounted for larger number of M&A deals over the study period except the years 2005 and 2006.

(5) Higher amount of M&A deals were contributed by manufacturing sector in the first three years and service sector in the last four years of study.

(6) Present service sector is attracting players to initiate the M&A activity.

(7) Within manufacturing sectors chemicals are contributing a lion's share.

(8) The number of M&A deals of manufacturing and service sectors is not progressing in the same degree of direction but this is not true in terms of amount of M&A deals.