Mergers and takeovers may be funded by a company i out of its own funds

Mergers and takeovers may be funded by a company i

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Mergers and takeovers may be funded by a company (i) out of its own funds, comprising paid up equity and preference share capital, for which shareholders are issued equity and preference shares or (ii) out of borrowed funds, which may be raised by issuing various financial instruments. A company may borrow funds through the issue of debentures, bonds, deposits from its directors, their relatives, business associates, shareholders and from public in the form of fixed deposits, external commercial borrowings, hybrids, loans from Central or State financial institutions, banks, rehabilitation finance provided to sick industrial companies under the Sick Industrial Companies (Special Provisions) Act, etc. Well-managed companies make sufficient profits and retain them in the form of free reserves, and as and when their Boards propose any form of restructuring, they are financed from reserves, i.e. internal accruals. Where their own funds are found to be inadequate for funding of mergers, takeovers, etc. they may seek financial assistance from financial institutions and banks depending upon the quantum and urgency of their requirements. They may issue further equity or preference shares, debentures, or may raise public deposits or even resort to external commercial borrowings etc. Some companies raise funds through private placement of their shares, debentures and other loan instruments. Although adequate foreign investments are flowing into the country yet most companies in India depend on domestic credit for their financial requirements.
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Ordinarily, a cash rich company may use its surplus funds in different ways. Companies are now increasingly using their surplus funds also for taking over the control of other companies, often in the same line of business, to widen their product range and to increase market share. FUNDING THROUGH EQUITY SHARE CAPITAL Equity share capital can be considered the permanent capital of a company. Normally it is always available unless the company goes into liquidation or till any time before that stage, the Board resolves for capital restructuring. Moreover, equity needs no servicing as a company is not required to pay to its equity shareholders any fixed amount of return in the form of interest etc. When the profits of a company permit, the Board at its discretion, may resolve to pay them a suitable amount as dividend, after approval by the shareholders. Therefore, equity capital is the best suited source of funding a merger or a takeover. Merger provides additional assets in the form of plant, machinery, buildings and other infrastructure for additional and diversified industrial production. In this case, equity instrument plays a dominant role as the assets of the merging companies are taken over by the merged company and in return the merged company issues its equity to the shareholders of the merging companies.
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