The landscape of Indian business has transformed as a result of the tremendous growth of startups in recent years. These businesses are bringing about innovation in fields like technology, e-commerce, transportation, finance, etc., and creating new employment in the process. To support their growth, Indian entrepreneurs have been able to take use of both the country’s sizable population and the availability of finance. The government has also launched several incentives and initiatives to support companies, including the Startup India program. India is the country with the second-greatest number of startups after the United States of America.
WHAT ARE EXIT STRATEGIES?
Exit strategies as essentially a plan executed by entrepreneurs, investors, traders, or even venture capitalists to liquidate their companies. An exit strategy is a plan that a startup company develops to enable its founders and investors to realize their investment and exit the company. An exit strategy is typically designed to maximize the value of the company and generate a return on investment for its stakeholders.
Usually an “exit strategy” is perceived with a negative connotation, when in reality, a clear exit strategy implies that the business is prepared for a successful transition. In simple words, an exit plan is a way through which an investor plans to get out of an investment.
An entrepreneur’s strategic plan to transfer control of a business to investors or another firm is known as a “Business Exit Strategy.”
The most common exit strategies for startups include –
- Initial Public Offering
- Management buyout
An acquisition is a business transaction that happens when a company purchases the other and gains complete control over it. Acquisitions are mostly friendly and consensual takeovers between the acquirer and the target company. The word ‘acquisition’ and ‘take over’ are often used synonymously. Takeover usually signifies a hostile situation whereas acquisitions are more amicable ones. Acquisitions are often coordinated by investment bankers or lawyers.
TYPES OF ACQUISITIONS
Companies consolidate with each other for a variety of reasons and in several ways. The most common types of acquisitions include:
When a company acquires another company that offers similar products and services then it is called a Horizontal Acquisition. A real-world example would be Facebook acquiring Instagram for $1 billion in 2012. In this case, both Facebook and Instagram are social media platforms and the acquisition allows Facebook to expand its user base and gain access to Instagram’s photo-sharing technology.
When a company acquires another company that produces a product in its existing supply chain then it is called Vertical Acquisition. One example of a vertical acquisition in an Indian context is the acquisition of Shriram Transport Finance by Piramal Enterprises. Piramal Enterprises, a diversified financial services company, acquired Shriram Transport Finance, India’s largest commercial vehicle financier, in January 2019. This acquisition was seen as a strategic move that allowed Piramal to expand its offering to include a broader range of financing solutions and gain access to a larger customer base.
PROS AND CONS OF ACQUISITIONS
- The quickest way to increase market share.
- It helps companies reach economies of scale (cost reduces when production increases.
- Has the potential to reduce or eliminate the competition.
- Acquisitions include a lot of legal arrangements, negotiations, audits, and reviews which take a long time to complete
- Acquisitions are extremely expensive as they have to pay the target company and bear the legal fee, taxes, etc.
A merger occurs when two individual companies decide to join hands together and give rise to a new business entity. Two companies join together to form a new entity, which can include a new name, ownership, and management. This is a voluntary decision, as both companies collaborate to gain certain advantages, even if it means sacrificing some of their autonomy. Generally, no money is exchanged as part of the merger. Usually, the motives for a merger may be –
- To expand market share
- Gain entry to new markets
- Reduce operating costs
- Increase revenues
- Increase profit margins
One of the biggest mergers in India is the merger of Vodafone India and Idea Cellular. The merger was announced in March 2017 and was completed in August 2018. The merged entity, Vodafone Idea Limited, is now India’s largest mobile network operator with over 408 million subscribers. The merger was done to help the two companies compete more effectively with the other major players in the market such as Airtel and Reliance Jio.
TYPES OF MERGERS
Companies merge for a variety of reasons and in several ways. The most common types of mergers include:
A Vertical Merger is a type of merger between two businesses in different parts of the same supply chain. This type of merger is done to increase operational efficiency and improve the overall performance of the companies involved. The companies involved may sell different products, but they have shared supply chains that the merger allows them to take advantage of. A vertical merger example in the Indian context could be the recent acquisition of Reliance Jio by Facebook. The acquisition combines the largest telecom network in India and the world’s leading social media platform. This merger is expected to create a powerful platform and provide customers with access to a range of services, including digital payments, e-commerce, and content streaming. The merger is also expected to create significant synergies and cost savings.
A Horizontal Merger involves two businesses in the same industry joining forces to increase their market share, benefit from combined resources, and achieve cost savings through scale. A horizontal merger example in the Indian context is the merger of India’s two largest e-commerce companies, Flipkart and Amazon India. In August 2018, Walmart acquired a 77% majority stake in Flipkart for $16 billion. This merger created a giant e-commerce giant in India, with over 50% of the market share. The combined entity was able to leverage the strengths of both companies to gain a competitive advantage over Amazon India.
PROS AND CONS OF MERGERS
- Through mergers, economies of scale are achieved as bigger firms work more efficiently.
- More profits enable more investment in research and development improving the overall quality and diversification of the products and services provided by the company.
- Companies that are failing can benefit from the new management.
- Possibility of creating a monopoly due to increased market share, which is detrimental to the consumers as the prices would rise
- A large company might also face diseconomies of scale due to miscommunication and lack of coordination.
LAWS GOVERNING MERGERS AND ACQUISITIONS
The laws governing Indian companies regarding mergers and acquisitions depend on the following things:
- Public or Private companies
- Listed or unlisted companies
- Foreign-owned or resident companies
- Operating in specified sectors
The regulatory framework in India governing mergers and acquisitions (M&A) transactions consists of several laws and regulations. They are –
Companies Act, 2013 –
The Companies Act, 2013, and its associated regulations, orders, notifications, and circulars provide the legal framework for companies incorporated in India, outlining the process for issuing and transferring securities as well as for schemes of arrangement.
Section 230 – 234 of the Companies Act, 2013 deals with The Merger Provisions which govern schemes of arrangements between a company and its shareholders. Section 233 of the Companies Act deals with fast-track mergers and Section 234 of the Act allows cross-border mergers, which are mergers between Indian companies and foreign companies.
Competition Act, 2002 –
The Competition Act, of 2002 governs the merger control laws in India. Recently, the CCI (Competition Commission of India) revised reporting requirements for companies planning to execute Mergers and Acquisition deals in India. For the same purpose, Form – II of the Competition Act, 2002 has been amended.
Exchange Control law –
Exchange control laws like the Foreign Exchange Management Act, 1999 (FEMA), Foreign Exchange Management (Non-debt instruments) Rules, 2019, and the Foreign Direct Investment Policy of India (FDI Policy) govern the cross-border M&A transactions alongside the provisions of the Companies Act, 2013.
Insolvency and Bankruptcy Code, 2016 (IBC)
The Insolvency and Bankruptcy Code (IBC) of India provides a regulatory framework for the insolvency resolution of insolvent companies. The National Company Law Tribunal (NCLT) oversees the corporate insolvency process and any appeals to the NCLT’s orders are heard by the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court of India. By the end of FY 2020-21, 348 acquisitions had been completed through the IBC’s corporate insolvency resolution process.
When it comes to the disputes of Mergers and Acquisitions about the allegations of fraud and cheating, the Indian Penal Code, 1860, and the Code of Criminal Procedure, 1973 determine the penalty and procedure of investigation.
Apart from the general legislation, Indian companies operating in certain sectors are subject to sector-specific laws. These include –
- Banking Regulation Act, 1949
- Insurance Act, 1938
- Mines and Minerals (Development and Regulation) Act, 1957
- Drugs and Cosmetics Act, 1940
- Telecom Regulatory Authority of India Act, 1997.
INITIAL PUBLIC OFFERINGS (IPOs)
Raining funds or capital is essential for the smooth flowing of the company. One of the methods of fundraising is issuing shares to the public known as an “Initial Public Offering”. An IPO is generally issued by an issuer who can be a new or a medium-sized company to the public. It is in the form of ordinary stocks or shares. Some large or big privately-owned companies also issue shares that would wish to transform themselves into openly traded firms.
The most recent startup to raise an IPO in India is Zomato, which went public in April 2021. The company raised over $1 billion in its initial public offering (IPO). Zomato is a food delivery service that operates in India, Australia, the United States, the United Kingdom, Canada, New Zealand, and other countries. The company’s IPO was the biggest by an Indian startup in more than a decade.
PROS AND CONS OF IPOs
- IPOs help raise lots of funds for the company which can be diverted to finance research and development, hire new employees, build fixed assets, reduce debt, etc.
- IPO offers stakeholders who have invested resources in a company the opportunity to receive a substantial financial return on their investments. This can be a large payout or the ability to liquidate their capital from the company. It is a way for founders and investors to reap the benefits of their hard work and dedication over long periods.
- Through IPOs, the company gains a lot of publicity and credibility in the market. The company exposes itself to potential consumers who are unaware of the company and its products.
- By raising an IPO there is a threat of losing control over the company as the ownership is transferred to outsiders who can take control and even fire the entrepreneur.
- The confidential information about the finances and operations of the company is disclosed to the whole world.
- The costs of auditing the firm are very high.
LAWS GOVERNING IPOs
The Securities and Exchange Board of India (SEBI) is responsible for overseeing the issuance and trading of securities on Indian stock exchanges. SEBI prescribes regulations and guidelines that must be followed by companies that wish to become publicly listed, covering a variety of topics such as disclosure requirements, minimum public ownership thresholds, and corporate governance rules.
The Indian legal framework surrounding IPOs is comprehensive and designed to ensure transparency, accountability, and investor protection. This includes the –
Companies Act 2013
This Act sets out the eligibility criteria for companies wishing to go public, such as having a minimum net worth and profitability track record.
The Securities Contracts (Regulation) Act 1956
This Act regulates the trading of securities in India and requires the registration and regulation of stock exchanges, brokers, and other market intermediaries.
Indian Income Tax Act 1961
This Act stipulates the taxation of income from securities, including IPO proceeds. Overall, these laws, in conjunction with regulations and guidelines from SEBI, create a secure system for the IPO process in India.
MANAGEMENT BUYOUT (MBO)
A management buyout (MBO) is a process whereby the current management team of a company buys out the majority of the company’s shares from the existing shareholders. This is commonly seen in India, as many startups are venture funded and the founders are often looking for additional capital to grow their businesses. An example of a startup MBO in India is Oyo Rooms, a hospitality venture focused on providing low-cost, standardized accommodation. The company was founded in 2012 by Riteish Agarwal and was venture funded by Lightspeed Ventures and Sequoia Capital. In 2015, Agarwal led a successful MBO, with the help of existing investors, to gain control of the company. This allowed Agarwal to drive the growth and development of the business, and the company has since raised over $1 billion in funding.
PROS AND CONS OF MBO
- Streamlines operations of the company and continually emphasize what should be done to achieve organizational goals.
- Secures employee loyalty and commitment to attaining organizational goals.
- The development of the objectives of the MBO itself would take a lot of time leaving less time for the managers and employees to do their actual job.
- It is easier to succeed with support from the top management as it becomes easier to integrate with other systems of the company.
LEGAL FRAMEWORK OF MANAGEMENT BUYOUTS
In India, Management Buyouts (MBOs) are subject to various legal frameworks, including the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) regulations, and the Competition Act, 2002. These regulatory frameworks are designed to ensure that MBOs are conducted fairly and transparently, with due regard for the interests of all stakeholders. The Companies Act, 2013, requires the approval of the board of directors and shareholders, and the appointment of independent directors to oversee the process. SEBI regulations require companies to make public disclosures of any substantial acquisition of shares, including those made through MBOs, and provide for the fair pricing of shares and the protection of minority shareholders. Lastly, the Competition Act, 2002, requires companies to obtain approval from the Competition Commission of India (CCI) for certain mergers and acquisitions, including MBOs. In sum, the legal frameworks in place in India ensure that MBOs are conducted in a transparent and compliant manner while protecting the interests of all stakeholders.
Liquidating a company means the process of shutting down a business and converting its assets into cash and paying off its liabilities. When a company is unable to pay its debts and its assets are not enough to cover its liabilities, in such cases, the company opts for liquidation. The main aim of a company’s liquidation is to increase its assets’ value to pay off its creditors and shareholders.
Some of the recent startup liquidations in India include:
Ola Electric Mobility:
Founded in 2017, Ola Electric Mobility was a subsidiary of Ola Cabs. It aimed to create an electric vehicle ecosystem in India. The company ceased operations in February 2021.
Grofers was a grocery delivery service founded in 2013. The company shut down its operations in April 2021 citing high costs and losses.
TYPES OF LIQUIDATION
There are two types of liquidation strategies –
When a company’s shareholders believe that the company cannot continue its operation profitably, then they choose Voluntary Liquidation. It can be –
- Creditors voluntary liquidation
- Members voluntary liquidation
When the creditors or the court (external parties) initiate liquidation, then it is called Involuntary Liquidation. It can be –
- Compulsory liquidation
- Court ordered liquidation
PROS AND CONS OF LIQUIDATION
- Helps pay off the debts and liabilities of the company
- Helps recover some of the invested capital
- The company avoids any more losses by exiting the market
- The assets may not be enough to pay off the debts
- It might lead to unemployment and affect the economy negatively
- The reputation of the company and customer loyalty might get damaged
LEGAL FRAMEWORK FOR LIQUIDATION
The legal framework for the liquidation of startups in India is governed by the Insolvency and Bankruptcy Code (IBC), 2016, and the Companies Act, 2013. The IBC sets out the process of Corporate Insolvency Resolution Process (CIRP) that involves the appointment of an insolvency professional who will manage the company’s affairs and facilitate the sale of its assets. The Companies Act, 2013, meanwhile, provides for the voluntary and compulsory liquidation of companies, as well as the rights of creditors and shareholders during the liquidation process. The legal framework seeks to ensure that the process is conducted fairly and transparently, with due regard for the interests of all stakeholders. The IBC and the Companies Act, 2013, provide a robust legal foundation for the liquidation process, allowing for the orderly winding up of companies and the protection of creditors’ rights.
In conclusion, exit strategies are an essential part of any startup’s business plan. Entrepreneurs need to understand the various types of exit strategies available, and the pros and cons of each, to make the best decision for their business. Acquisitions, mergers, IPOs, management buyouts, and liquidations are the most common exit strategies for startups in India. Each has its unique advantages and disadvantages and entrepreneurs should carefully evaluate their options before deciding which strategy is best for them. While each exit strategy offers its own unique benefits, it is important to remember that no one strategy is perfect for every situation. Therefore, entrepreneurs must make their decisions based on their particular business goals and objectives.