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The Changing Landscape of Corporate M&A in India

Published on Thu, Mar 13,2014 | 13:01, Updated at Thu, Mar 13 at 13:01Source : 

By: Cyril Shroff, Managing Partner, Amarchand Mangaldas & IBA M&A Conference Co-chair

So far, 2014 is looking like the year of the big deal. The year 2014 has started with a bang for inbound mergers and acquisitions (M&A), with India Inc seeing more than 15 such deals in the first two months of the year. Besides the mounting interest from buyers in the Indian consumer growth story, other sectors such as health care, metals, real estate and telecom have led the way in M&A deals this year. Deals in telecom, media space are currently in the pipeline.

This is a far cry from 2013. Hit by sluggish economic trends, M&A activities of Indian companies slowed down in 2013 to a total of nearly 500 deals worth close to $30 billion. General trend in 2013 saw India Inc preferring outbound investments over domestic ones. However, the ODI figures may have definitely tapered on account of RBI’s recent capital control measures.

In comparison to 2013, India Inc expects M&A activity to remain solid in 2014. The country’s fundamentals are still strong and that will continue to drive business and economic growth.  India continues to have a high rate of savings, an increasingly skilled labour force, a dynamic private sector with first rate management capabilities and increasing global competitiveness in many areas.

The leading catalyst for deals in 2014 will be large cash reserves, followed by opportunities in the Indian and emerging markets, improved consumer confidence and access to cheap credit abroad.

The impending elections in May, 2014 will however have a huge impact on M&A activities in India. Most expect M&A activities to pick up post the general elections in May, 2014. Despite the improved sentiment on India, foreign companies are awaiting the outcome of elections before committing significant dollars as investment into India. Most foreign investors are of the opinion that it would be prudent to await the shape and formation of the new government before making investment decisions about India. Political uncertainty and the fear of a fractured mandate have resulted in strategic players adopting the “wait and see” policy.

Drivers for Increased M&A Activity
Liberalization of the economy and a growing need for investment, particularly in infrastructure and industry, have resulted in a more investor-friendly climate in India. The government has undertaken a series of modest economic reforms since June 2013 to tackle the fiscal deficit and boost foreign investment. Nearly all sectors of the economy are now open to foreign investment, although in varying degrees.  

The Reserve Bank of India’s recent liberalisation permitting FDI investors “in control” to acquire shares on the stock exchange will definitely boost consolidation of shareholding by FDI investors in control in India. The recent regulations on foreign portfolio investors have also simplified investment routes into India resulting in increased foreign investment in the country.

Short-term Challenges to Indian M&A
The legal environment in India is increasingly becoming more sophisticated and refined as India becomes a mainstay of the global corporate climate. Today, M&A in India is a vital part of inbound and outbound economic activity. As targets or acquirers, Indian business is increasingly involved in horizontal and vertical integration, and in maximizing the synergies that accompany M&A transactions.

Regulatory Uncertainty: However, in some cases, M&A laws in India are still evolving and the regulators are still ‘catching up’ with the global M&A wave into and out of India. This effort to ‘catch up’ however often results in the regulators applying varying ‘interpretations’ of a stated law which has created substantial confusion and an upheaval of settled market practice. The definition of “Control” is one such example. The definition though consistent across various laws is still subject to the interpretations of various regulators. Multiple regulators interpreting the same definition has definitely resulted in increased confusion in the minds of foreign investors. This definitely impacts deal certainty and resolving this issue is definitely a must if the Indian government expects to attract greater foreign investment into the country.

Regulatory Development: Further, the core tenets of Indian law, especially those involved in M&A transactions, are in the process of undergoing modernization. Currently there are more than 116 major bills that are pending parliamentary approval. Such major bills include goods and service tax and the Direct Tax Code as well as financial sector reforms on pension funds, banking and insurance. The GAAR regime is yet to be implemented. Once these legislations are implemented, these new statutes will help bring India’s outdated laws into the 21st century and hopefully smoothen the lifecycle of an M&A deal in India.  

New Legal Developments: Of course, the introduction of the Competition Act, 2002 and the revamped SEBI Takeover Regulations in 2011, as well as the notification of limited sections of the new Companies Act, 2013, has created their own sets of issues in India pertaining to their interpretations and impact on deal timelines, valuations and processes.

The SEBI Takeover Regulations in 2011 have changed life for Indian listed companies and for their shareholders, Indian and global. The 2011 Code has been extolled for simplifying the open offer and disclosure regimes in India, while incorporating global best practices. However, the Indian industry continues to grapple with issues such as negative control and the regulator’s unpredictable interpretations of the regulations.

The notification of the new Companies Act, 2013 has certainly been a game changer for corporate India. However whether this new act will overhaul, modernise, and simplify corporate laws in India or just remain an “old wine in a new bottle” definitely needs to be seen.

The recent SEBI and RBI notifications on call and put options have provided some perspective in the manner in which regulators will treat option arrangements in Indian contracts. However, the notification does not have a retrospective effect and one needs to see how the Indian regulator will treat existing option arrangements.

Going private continues to remain a missed opportunity. Price discovery driven by participating shareholders has often led to the failure of delisting offers, since anticipated loss of liquidity drives up delisting price. Even if company is successfully delisted, minority squeeze out is still not permitted in India. This creates difficulties in effective consolidation. Additionally this may give a small number of shareholders greater say in decision making (where related party transactions have to be undertaken) and in cases where the promoter holds 90% or more, minority shareholders have a perpetual put right against controlling shareholder under the new Companies Act, 2013. However SEBI is cognizant of concerns surrounding delisting and proposes to revamp the existing delisting regulations.

Shareholder Activism: Institutional investors in the minority position in multiple listed companies are being proactive in monitoring investee companies. Proxy advisory firms are also playing an important role and their significance has increased in checking promoter driven transactions. They closely scrutinise related party transactions, appointment of auditors and directors and executive remuneration.

The role of the minority shareholders in Indian listed companies has also significantly increased. In certain cases, the approval of the “majority of minority” shareholders is required (where scheme is between related parties or promoters are being issued additional shares). The new Companies Act, 2013 has also granted greater powers to the minority shareholders including the right to bring a class action suit against the company, directors, third party advisors, to sue against oppression and mismanagement, to exercise their put right against controlling shareholders and to exit in certain specified circumstances.

The India Growth Story
However, investors who have been prepared to take Indian sensitivities into account have achieved notable M&A successes, for example, through strategic investment in telecommunications and, from a private equity perspective, in real estate, construction and property development.

In the short-term, India may seem to be plagued by economic and political uncertainty. The Indian economy is definitely impacted by the vagaries and uncertainties of the global economic climate. However, the long-term India story continues to remain intact. Many sectors continue to reap the benefits of India’s demographic dividend – FMCG, telecom services, domestic retail and e-retail.

In the long term, it will be extremely difficult for any foreign investor to ignore one of the greatest economies in the world.

Cyril Shroff is Co-Chairing the IBA M&A Conference in Mumbai, 21-22 March 2014

The IBA M&A Conference will host eminent regulators such as U.K. Sinha (the SEBI Chairman), Ashok Chawla (Chairman of the Competition Commission of India), Prashant Saran (Whole-time member, SEBI) and V.S. Sundaresan (CGM - Corporate Finance Department, SEBI). It is also a privilege that Justice B. N. Srikrishna and Justice Gautam Patel have agreed to attend the conference.

The conference includes an engaging sit-down dinner panel with K.V. Kamath (Chairman, ICICI Bank) and Noshir Kaka (Managing Director, McKinsey).

Conference topics include –

India’s Investment Climate: Evaluation of Opportunities, Risks in the Emerging Political Environment   

Regulatory Changes Affecting Foreign Investment in India

Key Risks in Cross Border M&A Deals

Companies Act, 2013: New Era in Corporate Law in India?

New Takeover Code, 2011:  New era or a Damp Squib?

Disputes Relating to M&A Transactions in India

Rise of Corporate Governance and Shareholder Activism in India

Antitrust Regulation of M&A Transactions in India: Three Years of Merger Control Experience

Emerging Tax Themes Affecting M&A Transactions in India

BRICS: Opportunities and Challenges

Media Partner: The Firm


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