Read the passage and answer the questions.
The surge witnessed in mergers, amalgamations and takeover of companies during the past few years is indicative of the shape of things to come. While these concepts are not new and were recognised even in the Companies Act of 1913, the compulsions have undergone a dramatic change. In the past, mergers and acquisitions were used largely as an instrument for revival of sick units or for obtaining tax benefits. It was not uncommon for a business house to merge a sick company with a profit-making one and claim tax benefits. The objective was not necessarily to achieve faster growth. The liberalisation process witnessed during the late seventies and the eighties and particularly the relaxation of some of the restrictive provisions of MRTP Act and FERA, brought about a qualitative change in the mergers and amalgamations of companies. Even so, the incentive to grow as almost non-existent and in fact some companies preferred to “demerge” by splitting one company into two or more so as to escape from the harsh provisions of the MRTP Act.
The fast pace of liberalisation since July 1991 and the time bound programme of structural reforms under pressure from the IMF and the World Bank have shaken the Indian industry from a slumber by exposing it to internal as well as international competition. Not surprisingly, the pressure is building up on every enterprise to modernise and expand to cut costs. Gone are the days of the licence and permit raj, high import duties and the prosperity guaranteed by a “seller’s market”. With the rising threat of competition and the “seller’s market” giving way to “buyer’s market” in a large number of industries, the compulsion to look for economics of scale in production and cutting down the selling cost is increasing.
Simultaneously, the virtual scrapping of the MRTP provisions and relaxation in FERA have removed the disincentives to grow. Hence mergers, amalgamations and takeovers have assumed greater importance. Mergers and acquisitions have now come to represent a short cut for companies to achieve an accelerated growth. This is the trend world over and India cannot remain an exception as it moves towards globalisation.
What was the motive of some companies behind resorting to demerger ?