The new business environment in India


It is the new environment created by economic reforms initiated by the Government of India that did the trick and continuing to do the same. Even countries like U.S.A are now accepting India as a leading economic force.

The new reforms supported takeovers (T), mergers (M) and acquisitions (A) in three distinct ways. First, it rendered them feasible by removing the barriers legal and others. Second, it rendered them attractive, as size could be secured instantly through this route. And third, it rendered them necessary, since for competing effectively, the firms now needed size.

Made them feasible:
In the pre-liberalization era, the policy-cum-legal framework in the country did not make takeovers and M&As feasible. In fact, it frustrated attempts in this regard. Whenever firms tried a merger/acquisition, they collided either with the MRTP restrictions or with FERA barriers. Actually, the restrictive policies forced the firms to travel in the opposite direction; they deliberately went in for more than one company in the same industry, each with a small capacity. And some business houses even de merged some of their existing companies, splitting them into two or more companies, so as to escape the restrictive provisions. In short, the rewards of operating on a mega scale had been denied to Indian firms. While incentive to become big almost non-existent, the barriers against becoming bigger were formidable.

The reforms altered the paradigm completely and made takeovers and M&As feasible. Actually, four distinct streams of policy changes namely, de-licensing, MRTP modifications, FERA relaxations and the new takeover code, acting in concert, had brought about the transformation. The permission of overseas acquisitions by Indian Companies, in specified sectors, financed through issues of American depository receipts (ADR), global depository receipts (GDR) , through stock swaps also helped the process.

Made them necessary:
The ‘necessary factor’ came mainly from the play of market forces. Firms had to be now big to face the new competition. To some of them, scale/size was the main consideration in becoming big; to some others, synergy was the main considerations; and to some others, both were powerful considerations. In the new context, survival depended on exploitation of economies of scale and synergy. At the same time, the firms realized that capacities could not be enhanced quickly through the start-up route and only by mergers/takeovers/ acquisitions, quick expansion in capacity could be achieved. Consequently, intra group mergers/ restructuring based mergers also became necessary. It was thus natural that with liberalization, many firms took to the merger / acquisition / takeover /amalgamation route. Competitive pressures also made corporates hive off, restructure and focus within their ongoing operations. The multinationals (MNC) enthusiastically took to this route; they merged some of their enterprises into larger entities. They also went in for takeovers. The Unilever example amply demonstrates this point.

Made them attractive:
In the new context, the firms also saw a strong attraction in this route. First, firms found here an easy route for fast growth. They could now grow without going through the rigmarole of setting up fresh capacities and without spending any time whatsoever. Favorable tax laws added to the attraction. Successive annual budgets had made such reorganizations fully tax neutral. M&A deals are now exempt from capital gains tax, which had all along been a major deterrent. The lowering of tax rates and simplifications of rules relating to M&A has facilitated the process.

No wonder then that the corporate scene has started witnessing a spate of mergers.

The Diversification Rush:
The corporate scene is now witnessing a spate of diversification as well. The newly-conferred entrepreneurial freedom had made diversification a favorite activity for Indian Industry.

Diversification becomes market driven:
In the past too, Indian companies were resorting to diversification. Now, the pace has become faster and the reasons different. In market economies, diversifications usually follow market opportunities spotted by firms. In India, in the pre-liberalization days, diversification took place mostly as a response to the restrictions that were operating in industry. Firms used diversification for circumventing some government restriction or the other. Often, the diversifications were the result of the control-license system, rather than of systematic strategic planning on the part of the firms.

The licensing system with its restrictions on expansions, sectoral preferences etc, determined a firm’s diversification decisions. The family –business factor, another typical characteristic of Indian Industrial scene over the years, was another reason behind the haphazard diversification. Usually family businesses prefer to be present in several sectors.

According to their perception, putting all the eggs in one basket is too risky and being present in many businesses not only minimized the risk, but also enhanced profit opportunities. They were not bothered much about concepts like core competency. In contrast, in the open regime diversifications were the outcome of systematic business planning. The opportunities and threats emerging in the environment formed the rationale for the diversification. There were indeed many opportunities to be tapped and many threats to be countered through diversification.

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