Healthcare M&A 2024 Comparisons

In 2023, India saw a fair number of M&A deals in the healthcare sector, showcasing the constant growth and focus on investments in this sector. Amongst others, a burgeoning middle class, eager to pay for quality health care, and the importance of healthcare in the wake of the pandemic, have resulted in increased spending on private healthcare. Consequently, deal activity in the healthcare space was fairly robust in 2022 and 2023 and is expected to continue to be robust in 2024.

Deal activity in India is higher than the average deal activity in the Asia-Pacific region.

Despite a decline in the overall volume (number) of such transactions, the value of these deals has increased.

Deals are expected to continue in the healthcare sector, although the volumes may be subdued. Exits for investors have been strong, which has reinforced investors’ hypothesis with respect to healthcare investments. As a result, global private equity funds/venture capital firms are relatively comfortable in investing larger amounts of capital to work in India. Further, as the perceived risks for investing into India is diminishing, transactions are moving towards being control deals for private equity/VC firms, as founders and owners are increasingly comfortable handing over control to funds. Other key trends include the following.

• Healthcare services, including single-specialty segments, witnessed robust deal activity, for example:
1. consolidation in the hospitals sector, with larger chains acquiring smaller assets to expand geographic footprint and strengthen existing regions;
2. rising interest in single-specialty segments like mother and childcare, IVF, oncology, nephrology and eyecare, as these assets demonstrate strong unit economics; and
3. inflow of strategic capital (sovereign wealth funds, pension funds) into the Indian healthcare services sector.
• Increasing PE activity in the medical devices segment.
• Focus on direct-to-consumer models and technology adoption.
• Capacity utilisation and specialty portfolio acquisitions.

India is a preferred jurisdiction for incorporation, and entrepreneurs are typically advised to incorporate in India. Incorporation of a private limited company takes approximately four to six weeks from the date of submission of initial filing of the incorporation documents with the regulator.

There is no initial capital requirement/minimum paid- up capital to incorporate a private limited company other than the requirement to have a minimum of two shareholders for private limited companies and seven shareholders for public limited companies.

Entrepreneurs are typically advised to incorporate a private limited company under the Companies Act, 2013, as this form of entity is most suited to meet investor requirements from a funding and governance perspective.

Early-stage financing can be provided by any of the above-mentioned sources (or a combination thereof), depending on the nature of business, scalability, credentials and prior experience of the founders, and other relevant factors.

Early-stage financing would typically be provided by way of equity capital, and is documented by way of execution of agreements which typically include: 

• share subscription agreement recording the terms and conditions for the investment, including customary representations and warranties and indemnities;
• shareholders’ agreement including provisions with respect to governance and management, transfers and exit; and
• if the founders are involved in executive roles, employment agreements with founders.

The sources of venture capital include domestic and foreign venture capital funds, corporate venture capital, government funds/schemes, and angel investors. Foreign venture capital firms and foreign private equity investors are also involved in providing financing in the healthcare space.

While there are no model agreements (for instance, as prescribed by the national venture capital association in the United States of America), there are well-developed standards for venture capital documentation in India which are more market-practice and region driven.

To undertake an initial public offering or listing, start-ups are required to change their corporate form from a private limited company to a “public limited company”. Other than any such change in the corporate form, start-ups are not typically advised to change their corporate form or jurisdiction.

There is no specific trend in relation to whether start-ups prefer an IPO or sale at the outset. This is typically dependent on the optimisation of valuation of their business and the consequent demand, including if the market conditions are conducive for listing.

Many investors may prefer listing companies in India due to familiarity with the regulatory environment, market dynamics, investor base and attractive valuations. Listing in India may also benefit from regulations and policies that are tailored to the Indian market, potentially simplifying compliance and governance requirements. A domestic listing can also enhance the company’s visibility and reputation within the country.

The firm does not opine on such matters without consulting with foreign counsel.

Traditionally, the sale process would be run as a bilateral negotiation. More recently, auction processes are also becoming commonplace in sale processes, more particularly with respect to businesses backed by private equity/ venture capital investors or businesses that have steady growth.

A typical transaction structure may include: (i) a full or majority exit for VC investors; (ii) a partial exit for the founders/promoters; and (iii) the founders/promoters continuing to hold a reduced stake in the company along with being involved/leading operations.

Whether VC investors would sell their entire stake or a majority is typically linked to various factors including: (i) fund-life considerations; (ii) whether an IPO/listing or similar liquidity event is contemplated in the near future; and (iii) potential up-side.

More recently, VC investors have exited fully, with the new buyer putting in place professional management and incentivising such professional managers and CXOs with lucrative management incentive plans.

Buyouts by private equity/VC investors are typically for cash. In some situations, where the acquirer is involved in a similar business or is a public listed company, the consideration can be a hybrid of cash and stock-for-stock.

Founders are typically expected to stand behind representations and warranties, and certain liabilities after closing in early-stage companies. Escrow/holdbacks are not customary (particularly if there are exchange control elements involved) and are generally included to address material and specific issues.

Representations and warranties insurance is a relatively new concept in India, and stakeholders are familiarising themselves with the pricing, advantages, disadvantages and scope of coverage. While representations and warranties insurance is not customary in transactions, there is a recent trend in obtaining insurance particularly in sponsor-led deals or where the company is professionally managed.

Spin-offs are not customary in the healthcare industry and are generally resorted to where greater value may be unlocked due to divestment or to transfer a lucrative business into a separate entity. Spin-offs can be undertaken either by way of a: (i) contractual arrangement (a business transfer or an asset transfer); or (ii) demerger undertaken through a scheme of arrangement (which requires approvals from (among others) the national company law tribunal or where the proposed demerger is between a company and its wholly owned subsidiary, the regional director under the Companies Act, 2013).

Generic pharmaceuticals constitute a large part of the business (and consequently of the enterprise value) of several Indian pharmaceutical companies, and spin-off of such generic pharmaceutical business or over-the-counter business is generally not undertaken.

The Income Tax Act, 1961 (the “IT Act”) provides for tax beneficial positions for demergers undertaken by way of a scheme of arrangement, subject to satisfaction of certain conditions.

Key conditions for a transfer to qualify as a “demerger” in terms of Section 2(19AA) of the IT Act are:

• property of the transferred undertaking becoming the property of the resulting company;
• liabilities relatable to the transferred undertaking, immediately before the demerger, becoming the liabilities of the resulting company;
• property and the liabilities of the undertaking being transferred at values appearing in its books of account immediately before the demerger;
• resulting company issuing, as consideration, its shares to the shareholders of the demerged company on a proportionate basis;
• shareholders holding not less than three-quarters in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for the resulting company, or its subsidiary) becoming shareholders of the resulting company, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof; and
• transfer of the undertaking is on a going concern basis.

An “undertaking” will include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

According to Section 47(vib) of the IT Act, if in a demerger there is a transfer of a capital asset by the demerged company to the resulting company and if the resulting company is an Indian organisation, then such a transaction will not attract levy of capital gains tax.

In terms of Section 47(vid) of the IT Act, if there is an issue or transfer of shares by the resulting company in consideration of the demerger of the said undertaking(s) to the shareholders of the demerged company, then the transaction will not be amenable to capital gains tax.

A spin-off followed by a business combination is possible. Please refer to 5.2 Tax Consequences with respect to key requirements for demergers undertaken by way of a scheme of arrangement. Spin-offs may also be undertaken through contractual arrangements by way of a business transfer/asset transfer. Business transfers that qualify as a “slump-sale” are entitled to certain tax benefits under the IT Act. A slump sale is defined under the IT Act as transfer of one or more undertaking(s) by any means for a lump sum consideration, without assigning values to the individual assets and liabilities of the undertaking.

Timelines for: (i) demergers undertaken by way of a scheme of arrangement would typically take six to eight months; and (ii) spin-offs undertaken by way of contractual arrangement as a business transfer/asset transfer would typically take between two to four months (or longer, based on deal specifics).

With respect to demergers undertaken by way of a scheme of arrangement, notices to the income tax authorities are issued prior to the demerger being sanctioned by the relevant National Company Law Tribunal. Income tax authorities are required to communicate their representations within 30 days of receipt of the notice, failing which, it is deemed that they have no representations to make. In some jurisdictions, the jurisdictional National Company Law Tribunal insists on no-objection certificates being provided by the relevant income tax authorities prior to the demerger being approved. Prior notices are not required to be provided to the income tax authorities for a demerger undertaken by way of a scheme of arrangement between a company and its wholly owned subsidiary, which are undertaken under the “fast-track demerger” route (ie, under Section 233 of the Companies Act, 2013).

Acquisition of voting shares/voting rights or control in a listed company is governed by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Regulations”).

The Takeover Regulations prescribe shareholding and control thresholds (such as a first-time acquirer crossing 25% of the total voting shares/voting rights), which if breached, require a mandatory tender offer (MTO) for at least 26% of the total voting shares of the listed company to be made. In case of acquisitions below 25%, no MTO is triggered (unless such acquirer has acquired “control”, which is a test irrespective of an acquisition of voting shares/voting rights). Additionally, it is open for an existing shareholder (holding 25% or more of the shareholding of the listed company) to make a voluntary tender offer (VTO) – a VTO does not require an underlying acquisition to be triggered as such and if made is required to be made for at least 10% of the total voting rights of the listed company.

The extent of the stake that an acquirer acquires, and whether it intends to acquire such stake so as to trigger an MTO, is dependent on commercial considerations. It is not unusual in the Indian context for acquirers to acquire a sub-25% stake and accumulate considerable shareholding interest, while still falling outside the ambit of triggering an MTO – however structuring such sub-25% stake acquisitions should take care to not include rights (by way of board rights/reserved matter rights), since that would otherwise trigger an MTO.

From a reporting perspective, the Takeover Regulations mandate an acquirer crossing 5% of the voting shares/voting rights in a listed company (in the first instance) to make a disclosure of the holding of such acquirer and “Persons Acting in Concert” with such acquirer (PAC) to the stock exchanges and the listed company. Also, any acquirer (along with PACs) already holding 5% or more of voting shares/voting rights is required to make a disclosure of a change in their holding exceeding 2% of the voting shares/voting rights. These disclosures are required to be made to the stock exchanges and the listed company within two working days of such acquisition/change. These disclosures do not need the acquirer or PACs to state the purpose of the acquisition or their plans or intentions with respect to the listed company.

No requirement as such is mandated on an acquirer acquiring a stake in a listed company to publicly propose or state its future plans regarding any further acquisitions. Having said that, if an MTO is triggered, the offer document requires that the acquirer specify its rationale for the acquisition and (long term) commercial justifications and the strategic plans with respect to the business.

In terms of the Takeover Regulations, an acquirer (along with PACs) is mandated to undertake an MTO in the following circumstances (both direct and indirect acquisitions).

• If an acquirer (along with PACs) holds less than 25% of the total voting shares/voting rights of a listed company and acquires or agrees to acquire such number of voting shares/voting rights, which results in such acquirer (and its PACs) holding 25% or more of the voting shares/voting rights of the listed company.
• If the acquirer (along with PACs) already holds 25% or more of the total voting shares/voting rights of a listed company and acquires or agrees to acquire such number of additional voting shares/voting rights, which results in such acquirer (and its PACs) acquiring more than 5% of the total voting shares/voting rights of the listed company, in any given financial year.
• Irrespective of acquisition of voting shares/voting rights, if any acquirer or its PACs acquire control over a listed company.

Acquisition of shareholding/control of listed companies is either through a share acquisition for cash (primary or secondary) or through a merger scheme (which is typically structured as a share swap requiring sanction of the National Company Law Tribunal, a judicial authority). If the merger scheme route is employed, a minimum of 75% of the shareholders (of the entity being merged) must receive their consideration in the form of shares – if this criterion is not met, the merger transaction results in tax incidence in the hands of the recipient receiving the consideration. However, the merger scheme route for third-party acquisitions is less common than the share acquisition route.

A contractual share swap (outside of the merger scheme process) is not typical in India on account of tax incidence in the hands of the recipient of the consideration.

From a timing perspective, a merger scheme transaction typically takes around ten to 12 months to complete, while share acquisitions for cash can be completed sooner (subject to transaction-specific regulatory approvals that may be required). However, an acquisition undertaken through the merger scheme route (in which the listed company is directly involved in the merger) benefits from exemptions from MTO obligations and is preferred if the intention is to avoid an MTO.

Also, a share acquisition for cash does not require the approval of the listed company’s shareholders, while a merger scheme requires shareholders’ approval (by way of three-quarters majority and in certain cases an additional minority shareholder approval).

Having said that, electing one route over the other is ultimately dependent upon the facts and timing pressures underpinning the specific transaction and the commercial appetite of the parties involved.

It is also common to see acquisitions of listed companies structured as business transfers – where the acquirer enters into an agreement directly with the listed company to purchase the listed company’s business/an identified business undertaking via contract, or the business of the listed company being ”demerged” to the acquirer in consideration for shares issued by the acquirer to the shareholders of the listed company. Contractual business transfers do not attract tender offer obligations but do require shareholder approval (by way of three-quarters majority, as well as a separate approval of the minority shareholders) but need to be structured carefully for ensuring maximum tax benefits. A demergeris a scheme process and is akin to the merger scheme process discussed above – the requirements as to judicial sanction, timing, shareholder approval and non-cash consideration applicable to a merger scheme transaction also apply to a demerger.

Acquisition of shareholding/rights or control of listed healthcare companies follows the norm applicable to listed companies in general, as discussed above.

For underlying acquisitions triggering an MTO, pricing is generally not regulated except in certain specific cases (such as if the acquisition is undertaken through the exchanges or if the transaction is a cross-border exchange control regulated transaction). However, the price at which an offer in the MTO is to be made is regulated by the Takeover Regulations – and is required to be above a certain floor price, which is determined as the highest of a set of certain parameters, such as: (i) the negotiated price at which the underlying share acquisition is undertaken; (ii) the price paid by the acquirer (and its PACs) for previous acquisitions of the listed company’s shares during the preceding period of 52 weeks/26 weeks; (iii) the volume weighted average market price of the listed company’s shares (during the preceding 60 trading days) (if the listed company’s shares are frequently traded); and (iv) the price determined on the basis of a valuation of the listed company (if the listed company’s shares are not frequently traded).

Pricing in case of a merger scheme transaction (and the determination of the swap ratio), and in a demerger is determined based on a valuation report generated for the entities involved.

Pricing for contractual business purchases is not regulated as such but this determination is often underpinned by tax considerations.

It is not typical to effect valuation adjustments in case of listed company acquisition transactions. Convertible instruments are subject to a market price-determined valuation floor at the time of conversion (which typically does not permit adequate headroom to effect valuation and anti-dilution adjustments). Also, tenure for convertible instruments is limited to 18 months, which typically does not permit an adequate time horizon to meaningfully effect valuation and anti-dilution adjustments. In addition, typically, listed companies are not permitted to issue partly paid-up instruments, except for share warrants (which require 25% of the consideration to be brought up front with permissibility for the balance to be brought in at the time of conversion). However, similar to other convertible instruments, conversion of share warrants is subject to a market price valuation floor and a tenure of 18 months (failure of which results in the upfront consideration being forfeited). Share warrants tend to be used more for deferring the full consideration rather than for effecting valuation and anti-dilution adjustments.

While the Takeover Regulations do permit an acquirer to withdraw an MTO in certain identified cases – ie, if: (i) a statutory approval required for the MTO or for effecting the underlying acquisition is refused; (ii) the acquirer (being a natural person) has died; (iii) conditions specified in the underlying agreement not being met and such agreement being terminated; and (iv) SEBI (the capital markets regulator) permitting a withdrawal, in practice, it is not easy to withdraw an MTO once triggered. Generally speaking, SEBI is not amenable towards permitting acquirers to withdraw MTOs.

Having said that, Takeover Regulations do permit conditional MTOs – ie, an MTO subject to a minimum level of acceptance. In a conditional MTO, if the tender in the MTO does not reach a certain threshold (specified at the outset in the offer documents), the acquirer has the ability not to proceed with the MTO. However, if the acquirer does not proceed with the conditional MTO, it is also barred from completing the transaction set out in the underlying agreement.

Share acquisitions are typically documented through share purchase agreements/share subscription agreements. Merger scheme transactions and demergers are documented through a scheme document (which outlines the proposed merger and is submitted with the judicial authority for sanction) and an implementation agreement/co-operation agreement for documenting the obligation of the parties in relation to the transaction. Contractual business purchases are documented through a business transfer agreement/an asset purchase agreement.

Ability of listed companies to support an acquisition transaction is often underpinned by corporate governance implications, and typically listed companies do not undertake obligations (such as providing indemnities in case of share transfers by selling shareholders) where strong rationale for undertaking such obligations cannot be shown in the context of the benefits of the transaction to the shareholder body in general – in fact, in case of secondary share sale transactions, the listed company may not be a party to the underlying share transfer agreement at all. However, if the listed company is party to the underlying agreements, it may provide certain fundamental warranties around authority and capacity and due issuance (in case of subscription transactions) – however, providing business warranties is fact specific and listed companies typically provided them only if acquisition is of a controlling nature (and not in case of minority acquisitions).

On receipt of the offer documents pertaining to a tender offer, the board of directors of the listed company are mandated to constitute a committee of its independent directors, who are required to provide reasoned recommendations on the proposed tender offer.

If an MTO is triggered, the offer is required to be made for at least 26% of the voting share capital of the listed company. Tender received pursuant to the offer must be mandatorily acquired by the acquirer unless the MTO is conditional in nature (as discussed in 6.5 Common Conditions for a Takeover Offer/Tender Offer).

Takeover Regulations permit incoming acquirers to make a delisting-cum-tender offer.

If the tender received in the offer is such that the total shareholding of such acquirer (together with the stake acquired in terms of the underlying agreement) crosses a specified threshold (such as 90%), such acquirer will be able to delist the listed company from the exchanges. Having said that, in either case, the minority shareholders of the listed company are not under an obligation to tender in the offer.

Any forced exit or squeeze-out of the minority shareholders must be effected through a capital reduction process (which is also a scheme process) and requires shareholders’ approval (by way of three-quarters majority) as well as judicial sanction. It should be noted, however, that in case of squeeze-out transactions there is a risk that the minority shareholders approach courts and regulatory authorities to try and block the squeeze-out.

Prior to launching a tender offer, the acquirer is required to have in place firm financial arrangements evidencing the ability of the acquirer to complete the purchase of the shares tendered in the offer – this aspect is confirmed by the manager to the offer.

Financing of tender offers is generally through internal accruals, equity financing or through debt financing from non-banking entities (Indian banks are generally not permitted to lend for tender offer financing). SEBI has in the past viewed providers of equity financing as persons acting in concert with the acquirer (and thereby equally liable with the acquirer for fulfilment of the tender offer obligations).

As discussed in 6.5 Common Conditions for a Takeover Offer/Tender Offer, Takeover Regulations permit withdrawal of an MTO only in certain limited cases – an acquirer’s financing not holding up for it to complete its tender offer obligations will not automatically permit such acquirer to withdraw the tender offer and any such withdrawal will require SEBI approval.

In case of contractual business transfers, it may be more open for the transaction to specify the financing holding up as a condition to completion of the purchase. However, this would still have to be looked at through a governance lens given that the selling entity being a listed company has minority public shareholders and the board of the listed company may have to justify to them the rationale behind agreeing to include such a condition in the transaction documents against the back drop of the seller’s (listed company’s) requirement to have deal certainty.

As discussed in 6.5 Common Conditions for a Takeover Offer/Tender Offer, the ability of listed companies to support an acquisition transaction is often underpinned by corporate governance implications, and typically listed companies do not undertake obligations to support such transactions unless a strong rationale of a benefit to the listed company as such can be shown. In the same vein, it is not typical for listed companies to grant any specific deal protection measures.

Having said that, Takeover Regulations do prescribe certain value protection (during the interim of the offer period) such as a requirement on the listed company to continue to undertake its business in the ordinary course, or not effect any change in capital structure or not undertake non-ordinary course material borrowings, etc, (without having obtained shareholder approval).

Governance rights made available to a majority shareholder that are disproportionate to its shareholding or which detrimentally impact the minority shareholders is likely to be subject to regulatory scrutiny. In fact, while Indian law may permit a majority of shareholders to appoint nominees on the boards of a company, any such director appointed has a fiduciary responsibility to act in the best interest of the company and all its stakeholders (and not just the majority shareholder that has nominated the director). Accordingly, any arrangements between the majority shareholder and the listed company that may require the board of the listed company to undertake actions that are beneficial only to a certain set of shareholders/stakeholders is likely to come under regulatory scrutiny and its enforceability be challenged. 

Specifically, do also note that compensation or profit-sharing arrangements in connection with dealings in securities between a majority shareholder and an employee/director of the listed company requires board and minority shareholder approval.

In general, listed companies in India have a high concentration of promoter/principal shareholder shareholding. Accordingly, incoming acquirers typically contract with the existing promoter/principal shareholder to purchase their stake, which in turn triggers an MTO (if the relevant thresholds are breached). Takeover Regulations do not permit parties to the underlying agreement to tender any of their shareholding in the MTO.

In cases of MTOs triggered where the promoter/principal shareholder is not contracting to sell as part of any underlying transaction (a less common scenario), it is still not typical for the incoming acquirer to enter into any undertakings with the promoters/principal shareholders mandating them to tender in the MTO – since these type of arrangements end up reducing the tender headroom (of 26%) available to the non-promoter/minority shareholders – and thereby impact the ability of non-promoters/minority shareholders to exit in the tender offer.

While there is no formal consent as such that is taken from SEBI for launching an MTO or entering into the underlying agreement that triggers an MTO, the draft of the offer letter is required to be sent to SEBI for comments – and SEBI’s comments, if any, must be incorporated into the final offer letter circulated. Takeover Regulations prescribe a period of 15 working days for SEBI to revert with its comment on the draft offer letter. However, in cases where SEBI has sought clarifications or additional information, this timeline tends to get extended until such clarifications are addressed and additional information provided. While reviewing the offer letter, SEBI would analyse whether the price offered in the offer letter is line with the pricing provisions of the Takeover Regulations, and generally as well that the terms of such offer and the underlying transaction do not impact the minority shareholders detrimentally.

The tender offer process from its launch to its conclusion covers several milestones such as issuance of the public announcement of the tender offer, detailed public statement of the tender offer, circulation of the offer letter, commencement and closure of tendering period and payment of consideration to the tendering shareholders and takes around three to four months from launch to conclusion (ie, payment being made to the tendering shareholders). However, if the tender offer requires statutory or regulatory approvals (such as anti-trust approvals) and consequently the payment to the tendering shareholders cannot be made without these approvals, this timeline gets extended pending receipt of such approvals.

Competing offers can be launched only within a specific window following the initial tender offer – ie, within a period of 20 working days (or around 25 calendar days) from the launch of the initial tender offer. If a competing offer is launched, the schedule of activities and the tendering period for both the initial tender offer and the competing offer will be carried out with identical timelines and the last date to tender in the initial tender offer will be moved to the last date to tender in the competing offer.

If regulatory/anti-trust approvals are required for completing the tender offer, the payment to the tendering shareholders may be delayed until receipt of such approvals. However, such extension would require that interest for such delay as may be specified by SEBI (which is typically at 10%) be paid to the tendering shareholders.

If an MTO is triggered, an immediate public announcement/launch of such MTO (on the same day) is incumbent on the acquirer (unless in certain specific cases of indirect MTO triggers, in which case the public announcement can be made within four working days (“Certain Indirect MTOs”)). Other than in case of Certain Indirect MTOs, once the public announcement is made, the tender offer is said to have been launched. In case of Certain Indirect MTOs however, the MTO process is launched only when the primary transaction (that has triggered the MTO) is concluded. Parties may approach regulatory and statutory authorities for obtaining approvals during the interim of the primary transaction being concluded – however, this is typically fact specific and dependent on the contours of the deal.

Setting up and operating hospitals and other clinical establishments require several approvals from central and state authorities. Depending on the nature of operations and location of the hospital, the key licences required and regulators involved are set out below.

• Licence to operate, registrations for operation of medical equipment, registrations for operation of nuclear facilities and approval of radiology safety officer issued by the Atomic Energy Regulatory Board under the Atomic Energy Act, 1962.
• Registrations issued by the relevant municipal authority in relation to, inter alia, genetic counselling, pre-natal diagnostic procedures, pre-natal diagnostic tests, and ultrasonography under the PreConception and Pre-Natal Diagnostic Techniques (Prohibition of Sex Selection) Act, 1994, Pre-natal Diagnostic Techniques (Regulation and Prevention of Misuse) Act, 1994.
• Approvals under the Clinical Establishments (Registration and Regulation) Act, 2010 or under respective state clinical establishment legislation.
• Licence issued by the state government under the Medical Termination of Pregnancy Act, 1971 to undertake medical termination of pregnancy.
• Licences issued by the Directorate of Health Services of the relevant state under the Transplantation of Human Organs and Tissues Act, 1994 to facilitate transplantation of kidney, pancreas, lung, cornea, liver, heart, intestine from living participants and cadavers and to certify brain stem death.

The timeline for obtaining licences varies from state to state, and can take approximately two to four months.

The Security Exchange Board of India (SEBI) is the primary securities market regulator for M&A transactions involving public listed companies.

India is an exchange-controlled economy and investment in certain sectors may require government approval. With respect to: (i) construction and operation of hospitals or clinical establishments; and (ii) manufacturing of medical devices, foreign direct investment (by way of investment in equity capital) is permitted up to 100% under the automatic route (ie, without requiring prior government approval).

In terms of Indian foreign exchange rules, government approval is required for (among other things) investments into India by an entity of a country, which shares a land border with India or if the beneficial owner of an investment into India is situated in or is a citizen of any such country (“Restricted Investments”).

Further, investment in equity instruments by foreign investors is required to be reported to the Reserve Bank of India (through authorised dealer banks) after completion of the investment within: (i) 30 days, where the foreign direct investment is made by way of a primary subscription and such reporting is by the investee company; (ii) 60 days, where the foreign direct investment is made by way of a secondary transfer and such reporting is by the resident seller/purchaser.

Please refer to 7.3 Restrictions on Foreign Investments.

As per the Indian merger control regime, a “combination” (ie, an acquisition, merger or amalgamation) must be notified to and approved by the Competition Commission of India (CCI), if the prescribed thresholds for the asset and turnover are breached and the combination accordingly does not fall under the exemption. A CCI notification is mandatory and is subject to a “standstill” or suspensory obligation, until approved by the CCI within the prescribed timelines.

The CCI must issue a prima facie opinion if, on the basis of its analysis, it believes that the transaction is likely to cause an “appreciable adverse effect on competition” (AAEC) in the specific industry within 30 working days from the date of notification, or approve it if there is no AAEC. However, if the CCI has not passed any orders within a period of 210 days, the combination is deemed to be approved.

On 7 March 2024, the Central Government issued a notification exempting any acquisition, merger or amalgamation, if the enterprise being acquired, taken control of, merged or amalgamated has (i) assets not more than INR450 crore in India, or (ii) turnover of not more than INR1250 crore in India, from the provisions of Section 5 of the Competition Act 2002 for a period of two years from the date of publication of its notification in the official gazette.

In terms of the existing framework under the Competition Act, 2002, notification is only required with respect to deals in which the value of assets or turnover of the parties involved or the group to which they belong, is above certain identified limits/thresholds, which are stipulated separately for a global basis and domestic values.

A new threshold which is linked to the value of the deal known as the Deal Value Threshold (DVT), which is based on the transaction’s size or the amount the acquirer is willing to pay as consideration is proposed to be included in terms of the Competition Amendment Act of 2023. In terms of the DVT, transactions exceeding INR20 billion in value will trigger the requirement to notify the CCI if the enterprise involved has “substantial business operations” in India. Provisions in relation to DVT are yet to be enforced.

Regulations and due diligence pertaining to the following matters are primarily relevant in the context of acquisitions:

• payment of employee benefits (including provident fund contributions, employee state insurance contributions, gratuity, bonus, etc); and
• contract workers and benefits, including:
1. formation and structure of employee trade unions;
2. pending union settlements; and
3. employee litigation, including with respect to trainees/contract workers raising claims for deemed employment/misclassification.

While a detailed diligence on the above matters is key, an in-depth understanding of existing and past operational practices should also be obtained, as some matters may not be covered by way of documentation (for instance, strikes and lock-outs). Labour diligences are also key to identify roadblocks or potential issues with respect to operational synergies.

Labour consultation may be required if the target’s personnel are represented by a trade union, and forms the basis of the collective bargaining agreements entered into between the target and such trade union.

The Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) deal with the regulation and management of foreign exchange and currency control in general, specifically in respect of an inflow and outflow of currency.

RBI issued the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2023 (the “Regulations”) on 21 December 2023.

The Regulations set out the manner for receipt and payment in foreign exchange transactions.

The Regulations specify that:

• no person resident in India is permitted to make or receive payments from a person resident outside India unless permitted under FEMA or approved by RBI;
• payment should be received in “foreign currency”, which means any currency other than Indian currency; and
• the Regulations bifurcate the transactions into two categories – ie, (i) trade transactions; and (ii) transactions other than trade transactions.

For trade transactions, receipt/payment for export or import have been set out for countries like Nepal, Bhutan, and Asian Clearing Union (ACU) member countries.

The Regulations specify that payments and receipts for any current account transaction – aside from trade transactions – may only be made in Indian Rupees between an Indian resident and a foreign resident visiting India.

The Clinical Establishments (Registration and Regulation) Act, 2010 (the “Central Act”) and the Clinical Establishment (Central Government) Rules, 2012 (the “Central Rules”) are significant.

In terms of Rule 9(ii) of the Central Rules: “the clinical establishments shall charge the rates for each type of procedures and services within the range of rates determined and issued by the Central Government from time to time, in consultation with the State Governments”. It is understood that as at the time of writing, no such range of rates has been fixed.

Given that “health” is a state subject in terms of the constitution, the Central Act is only applicable to states that have adopted the Central Act under Article 252 of the Constitution of India (which, as at the time of writing, consists of 12 states and seven union territories).

It is understood from the information available in the public domain that a petition for the standardisation of rates by private hospitals for providing medical facilities has been filed in the case of Veterans Forum for Transparency in Public Life v Union of India (WP(C) 648 of 2020) and is currently pending in the Supreme Court of India (the “Petition”). In terms of the order dated 27 February 2024, passed by the Supreme Court, the Supreme Court directed the Secretary, Department of Health, and Union of India to hold a meeting with their State/Union Territory counterparts to formulate a proposal for notification of rates under Rule 9 of the Central Rules (failing which, the court will consider making the rates presently applicable with respect to the CGHS scheme as the relevant rates for the purposes of Rule 9). The matter is currently pending before the Supreme Court.

The Ministry of Health and Family Welfare (the “Health Ministry”) notified an amendment (the “GMP Amendment”) to Schedule M of the Drugs and Cosmetics Rules, 1945 (the “Drug Rules”) on 5 January 2024. Schedule M of the Drug Rules prescribes good manufacturing practices for pharmaceutical products.

The Directorate General of Foreign Trade issued a notification on 11 March 2024, amending the export policy for human biological samples. After the amendment, human biological samples that are covered under the Drugs Act and the Drugs Rules are allowed for export after obtaining a no objection certificate from the Central Drugs Standard Control Organisation (CDSCO).

Transactions involving purchase of shares of listed companies as well as scheme merger and demerger transactions, diligence access may be provided by the listed company to potential acquirers. However, sharing of any unpublished price sensitive information (UPSI) is permitted only if the board of directors of the listed company in their informed opinion determines that the provision of such information is in the best interest of the listed company, the board of directors has passed a board resolution authorising the provision of such information and the recipients of such information have entered into confidentiality/non-disclosure agreements with the recipients of such information – also, any UPSI, if shared, must be disclosed in the tender offer documents (where a tender offer is triggered) or disclosed publicly prior to completion of the deal (where a tender offer is not triggered). In practice, sharing of diligence information for contractual business purchases is also undertaken only once such determination is made, board resolution is passed and a confidentiality/non-disclosure agreement executed.

Once the above process is followed, there is no regulatory restriction as such on the quality and quantum of diligence information that can be provided.

Alignment of diligence information being provided to different bidders depends on the specific requests by the bidders in question – there is no regulatory mandate on the listed company to provide the same information to all bidders involved.

Form and compliance with respect to provision of diligence information is not industry specific and the principle highlighted above is equally applicable in case of diligences of healthcare companies – qualitatively, healthcare companies require various licences and permits in place for conducting business, and typically diligence access does cover information for ascertaining the listed company’s compliance with these requirements.

Data privacy restrictions under the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (the “SPDI Rules”) and the Digital Personal Data Protection Act (the “DPDP Act”) (which is enacted but not yet in force) would limit due diligence of a healthcare company.

The Information Technology Act, 2000 (the “IT Act”) and the SPDI Rules primarily govern data privacy in India. Once the DPDP Act comes into force, it will repeal Section 43A of the IT Act and the SPDI Rules. Compliance obligations would need to be re-evaluated by the healthcare companies once the DPDP Act and the enabling rules are implemented. 

• SPDI Rules prescribe consent requirements with respect to processing and collection of sensitive personal data or information, as well as prescribe security practices and procedures pertaining to collection and processing of personal information.
• If the healthcare company intends to share any sensitive personal data (SPDI) or information like medical records and history, during the due diligence process, it would have to obtain prior written consent from the data subjects and inform the data subjects of the purpose for which such data is being shared. If the healthcare company has already collected personal information of the data subjects and has not obtained consent for sharing such data while undergoing any merger/acquisition, then the company would have to obtain fresh consents.

Thus, a healthcare company would have to obtain free, specific, informed, unconditional and unambiguous consent with a clear affirmative action from its data subjects prior to collection of their personal information, which would have to be done by way of a privacy notice.

• A healthcare company would also have to ensure that the entities with which it shares such personal information, delete such information once the purpose for which it was shared has been achieved. This would have to be done by incorporating appropriate data deletion clauses in the non-disclosure agreements entered into by the healthcare company and third parties with which the company is sharing data.
• Data fiduciaries can share personal data with data processors only under a valid contract. Thus, healthcare companies which are sharing personal data with bidders/acquirers during the due diligence process, will have to enter into data processing agreements to ensure purpose limitation, adequate security measures prevent personal data breach, notification and non-disclosure requirements are accounted for. The data processing agreements should ensure that the third party with which the data fiduciary is sharing data assists in case any data subject wants to exercise any data subject rights and that the third party erases data if consent is withdrawn by the data subject.

Unlisted companies’ acquisitions do not require a public bid. However, in case of listed company acquisitions, on the date of execution of the definitive documents (or immediately thereafter in case of certain indirect acquisitions), an acquirer is required to make a public announcement of a tender offer followed by a detailed public statement and thereafter, an offer letter. These offer documents will list material aspects of the transaction. Please refer to 6. Acquisitions of Public (Exchange-Listed) Healthcare Companies, which discusses the tender offer process in more detail.

In case of merger and demerger transactions as well as contractual business purchases, the board involved is required to make exchange disclosures after approving the transaction.

In case of business combinations (scheme mergers or demergers) between unlisted entities or contractual business purchases, there is no requirement as such to issue a prospectus. However, if the business combination involves a listed company, an abridged prospectus is required to be issued.

In case of acquisitions of business of a listed company by an unlisted company under the scheme merger route or demerger route, SEBI typically insists that the shares issued by the unlisted company be listed on the exchanges.

In case of tender offers, the financial information regarding the acquirer is required to be provided in the offer documents. In case of scheme merger and demerger transactions, the financial statements of the entities are required to be provided to the exchanges and kept for inspection by the shareholders.

Financial statements need to be prepared as per the applicable accounting standards – it is common that even in cases of management certified financial statements, these are prepared in accordance with applicable accounting standards.

In case of acquisitions of listed companies, the tender offer documents must specify material details of the underlying transaction documents. Unless required for regulatory applications, copies of the underlying documents are to be kept open for inspection by shareholders.

Directors of a company have fiduciary obligations towards the company and its stakeholders (which include minority shareholders) as a whole, and this obligation supersedes the responsibility of a director towards their nominating shareholder (in case of a conflict).

Indian corporate and securities laws prescribe several duties and responsibilities on directors of companies primarily covered under the (Indian) Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “SEBI LODR Regulations”) (as additional requirements in case of listed companies). Some examples are:

• requirement to act in good faith in the best interests of the company, its employees as well as the community and the environment; and
• requirement to exercise due care, skill, and diligence, avoid conflicts of interest, and not seek undue gains. Independent directors have additional responsibilities such as to report unethical behaviour.

The SEBI LODR Regulations specify certain key functions of the directors which include reviewing corporate strategy, monitoring implementation, overseeing major expenditures, selecting and compensating key managerial personnel, managing conflicts of interest, ensuring integrity of financial reporting systems, and overseeing disclosure and communications.

As discussed in 6. Acquisitions of Public (Exchange-Listed) Healthcare Companies, Indian Takeover Regulations prescribe that once a tender offer is launched the listed company is required to constitute a committee of its independent directors, which would provide reasoned recommendations on the tender offer.

For scheme merger and demerger transactions, parties may also constitute an implementation committee to ensure a smooth transfer of the business. This committee typically has equal representation by both parties involved and may also include directors of the parties involved. It is less common for contractual business purchase transactions to constitute an implementation committee.

With respect to conflicts of interest, where resolutions of the board of a target are required to be passed (such as business combinations under the scheme route or contractual business purchases), interested directors are typically not permitted to vote on such resolutions. In case of public companies, Indian corporate law bars interested directors from voting on resolutions they may be interested in.

Governance, oversight, strategy, risk management, resource allocation and stakeholder communication are certain roles of the board of directors (the “Board”).

In relation to M&A transactions, the Board plays a critical role. It is tasked with strategic assessment of the target to alignment with the acquirer’s business plan and long-term strategic goals. The Board also conducts a thorough financial analysis to ascertain the deal’s financial soundness and to ensure fair value is offered or received. The Board also supervises the due diligence process and manages integration risks associated with the transaction. The Board’s involvement is essential in mitigating any potential conflicts of interest that may arise during the negotiation of such transactions. Having said that, the role of a target’s Board is pronounced in merger, demerger and contractual business purchase transactions as the Board is required to approve these transactions. In case of tender offer transactions (in which the promoters/principal shareholders are selling a stake), the target Board’s role is limited as the target may not necessarily be a party. However, a committee of independent directors may still need to be constituted to provide recommendations on the tender offer.

Shareholder litigation in relation to tender offers and business combinations typically arise if the pricing, terms of the tender offer or the valuation do not provide the best price/terms for minority shareholders. From a corporate governance perspective, acquirers/majority shareholder should not be provided with rights which are disproportionate to their shareholding or which detrimentally impact the minority shareholders or mandate the directors or the listed company to act for the benefit of only one set of shareholders.

Typically, independent outside advice is sought on tax inputs on structures, opinions from legal counsel on compliance with applicable laws and the appropriate issuance of shares, and valuation certificates from valuers. Independent director committees, constituted to provide recommendations on tender offers, may retain outside counsel or consult with SEBI-registered merchant bankers. Fairness opinions on the valuation ascribed are mandatory for merger and demerger transactions involving listed companies.