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M&A & The Emerging Political Environment

Published on Thu, Mar 13,2014 | 22:29, Updated at Thu, Mar 13 at 22:33Source : 

By: Christopher Saul, Senior Partner, Slaughter and May

It is arresting to read the comments of Vodafone in February this year about its long-running tax dispute in relation to Hutchison Essar.  Vodafone defended its conduct during talks with the Indian Government and explained that it had responded to Government queries in a timely manner notwithstanding, at one point, a six month delay by the Indian Government in responding to correspondence sent by Vodafone.  Vodafone observed that India’s action had “raised significant and widespread concern within India and internationally and has been criticised by businesses and interested bodies representing more than 250,000 companies across the US, Europe and Asia”.  This suggests that there are pretty deep-seated concerns with the investment climate in India.

Three questions spring to mind as follows:-

(a)  might it change with the imminent election?
(b) whatever happens in the election, have recent changes in company law and securities regulation moved the dial in the right direction and will those changes bring about more efficient and effective deal-doing?
(c) are recent enforcement actions by regulators directionally helpful?

In relation to the election I defer, of course, to friends and colleagues in India as I only really have the benefit of the European press.  What that does suggest, however, is that if Mr Modi becomes Prime Minister, then that will be good for business.  He has run Gujarat with evident efficiency and it must be a reasonable assumption that, if he has a strong mandate, he will be able to bring greater structure and efficiency to business-doing across India.  Time will tell.But the election is only part of all of this - what can we learn from the recent changes in the Companies Act and the array of prospective SEBI rules? In principle, they are encouraging because they suggest a will to modernise company law and securities regulation and to move disclosure and corporate governance forward.  The introduction, in due course, of senior executive remuneration disclosure, compulsory whistle blower mechanisms and the requirement for at least one woman director on the board of every company all are commendable steps towards better governance and transparency. 

The problem, however, is that there is a lot of confusion as to the reach of the new Companies Act rules and as to how they will interact with the forthcoming SEBI rules.  Many practitioners are, pending greater clarity, genuinely scratching their heads and finding it difficult to advise on the current state of the law.  This is troubling and one wonders whether there is any official forum in which all of these rules can sensibly be aligned and prioritised.  If not then, whatever the results of the election, uncertainty will prevail. 

At the same time, on the other hand, SEBI is pursuing enforcement measures vigorously - as the imprisonment of Subrata Roy indicates.  From an outside looking in perspective, it seems as though the regulator is getting tough and that may, of course, have a cautionary effect on others.  So this may go some way to temper investor anxiety otherwise arising from a climate of uncertainty.

The bottom line, however, is that investors who are spending a lot of money want to feel that the rule of law is “match fit” and on their side.  At the moment they struggle to feel that warm glow and the IBAconference will be a good forum in which to discuss whether this is fair, and, if so, how things might improve.

Christopher Saul and Zia Mody, AZB & Partners are co-chairing a session on India’s Investment Climate – Evaluation of opportunities, risks in the emerging political environment at the IBA M&A Conference in Mumbai, 21-22 March 2014.


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