The COVID-19 pandemic brought M&A deal activity in India to a slump in the early months of FY2020 and resulted in immense uncertainty in the markets. According to Grant Thornton, 2020 saw USD37.5 billion in M&A deals; lower than the immediately preceding years. However, M&A deal activity in India picked up pace significantly over the course of 2020. Similar to 2019, domestic deals continued to dominate the M&A market, and 2020 tended to favour consolidation-driven deals, as observed by PwC and Grant Thornton reports.
While corporates and acquirers took a cautious approach and focused on cash conservation in the initial months of FY2020, the market recovered, displaying an optimistic level of resilience. In spite of the pandemic, according to Bain & Company, India has managed to maintain its position as Asia Pacific's second largest deal market. Being one of the largest emerging markets in the world, India showed its commitment to growth and continued to evoke keen interest among foreign investors. With more focus on building sustainable business models, FY2021 is expected to see a more growth-based approach to M&A transactions.
COVID-19 and Lockdown
In response to the strict lockdown measures imposed in India, the relevant authorities introduced several reforms and relaxations with regard to certain regulatory requirements under the Companies Act, 2013, regulations framed by Securities and Exchange Board of India (SEBI), the Insolvency and Bankruptcy Code (IBC), and labour regulations, as discussed further in 2.5 Labour Law Regulations and 3 Recent Legal Developments. This was in order to help struggling corporates to stay afloat and to reduce the compliance burden on them for a certain period. Corporates have been allowed extended deadlines on certain corporate actions and compliances, and have been permitted to hold board and shareholders' meetings via audio-videoconferencing. As the lockdown restrictions began to ease in mid-2020, the Indian government and markets have focused on building resilient business and rekindling the economy.
Government Support and Stressed Assets
The Indian government released three schemes aimed at strengthening domestic electronics manufacturing sector, which cover (i) global investment incentives, (ii) production of components and semiconductors, and (iii) infrastructural development.
Similar to 2019, 2020 continued to see a few acquisitions of stressed assets. The year ended with the Murugappa Group taking control of the distressed CG Power and Industrial Solutions Limited. Given that the pandemic has significantly driven down the price of high-value assets, it is expected that the M&A space will witness a number of strategic sales and takeovers of non-performing assets in the coming years. The rising global interest in special purpose acquisition companies (SPACs), is also expected to be influential in India in the coming years, due to valuations in markets offering lucrative opportunities to foreign acquirers.
The Reserve Bank of India (RBI) also facilitated the rescue of two banks: Yes Bank and Lakshmi Vilas Bank. A consortium of banks led by the State Bank of India agreed to invest approximately INR9,350 crore (approximately USD1.28 billion) into Yes Bank, and Lakshmi Vilas Bank has been completely acquired by DBS Bank India.
A ban on Chinese apps, introduced in June 2020 and made permanent in January 2021, will lead to sales of these banned platforms to non-Chinese entities. Investor interest in acquiring stakes in Indian alternatives is also likely to increase. Furthermore, the restrictions under the FDI policy mentioned in 2.3 Restrictions on Foreign Investments will result in a large exodus of Chinese investors from India.
2020 has remained fairly consistent with 2019, with sectors such as telecoms, technology, pharmaceuticals and healthcare, infrastructure and finance, seeing M&A activity. Facebook’s acquisition of a USD5.7 billion stake in Reliance’s Jio Platforms was the largest M&A deal in 2020 in India, followed by Google’s USD4.5 billion investment in the same company.
With the onset of the pandemic, the technology sector, especially educational technology (ed-tech), has garnered increased attention. Whitehat Jr, an online coding school founded as recently as 2018, was acquired by ed-tech giant Byju’s for USD300 million. Facebook-backed Unacademy also acquired several niche ed-tech start-up companies.
The pandemic also pushed the transport sector to expand on personal mobility verticals in India. Softbank-backed Ola Electric Mobility acquired Dutch-owned electric scooter manufacturer Etergo. The scooter rental platform Bounce has also acquired the assets of bicycle rental company Ofo.
In the pharma and healthcare space, some of the significant deals in 2020 include Reliance’s acquisition of a majority stake in online pharmacy Netmeds for approximately USD83 million and the merger of Medlife and Pharmeasy, with a combined valuation of almost USD1 billion.
Other notable deals of the year were Zomato’s acquisition of UberEats for USD350 million, Reliance’s proposed acquisition of the Futures Group for USD3.4 billion, Haldia Petrochemicals Ltd and Rhone Capital’s joint acquisition of US-based Lummus Technology from McDermott International for USD2.7 billion, Groupe ADP’s USD1.51 billion acquisition of a 49% stake in GMR Airports, and the completion of GSK’s merger with Hindustan Unilever.
Companies are usually acquired by purchasing existing shares from shareholders or by subscribing to new shares, for cash consideration, to gain control. Share swaps are also prevalent though they are not often preferred as they gives rise to a tax liability without making cash available for meeting that liability. To address these issues, part-cash and part-share deals are often seen. Separately, in some cases, stock options are issued to eligible managerial personnel or earn-out payments are offered, as additional incentives. Mergers are also undertaken through a court approval process, largely for tax reasons as they are time consuming in nature. Furthermore, a merger of small companies (as defined under the Companies Act, 2013) may be undertaken through a "fast track merger" process.
Acquisition by way of business transfer is also not uncommon as it is considered tax efficient. Asset sales, being less tax efficient, are undertaken only when the acquirer wishes to acquire specific assets without the past liabilities.
Debt-equity investment structures have also been an attractive method for acquiring a company.
M&A in India does not have a primary regulator as it is governed by multiple pieces of legislation, depending on the mode of acquisition and the industry involved. The Companies Act, 2013, Indian Contract Act, 1972, Income Tax Act, 1961 and Competition Act, 2002 typically apply across all M&A activity. Furthermore, regulations framed by SEBI, the Foreign Exchange Management Act, 1999 and regulations framed thereunder may also be applicable, depending on the identity and/or residential status of the parties. As a consequence, several regulating authorities play a role in M&A transactions, such as the Reserve Bank of India (RBI), SEBI, the Competition Commission of India (CCI), the Registrar of Companies under the Ministry of Corporate Affairs (RoC), and even stock exchanges, which are required to approve the merger schemes of listed entities prior to them being presented to the relevant tribunals.
Sector-specific regulators, such as the Telecom Regulatory Authority of India (TRAI) and the Insurance Regulatory and Development Authority of India (IRDAI), and the concerned central and state ministries, also come into the picture for approvals and consents required for deals involving their respective industries.
Foreign direct investment (FDI) into India is governed by foreign exchange laws governing capital account transactions and is permitted through two routes (ie, the automatic route and the approval route). Under this regime, sectors operating under the automatic route can attract foreign investment without governmental approval. Sectors which are placed under the approval route, such as defence or atomic energy, require prior governmental approval. FDI is entirely prohibited in certain sectors, such as lotteries and tobacco production.
Foreign investments in India largely have to comply with:
FDI from Neighbouring Countries
Recently, the Indian government revised the FDI policy, to impose stricter norms on investments into India by investors based in countries that share a land border with India (ie, China (including Macau and Hong Kong, both being part of People’s Republic of China), Nepal, Bhutan, Bangladesh, Myanmar, Afghanistan and Pakistan). A mandatory prior government approval will now be required for any foreign investment, acquisition or transfer of an Indian company, if the acquirer or beneficial owner of such investment or acquisition is based out of a country that shares a land border with India. The primary objective behind this policy revision appears to be to curb any opportunistic takeovers of Indian companies by taking advantage of pandemic-related uncertainties. However, uncertainties still remain as the definition of "beneficial ownership" has not yet been clarified by the Indian government.
In India, any transaction which breaches certain prescribed asset or turnover thresholds ("combinations") is regulated by the CCI.
Prior approval of the CCI is required for such combinations. The CCI may either approve the combination unconditionally or, if it concludes that the combination could potentially have an appreciable adverse effect on competition (AAEC), it may either refuse to provide merger clearance, impose obligations on the parties which could be behavioural in nature, or may require disinvestment from particular business lines in order to eliminate the AAEC.
An exemption from the notification requirement has been provided for:
The Indian law on merger control also identifies certain categories of combinations which are ordinarily not likely to cause an AAEC. Accordingly, a notice to the CCI is normally not required to be filed for such combinations. However, this is a self-assessment test and if, upon a preliminary analysis, it is perceived that such a combination may cause an AAEC, the CCI may be notified to seek an approval. Of particular importance to financial sponsors/investors (who are not registered financial institutions as above) are the following categories:
In August 2019, the CCI notified a green channel whereby deemed prior approval is granted to those combinations in which there is no vertical, horizontal or complementary overlap in the target and acquirer groups, which can also include downstream portfolio companies in India. This is of particular importance to financial investors who acquire minority positions and have no operational activity in their group. In addition to this, the CCI has taken steps on the administrative side to enable electronic filing of antitrust cases and combination notices, on account of the pandemic.
The key pieces of labour legislation are the:
The government of India is set to implement the Code on Wages Act, 2019 (Wages Code) which has received presidential assent and unifies and subsumes four different acts, namely the Payment of Wages Act, 1936; the Minimum Wages Act, 1948; the Payment of Bonus Act, 1965; and the Equal Remuneration Act, 1976. The Wages Code harmonises the approach to "wages" across the four pieces of legislation with a common definition of wages and is intended to be applied uniformly to all employees as it proposes to do away with separate thresholds prescribed under the existing four pieces of legislation. The Wages Code also empowers the central government to set a national minimum wage which will be applicable across all states in India.
New Labour Codes
The following three new labour codes, for which the Indian government is currently in the process of framing rules, could come into effect from 1 April 2021.
The benefits of the new codes mostly pertain to improving the ease of doing business in India by providing more flexibility to employers in ensuring their compliance with labour laws.
In M&A, it is crucial to ensure that all statutory payments under applicable labour legislation have been carefully assessed and made in full to ensure that the liabilities thereunder do not pass on to the acquirer after the transaction, as the acquirer may not be able to contract out of such liabilities. Furthermore, in the event of termination of employees pursuant to an acquisition, the acquirer will have to take into account the retrenchment payments that might have to be made to terminated employees.
National security considerations in M&A in India are mainly reviewed on a sectoral basis. Foreign investment into media and defence include a national security review when being evaluated for FDI approval. In addition, any investment by a resident of Pakistan or Bangladesh requires the approval of the Ministry of Home Affairs. The Ministry’s approval is also required for the manufacturing of small arms and ammunitions.
Further, as described in 2.3 Restrictions on Foreign Investments, entities from a land-bordering nation will require approval to invest into Indian entities. The Indian government has also banned access to several mobile applications and websites operated by Chinese-controlled entities, for national security reasons.
An applicant who is a citizen of or is registered/incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau will require RBI approval for opening a branch/liaison office in India.
Outbound mergers, recently introduced, allow mergers or amalgamation between an Indian company and a foreign company, wherein the resultant entity is a foreign entity. Enabling this structure in India is a step towards globalisation, thereby facilitating ease of doing business in India. A merger between an Indian LLP with an Indian company is also now allowed.
Significant Beneficial Ownership
Significant beneficial ownership rules have been introduced for companies. The rules have been introduced to identify individuals who, directly or indirectly, have a significant holding or interest in a corporate entity. The rules are intended to identify the individuals who wield influence or control over a company but remain unknown.
As noted in 2.4 Antitrust Regulations, prior approval of the antitrust authority will not be needed for combinations where the value of the consolidated assets of the target enterprise is less than INR350 crore (approximately USD50 million) in India or the value of the consolidated turnover is less than INR1,000 crore (approximately USD140 million) in India. This threshold-based exemption provides for speedy conclusion of transactions and has given an impetus to M&A activity in the country. This threshold exemption will remain in place until 2022 unless extended further.
Furthermore, acquisitions or combinations which fall within the categories of actions which are deemed, ordinarily, to not be likely to cause an AAEC are exempt from the prior approval of the antitrust regulator. Owing to this exemption, acquisition of a non-controlling stake or further investment in a joint venture without acquisition of control are also exempt from the antitrust regulator’s approval.
In addition, the CCI has held that bids by entities belonging to the same group cannot per se be considered as amounting to cartel behaviour under Indian competition law. While examining the anti-competitive nature of the practice of price-setting by online cab aggregators such as Uber, the CCI took the view that as the fares are estimated through an application using algorithms which rely on big data and factors such as the time of the day and the local traffic situation, the resultant price for each trip is dynamic in nature and doesn’t involve any human intervention, being largely based on the "supply and demand" situation determined by the algorithm. Even though, the driver partners of the cab aggregators accede to the algorithmically determined price, the CCI was firm in its view that such conduct could not amount to collusion between the drivers as the fare for each trip is determined on the basis of a variety of factors.
Insolvency and Bankruptcy Code
The newly introduced law on insolvency and bankruptcy also saw several amendments and judicial interpretations in an effort to align the new law with the changing landscape of corporate India. The Indian Supreme Court has held that:
In light of the pandemic, the IBC has been suspended from operation by the government of India until 31 March 2021 in order to assist businesses in dealing with the lingering difficulties caused by the pandemic and to avoid opportunistic acquisitions by creditors. Any defaults arising after 25 March 2020 will not be covered by the IBC until the end of this suspension period.
The Companies Act, 2013 received significant amendments in late 2020. For more than 40 minor offences under the legislation, punishment by imprisonment has been done away with and several monetary penalties have been reduced or removed for, inter alia, delays in certain procedural filings. Furthermore, the amendments have addressed issues relating to beneficial ownership, foreign listings and exemptions for non-banking financial companies, in order to maintain ease of doing business and deal-making.
The FDI caps for certain sectors have recently been liberalised. The Indian government has now permitted FDI holdings of up to 100% in insurance intermediaries and 74% in insurance companies, previously heavily regulated. The FDI caps on coal mining and contract manufacturing have also been increased to 100%. These FDI reforms will attract M&A interest from foreign players in these sectors. The Indian Space Research Organisation also released a draft of the new Spacecom Policy 2020, which is geared towards attracting FDI into the Indian space sector.
The additional requirement of approval for investment coming from countries sharing a land border with India is one that has had a far-reaching impact on M&A activity in India. Please refer to 2.3 Restrictions on Foreign Investments for more information.
Recently, a court-appointed arbitral tribunal held that a "non-binding" term sheet entered between the OYO and Zostel in 2015 for a potential acquisition was, in fact, binding and that Zostel was therefore entitled to initiate "appropriate proceedings" and seek execution of the definitive agreement.
However, the tribunal also acknowledged that the draft definitive agreements for the proposed deal were neither finalised nor agreed upon between the parties and that there was no consensus ad idem between the parties.
Unless the OYO-Zostel award is challenged, experts believe that this award (although only applicable to OYO and Zostel) could lead to a chilling effect on M&A transactions that are customarily initiated through non-binding term sheets to begin an exploratory process before carrying a deal forward.
The securities regulator has expanded the definition of "encumbrance" to bring within its ambit all kinds of restrictions on the free transferability of shares by whatever name called. This is intended to ensure that the promoters of listed companies do not flout the disclosure norms by using complex structures that avoid disclosure of such encumbrances created through structures such as non-disposal undertakings or indirect pledges of shares through holding structures. Promoters are those persons who were instrumental in the founding of the company and who exercise control over the company through their shareholdings or management position.
Amendments to the Takeover Regulations
In light of the pandemic, SEBI has issued amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011 (Takeover Regulations) limited to the financial year 2020–21. These amended regulations allow promoters holding between 25% and 75% stake in companies to increase their shareholding during this period.
SEBI has introduced two methods for promoters to increase their stake in companies under the aforementioned relaxations. The first method is an increase in the creeping acquisition limits under Regulation 3 of the Takeover Regulations from 5% per financial year to 10%. This increase is only applicable to acquisition of shares by promoters in a preferential issue. Furthermore, this relaxation can be taken advantage of only until 31 March 2021.
The second method is a relaxation of the disqualification under Regulation 6 of the Takeover Regulations. Regulation 6 allows for promoters to make voluntary offers for an additional 10% of shares in their company, so long as they have not acquired shares in the company in the preceding 52 weeks without triggering the obligation to make a takeover offer. This disqualification on voluntary offers has been relaxed by SEBI until 31 March 2021.
The Takeover Regulations have also been amended to provide for escrow requirements in the event of indirect acquisitions where a public announcement of the open offer has been made. The acquirer must deposit 100% of the consideration amount payable into an escrow account.
With regard to listed companies, it is possible to acquire up to a 25% stake without making an open offer to the other shareholders. Persons holding 25% or more can acquire up to 4.99% in a financial year without triggering an open offer, as long as such persons do not exercise control over the target. Any acquisition of a large stake in a listed company is typically preceded by discussions with the promoters of the company. Successful implementation of an offer bid is usually difficult in the absence of an agreement with the promoter group, as most listed companies are owned and managed by promoter groups in India. In the absence of an agreement with the promoters, stakebuilding will require the co-operation of other large shareholders of the target company.
With regard to unlisted companies, private or public, shareholders can build a stake through primary and secondary investments subject to the conditions of the charter documents, and this is always preceded by extensive negotiations with the promoter group.
In the case of listed companies, the following material disclosures have to be made to the relevant stock exchanges and to the target company:
Insider Trading Regulations require insiders to make disclosures from time to time regarding their shareholding to the company. Insiders are also required to make disclosures, at the time of acquiring or selling such shares, to the company, which will then be disclosed to the stock exchanges by the company.
Listed companies do not have the flexibility to introduce higher or lower reporting thresholds in their by-laws and are bound by the central legislation. Furthermore, persons who can be deemed to be an "insider" under the Insider Trading Regulations are not allowed to trade when in possession of “unpublished price sensitive information”. A burden of proof is placed on such insiders who trade to prove that such information had no bearing on their trading decision.
Unlisted companies are not subjected to public disclosures other than the information that is filed annually as part of the company’s financials and other forms that are filed from time to time. However, companies are at liberty to include transfer restrictions in their by-laws governing shareholders, such as right of first refusal or restriction on sale to competitor, which can act as hurdles to stakebuilding.
Under the Indian foreign exchange laws, unless an investment is made as part of a foreign portfolio investment, foreign investors cannot acquire shares from the market unless they already have a controlling stake in a listed entity.
Antitrust laws enforced by the CCI, and any industry-specific regulatory requirements (such as those relating to insurance companies or private banking companies), can act as hurdles to stakebuilding.
Dealings in derivatives are allowed. Foreign currency derivatives, credit derivatives and options contracts are allowed to be traded through stock exchanges or through the over-the-counter market, and are subject to the supervision of SEBI and the RBI.
There are no specific provisions in the Indian antitrust laws or securities laws in relation to derivatives, and dealings in derivatives are bound by general disclosures to be made at the time of the agreement to acquire shares/assets.
After making a public announcement of an open offer, an acquirer is required to publish a detailed public statement in the newspaper. Detailed public statements, inter alia, identify the object, purpose, and strategic intent of an acquisition along with the acquirer’s future plans with respect to the target company.
In 2020, SEBI introduced certain relaxations pertaining to disclosure requirements for rights issuances, in order to facilitate the acquisition of stressed assets in the wake of the pandemic.
Unlisted companies are not required to announce or disclose a deal to the general public.
In the case of listed companies, the mandate of disclosure largely rests on the principle of materiality and is governed by the listing and disclosure regulations of SEBI, as well as the regulations of the stock-exchange where the securities of the company are listed. The company’s board is required to frame a policy for determination of materiality based on the criteria and guidelines prescribed by the listing and disclosure regulations of SEBI. Any corporate action pursuant to an M&A which involves acquiring shares, voting rights, or control is automatically considered material and required to be disclosed – without applying the test of materiality – as soon as reasonably possible and not later than 24 hours from the occurrence of event.
In addition, the listed entity is required to disclose certain events to the stock exchange within 30 minutes of the closure of the board meeting held to consider the same including any decisions pertaining to fund raising. Accordingly, and in conformity with the prescribed timelines, the parties disclose the deal upon signing of the definitive agreements.
Any premature announcement of the transaction is not advised, especially where it involves listed entities, since the same may lead to speculation and result in a violation of the regulations which prohibit market manipulation and the sharing of unpublished price sensitive information.
As discussed in 2.4 Antitrust Regulations, the antitrust laws in India also require mandatory prior notification of acquisitions that exceed prescribed asset or turnover thresholds, unless specific exemptions apply.
As discussed in 4 Stakebuilding, the market practice on timing of disclosures is harmonious with the legal requirements, wherein companies disclose the deal upon entering into binding definitive agreements which is also in compliance with the prescribed regulations.
The acquirer generally insists on legal, business and financial due diligence on the target to ensure that the affairs of the target are compliant with the regulatory framework.
The scope of the diligence also depends on the structure of the deal. For asset sales, the diligence is largely limited to assets while in other cases the diligence will encompass a review of the following:
The pandemic has resulted in a higher number of virtual due diligence exercises being undertaken, due to the lack of access to the physical documents of companies on account of the lockdown restrictions. Furthermore, there is an increased focus on potential contractual liabilities and certain aspects of the target’s operations, such as cash flows and supply chain management on account of liquidity crunches and movement restrictions. Another area to focus on has been data privacy and cybersecurity due to the heavy reliance on technology.
Exclusivity is usually demanded during the negotiation of the term sheet. Other than in deals where there are multiple bidders, the parties generally agree not to solicit other bids for an agreed time to give the acquirer an opportunity to undertake due diligence of the company.
Standstill obligations are usually demanded at the definitive agreement stage. Once definitive agreements are executed, parties to such agreements undertake not to take any action other than in the ordinary course of business, or effect any substantial change in the financials of the company, or do anything which would have a material adverse effect on the business of the company, or act in derogation of the obligations undertaken under the definitive agreements.
There are no restrictions on what a tender offer can contain. The tender offer is generally made by way of a memorandum of understanding or a term sheet which contain the broad outline of the transaction as well as the commercial terms. The tender offer letter generally contains the details of the offer (whether it will be by way of stock purchase, asset purchase, business transfer, or any other means); the purchase price; requests for due diligence; approvals required, if any, to consummate the transaction; and other covenants pertaining to confidentiality, non-disclosure, etc. While the tender offer is an indicative document signifying intention to enter into the transaction, these terms are carried forward in the definitive agreements and elaborated upon.
With regard to listed companies, a takeover bid may take 10–12 weeks from the date of public announcement (excluding any time spent on negotiations); while in the case of unlisted companies, the time period could range between three to six months depending on the length of diligence and negotiations.
However, these timelines could be affected by the time taken for obtaining approvals from various authorities such as SEBI, the CCI in the case of antitrust issues, or from the RBI in the case of issues related to foreign exchange regulation, in addition to approvals from any of the industry-specific regulators.
The pandemic had slowed deal processes in 2020, especially during the government imposed full lockdown period in March–April. The early weeks of the pandemic in India resulted in several transactions being halted due to the stay-at-home orders. However, government measures were also introduced to exempt the process of buyouts/ takeovers of financially distressed companies from cumbersome and time-consuming disclosure requirements and regulatory processes.
For listed companies, a mandatory offer will be triggered on acquisition of (i) 25% or more of the voting rights, or direct or indirect control; or (ii) additional shares or voting rights, in a financial year, in excess of 5%, if the acquiring shareholder already holds 25% or more of shares or voting rights.
In 2020, SEBI temporarily amended the threshold to allow promoters of a listed company to acquire additional shares or voting rights up to 10% through preferential issue of equity shares, without triggering an open offer. This relaxation is applicable until 31 March 2021.
Commonly used forms of consideration include cash, stock and options and combinations thereof. Furthermore, selection of the form of consideration also depends on various aspects such as the mode of financing and the incidence of taxation.
For listed companies, consideration is limited to (i) cash, (ii) shares of the acquirer, (iii) listed secured debt instruments of the acquirer, and/or (iv) convertible debt securities of the acquirer.
Due to the uncertainty surrounding company valuations, parties are opting for post-closing price adjustments to safeguard the deal value. The adjustments to purchase price can take the following forms:
Takeovers can be subject to obtaining necessary statutory approvals and such other conditions as may be contractually agreed to in the original agreement which triggers the open offer.
However, the acquirer is bound to disclose all such preconditions in the public statement and letter of offer and regulators discourage subjective preconditions being used for reneging on an offer. Hence, it is advisable to ensure that the conditions to an acquisition are objective in nature.
An open offer should be for at least 26% of the target company, which ensures that the acquirer acquires a simple majority in the company if all the shareholders who are made an offer accept the offer. Shareholding in excess of 50% would enable a shareholder to pass ordinary shareholder resolutions which can approve corporate actions such as capitalisation of profit or, alteration of authorised capital. Shareholding in excess of 75% allows a shareholder to pass a special resolution which is the highest threshold in corporate governance one needs to clear for undertaking key corporate actions such as sale of assets, mergers or making investments.
Some companies may require, in their charter documents, the unanimous consent of their shareholders or lead investors for the approval of certain capital raising transactions, in addition to meeting the thresholds contemplated under law.
Firm financial arrangements have to be made for fulfilling the payment obligations of an open offer. The acquirer has to open an escrow account and deposit an amount equal to 25% of the consideration of the first INR500 crore (approximately USD70 million) and an additional 10% of the balance consideration. Deposits can be in the form of cash, bank guarantees or frequently traded securities.
In case an open offer contains a minimum acceptance condition, the acquirer must deposit the higher of either 100% of the consideration expected for minimum acceptance or 50% of the total consideration of the open offer. Furthermore, as mentioned in 3.2 Significant Changes to Takeover Law, 100% of the consideration amount must be in escrow in the case of an indirect acquisition.
In India, deal security measures such as break-up fees are often used in acquisitions and sparsely used in investment transactions. In the case of acquisitions as well as investments, parties agree to non-solicit as well as standstill provisions as a way of providing deal security.
The pandemic has rendered the M&A space a more buyer-friendly atmosphere due to undervaluation and increased need for funding of companies; as a result, target companies are more desirous of deal security. Acquirers are addressing the pandemic risk by making it contractually feasible for them to walk away from a deal in the interim period. This is primarily done by including heavier warranties and indemnities in relation to the financial and operational effects of the pandemic on the target. On the other hand, targets have tried to mitigate the pandemic risk by including specific exceptions for pandemic-related effects within the material adverse change provisions in transaction documents, and shortening the period between signing and closure.
An acquirer can seek board and observer rights as additional governance rights in addition to seeking a veto right on identified actions. However, in the case of listed companies, an acquirer has to take measures to ensure that the governance rights do not qualify as giving the acquirer "control" over the target, as that will trigger an obligation to make an open offer.
Shareholders can vote by proxy by depositing the duly signed proxy form with the company. It should be noted that a proxy does not have the right to speak at a meeting and is not entitled to vote except on a poll.
The most commonly used squeeze-out method in India is the reduction of share capital. Such a reduction involves a repurchase by the company of shares held by certain shareholders and a consequent cancellation of those shares. Such a scheme of reduction first needs to be approved by a special majority of three-quarters of the shareholders of the company and subsequently an application has to be made to the governmental tribunal for approval of the same. The tribunal would usually approve a majority-approved scheme and the scope of the judicial review is limited to ensuring the fairness of the scheme, so the tribunal doesn’t normally opine on the economics of the deal.
Under the new Companies Act, 2013, a new provision enables the majority shareholders – holding more than 90% of the share capital – to squeeze out the remaining 10% by making an offer to buy out their stake. However, the provision does not clearly state that the minority shareholders are bound to accept the offer. Furthermore, recently notified provisions of Section 230 of the Companies Act, 2013 permit majority shareholders, holding 75% of the share capital, to seek to take over the shares of the remaining shareholders by making an application to the governmental tribunal. However, the aggrieved party is permitted to approach the tribunal in a prescribed manner. The practical application of these provisions remains untested and will have to be examined as jurisprudence develops around them.
There are no express restrictions on an acquirer obtaining irrevocable commitments to tender or vote by principal shareholders of the target company. However, any such commitment to participate in an open offer, prior to the announcement of that open offer, could result in such principal shareholders being considered as persons acting in concert with the acquirer and hence is not advisable.
Under the Takeover Regulations, public announcement of an open offer must be made by the acquirer on the date when it agrees to acquire shares, or voting rights, or control over the target company. This agreement may be written or oral. Given the conditions surrounding such an agreement, the parties always tend to take precautions to ensure that a binding agreement is only executed when they are prepared to make an open offer. Takeover Regulations also identify a specific time period depending on the mode of acquisition or type of instrument being acquired. In the case of convertible instruments, an open offer is made prior to conversion and not upon acquisition of convertibles. Public announcement has to be made by sharing information in the prescribed format with the relevant stock exchange with a copy being sent to the target company and SEBI.
Disclosures such as the object of the issuance, number of issued shares, subscription by promoters/directors, shareholding pattern and identification of proposed allottee are required to be made to the shareholders as well the RoC. Furthermore, the relevant stock exchange is required to be informed in case of issuance by a listed entity.
In addition, if the transaction requires CCI approval then relevant disclosures – such as details of nature of business undertaken by entities, their market shares and financials – have to be made.
Additionally, the details of any issuance are required to be filed with the RoC and the RBI (in case of non-residents).
As mentioned in 4.6 Transparency, SEBI has temporarily cut down on the disclosure requirements applicable to rights issues by listed companies and, inter alia, has allowed limited and lower standard disclosures, lowered the applicable minimum subscription threshold and increased the threshold requiring an application for filing the letter of offer with SEBI.
While there is no specific requirement to produce financial statements under the Takeover Regulations, as part of a detailed public statement, every acquirer is required to provide details of its financials to the stock exchange, prepared in accordance with generally accepted accounting principles.
Key terms of the transaction documents need to be included in the public announcement and the detailed public statement. Also, the target company will need to disclose any price-sensitive information to the relevant stock exchange, including material terms of agreements that could be deemed price sensitive. Additionally, SEBI has issued a circular mandating pandemic-specific disclosure such that listed companies report the impact of the pandemic on their businesses. In the case of an acquisition of shares by or from a non-resident, the share purchase agreement has to be attached while reporting that sale or purchase to the RBI.
Furthermore, if a proposed acquisition triggers the requirement of making a merger filing, then the copy of the relevant transaction documents have to be shared with the CCI as part of the filing.
Every director has a fiduciary duty to act for the benefit of the members as a whole and in the best interest of the company, its employees, shareholders and all concerned stakeholders. Accordingly, the directors should have a clear road map and understanding of the intended goal of a business combination.
Under the Takeover Regulations the board of a listed target company is required to ensure that (i) the business of the target company is conducted in the ordinary course during the offer period (including non-incurrence of any material borrowings), and (ii) no material assets are alienated in any manner whatsoever during that period. The board of directors of the target company is also required to constitute a committee of independent directors to provide reasoned recommendations on an open offer which the target will publish and make available to all the stakeholders for their consideration.
Companies with a large stakeholder base (which includes shareholders, debenture holders, deposit holders or any other security holder) or with turnover/net worth above the prescribed value, are bound to constitute special committees of the board. However, such committees are not unique to business combinations.
Indian law mandates that directors disclose their interests in other entities annually and update such disclosures timely. A salient provision of the Indian Takeover Regulations is the requirement of the committee of independent directors to provide written reasoned recommendations on the open offer to shareholders of the target company. Furthermore, a director is required to ensure that their interests do not conflict with the company’s and any interested director is not allowed to participate in a meeting where the board is resolving on matters in which they have an interest.
The business judgement rule has been upheld by Indian courts where directors have acted in consonance with their fiduciary duties and principles of due care and good faith. Furthermore, their conduct should be devoid of fraud and must not result in misappropriation of corporate funds.
However, under Indian law, the board is ultimately answerable to the shareholders and sale or merger of a company needs to be approved by the shareholders and cannot be undertaken only with the board’s approval. In addition, there are certain safeguards for minority shareholders and requirements for approval by a majority of the minority. In instances of takeovers, the courts tend not to call into question the commercial wisdom of the shareholders, unless that action is shown to be manifestly unfair, and have. indeed, upheld the commercial wisdom of shareholders of a company, who have ratified a scheme of merger or amalgamation with the requisite majority prescribed under the law. If a majority of the shareholders have voted in favour, Indian courts will not lightly disregard an informed view, one that they consider to lie in the domain of corporate strategy and commercial wisdom.
Given the limited powers of the board, a board in India will not be able to implement any of the commonly used takeover avoidance mechanisms by itself and will need the consent of the shareholders.
Independent outside advice is usually obtained in the form of valuation certificates from independent auditors, opinions from legal counsel on compliance with applicable laws and due issuance shares, and tax advice on complex structures.
In the case of listed companies, the committee of independent directors is allowed to seek external professional advice at the expense of the target company.
Decisions of the board without regard to stakeholder conflict resulting in benefits to that stakeholder have warranted judicial scrutiny and have been called out as invalid and of mala fide intent.
Furthermore, SEBI has proposed stringent disclosure rules for shareholder advisory firms (also known as proxy advisors) to address any concerns around conflict of interests and is considering prescribing a code of conduct for proxy advisers, which code would include disclosures on conflict of interest and how such conflicts are managed.
Indian Takeover Regulations do not recognise the term "hostile offer", and a hostile bid is generally understood to be an unsolicited bid without any agreement with persons in control of the target company. Hostile tender offers are not very common, largely due to complications in their implementation compared to negotiated transactions.
In hostile tender offer scenarios, the ability of directors to use defensive measure is constrained, largely by the Takeover Regulations requirements, which mandate that during the offer period the business of the target company should be conducted in an ordinary manner consistent with past practices. Furthermore, all the material decisions (viz, sale of material assets, borrowings, buy-back) are subject to shareholders’ approval via a special resolution which requires the consent of three quarters of the shareholders present and voting, which makes it difficult for directors to implement any defensive mechanisms by themselves.
Given that hostile tender offers are not a common occurrence, it is difficult to identify any common defensive measures. Based on previous instances of hostile offer, Indian companies have adopted techniques such as the "white knight", ie, seeking the aid of a friendly investor to buy a controlling stake in the target company (including by way of a competing offer), issuance of additional shares to dilute the interest of the bidder and buy-back of shares.
As mentioned in 3.2 Significant Changes to Takeover Law, SEBI took temporary steps to relax regulatory measures against hostile takeovers whereby it increased the creeping acquisition limits for promoters and provided liquidity to shareholders by allowing them to make an open offer regardless of any acquisition of shares in the preceding 52 weeks with or without making an open offer. These measures were a way to aid the promoters of companies to increase cash-flow, however, they also allowed for further consolidation of control over the company.
Furthermore, as mentioned in 2.3 Restrictions on Foreign Investments, the Indian government, in order to control opportunistic takeovers revised the FDI policy to restrict entities/persons/beneficial owners of an investment into India, based out of bordering countries, from investing without prior government approval. As mentioned in 2.6 National Security Review, several Chinese-owned online platforms were also banned in India, for national security reasons.
The Takeover Regulations do not identify specific duties of a director while implementing defensive mechanisms, although Indian company law does impose general obligations on directors which requires directors to carry out their duties with reasonable care and diligence and exercise independent judgement, and to act in the best interests of the company, its employees and the shareholders.
The Takeover Regulations do not specify any provisions which empower the board of directors to reject any offer bid or business combination. As stated above, as all material decisions (viz sale of material assets, borrowings, buy-back) are subject to shareholders’ approval via special resolution, directors have a very limited role and they are not in a position to thwart any acquisition bid.
Disputes largely arise in case of a disparity in the price paid in the case of an acquisition or if there is allegation of minority-shareholder oppression. Hence, in the absence of these factors, disputes are uncommon.
The Union Budget 2021 has announced that goodwill will not be eligible for tax depreciation, effective from 1 April 2021. This amendment will also affect past goodwill, as depreciation cannot be claimed in the future. This is likely to affect corporate restructurings which have already set off goodwill values. This has led to increased scrutiny by the tax authorities of current company valuations and could potentially result in litigation.
As noted in 10.1 Frequency of Litigation, disputes usually arise when there is a price differential between the sellers and the minority shareholders, who feel that their shares are not being valued on a par with the promoters. Disputes also arise from allegations of minority oppression or mismanagement of the company where minority shareholders are not in agreement with the sale proposal.
The early weeks of the pandemic saw several deals at various stages either being called off or put on hold. Transactions too far along were being examined for force majeure applicability.
In the latter part of 2020, a USD3.4 billion asset sale between Future Retail and Reliance Retail turned into a feud involving Amazon. Amazon alleged that the sale violated an earlier agreement with a Future Group entity, under which Amazon was entitled to a first refusal of any sale offer. The Singapore International Arbitration Centre (SIAC) passed an interim award in favour of Amazon and ordered a status quo. Amazon sought enforcement of the arbitration order in India, and a single-judge of the Delhi High Court agreed with the status quo. Future Retail appealed the order before a division bench of the Delhi High Court, which stayed the single- judge order. Furthermore, the scheme of arrangement with Reliance Retail had already received approval from the CCI, and no objection from SEBI. Amazon has now approached Supreme Court of India against the Delhi high court division bench order.
The final outcome in this case will determine who will control the largest brick-and-mortar conglomerate in India.
Another legal battle in the M&A space has emerged in the wake of Kalaari Capital’s exit from Milkbasket through a share sale to MN Televentures. MN Televentures has appealed to the National Company Law Tribunal (NCLT) for Milkbasket’s refusal to register the transfer from Kalaari Capital.
These legal disputes are yet to be resolved but should prompt promoters and companies to carefully review deal terms, and to examine how much they are willing to concede. Furthermore, the slew of documents involved in various stages of the financing of a company makes it crucial to assess in detail every consent and waiver requirement for future deals.
Shareholder activism in India is slowly growing into an effective tool. In the last few years, institutional investors have begun to play a more active role in the management of companies. Most cases of activism arise when the majority shareholders move forward with a deal that leaves the minority shareholders in an unfairly prejudicial position. The Companies Act, 2013 also provides for the institution of class action suits against any fraudulent management or conduct in the affairs of a company. This was introduced in the wake of several instances of corporate fraud.
Recent years have brought major moves that could potentially expand shareholder activism in India, of which a notable few are:
The view of shareholder activists towards the M&A space largely depends on the whether there exists prejudicial treatment of minority shareholders and on the corporate governance structure of the company.
Shareholder activism has not been noticeably affected by the pandemic. This could be attributable to the increased uncertainties surrounding the financial health of most industries.
Shareholder activism in India is still gaining traction in the corporate world. Due to issues surrounding the implementation of legislation and sanctions, in most cases, the full force of shareholder activism is yet to be seen. In the context of M&A, companies may have cause for concern if an announced deal places their minority shareholders in a detrimental position. Aggrieved shareholders are empowered under the Companies Act, 2013, subject to certain thresholds, to approach the NCLT to move against decisions of the company.
Overview and General Trends
2020–21 will likely go down in history as a black swan event, marked by immense disruptions at a global level. These have been extraordinary times for governments and businesses, with both facing macroeconomic and microeconomic stress. Public and private equity and bond markets have seen great volatility over the past year, with some sectors and companies reaching record valuations while others facing existential crisis. The first half of 2020 was marked by corporates overhauling their internal processes, adjusting to the virtual workspace and focussing on business continuity. The latter half of 2020 saw M&A activity picking up pace as companies became more comfortable operating in the new normal, while those with cash acquired/invested and many others consolidated.
Overall, deal volumes shrunk in 2020, but there was an accelerated momentum towards the end of the year until now (March 2021). As businesses resumed work, India witnessed a wave of consolidation in several sectors, with investors favouring entrenched players and market leaders to tide over the pandemic–induced stress through bridge financings, distressed rescues and equity infusions.
Amidst all this, market practitioners have had to rethink some of the conventional modes of deal–making and the general trend is shifting towards bespoke solutions tailored to suit the specific issues and considerations of each deal. The Boston Consultancy Group 2020 M&A Report also highlights this trend, underlining that “alternative deals have been and will continue to be important tools for gaining access to capabilities — so that companies can address not only the current pandemic induced crisis but also ongoing trends such as technology-driven disruption and the convergence of industries”.
Alongside this shift, warranty and indemnity (W&I) insurance-backed deals have recently also seen a rise in the Indian M&A space in both domestic and cross–border deals. W&I insurance policies are gaining prominence given their sector-agnostic applicability and the certainty they can offer. While Indian promoter-led entities will take some time to grow accustomed to the procedural nuances of W&I insurance, they are quickly recognising and utilising its efficacy as a tool for insuring and transferring transaction risk vis-à-vis general and distressed deals alike. W&I insurance offers significant benefits but, with its involvement in deals, transactional due diligence takes centre stage in determining the actual scope of reaping those benefits. Choosing between, say, a buyer’s diligence or vendor diligence, scope of diligence (legal, compliance, tax, finance, asset and/or seller diligence), timing of diligence or diligence materiality become critical decision points.
Consequently, W&I insurance offerings are seen to be broader when such aspects are assiduously assessed and implemented with foresight. As for number-crunching, the offerings are generally aligned with global figures on retention/deductions and de minimis, which may seem too high for medium to small-sized INR-denominated deals. And although the cost of insurance has decreased in recent years, it remains comparatively higher than the cost in matured markets. That being said, with the finance minister’s proposal to increase foreign investment in the insurance sector, one could expect competitive offerings in the future with a larger crop of players in the market.
Legal and Regulatory Developments
The Indian government has been closely tracking the economy’s recovery since March 2020 and most of the legal and regulatory changes in the past year were aimed at supporting and catalysing this recovery. Several key changes were introduced as a result of extensive consultations with the industry. Examples include relaxations in foreign direct investment (FDI) limits in the defence and insurance sectors of up to 74% under the automatic route (from erstwhile 49% FDI limit under the automatic route). This is expected to unlock foreign investment in these capital-intensive sectors, with existing investors increasing their stakes up to the new cap and various new investors entering the Indian market who were waiting to do so-called control deals. It must be noted, however, that there has been limited activity in these sectors.
Initiation of fresh insolvency applications under the Insolvency and Bankruptcy Code, 2016 (IBC) was also suspended by the Indian government to prevent corporates (undergoing genuine business failures due to the pandemic) from being dragged into insolvency. The government had to extend this suspension several times as the economy struggled to bounce back. As a result, distressed buyouts, secondary debt purchases and debt restructurings have quickly outpaced conventional insolvency proceedings and are currently the preferred choice for distressed investors. Interestingly, Indian courts did not, in most cases, grant any relief to parties due to COVID-related delays or defaults unless the contracts themselves provided for a particular course of action. At the same time, they have condoned delays and extended limitation bars on parties initiating legal recourses.
On the legislative front, several amendments were introduced to the (Indian) Companies Act to improve compliance and corporate governance. Some of the key changes include the decriminalisation of minor offences and modification/reduction of penalties and the exclusion of private and public companies who have listed their non-convertible debt securities issued on private placement basis from the definition of “listed companies”. Provisions related to corporate social responsibility (CSR) have also been amended, and companies spending CSR amounts beyond their legal requirements are allowed to set off such excess amounts against such obligations for future years.
Similarly, certain amendments were made to the (Indian) Arbitration and Conciliation Act recently which have clarified several practical aspects around the unconditional stay of enforcement of arbitral awards where the underlying arbitration agreement or making of the arbitral award is induced by fraud/corruption. These changes, along with previous amendments to the law made in 2019, are expected to send a positive signal to global corporates regarding certainty in deal-making and instil confidence in the Indian arbitration regime.
On the contrary, in response to major geopolitical developments, the government has intensified scrutiny on foreign investments flowing from countries that share a land border with India. Accordingly, an entity of a country, which shares a land border with India or wherein the beneficial owner of an investment into India is situated or is a citizen, can invest only under the Government route. This equally applies to the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction. This regulatory change has impacted a number of foreign investments and M&A deals, as investors sought to re-evaluate their proposed structures to ensure full compliance with this change. This policy is sure to evolve over the next few months.
Sectors in Focus
Insolvency and distressed debt
The government’s decision to not extend the IBC suspension beyond 31 March 2021 is expected to be viewed positively by the investment community, as a testament to the government’s faith in the economic recovery. The tribunals have used this long period of suspension to dispose of legacy cases, and are well-placed to handle the fresh filings upon the IBC suspension being lifted. Furthermore, the government has recently introduced a pre-packaged insolvency mechanism in India. This mechanism is a debtor-in-possession model, touted as a faster and more efficient alternative to the conventional IBC process. This is expected to further develop the secondary asset market as well as reduce the burden on tribunals. Along with this, the government has opened up discussions around the setting up of so-called bad banks in the form of asset reconstruction companies (ARC). Market reports indicate that this may be done by several large public sector banks and is expected to give tough competition to existing ARCs. Developments like these are expected to keep the spotlight on this sector in the coming year.
As the lockdowns brought normal life and conventional education to a halt, virtual education quickly became the de facto solution for millions of students. Throughout 2020–21, ed-tech had an extraordinary run as ed-tech startups attracted almost USD2.22 billion of foreign investment flowing into start-ups – almost a 300% jump from 2019. These developments come on the heels of the National Education Policy launched by the government, as well as increased budgetary allocation increasing from USD11.3 billion in 2018-19 to USD13.2 billion in 2020-21. The sector also witnessed a fair share of high-profile deals, such as the acquisition of Whitehat Jr by Byju’s for USD300 million in an all cash deal, as well as a string of 5 other ed-tech startups being acquired by other players within the first half of 2020. These acquisitions have yielded handsome returns to investors, many of whom are pumping money back in this sector, as investors expect to see even more growth in the coming year.
Along with ed-tech, is another sector that has grown exponentially over the last year is that of digital payments, as people's habits have adjusted to life in lockdowns. RBI’s latest proposal to introduce pan-India new umbrella entities (NUE) for retail payments as a competitor to the National Payments Corporation of India — which runs UPI and RuPay Cards, among others — may be a game changer. Several corporate groups, banks, fintech companies and foreign investors have already expressed interest in setting up an NUE. Despite this, as competition between players operating on existing UPI and RuPay platforms increases, consolidation through M&A/JVs can be expected as they look to consolidate their market share.
Despite immense volatility in Indian and global equity markets in March 2020, the markets have dramatically, though not entirely unexpectedly, rebounded on the back of investors’ optimism around India’s economic recovery and the picking up of pace of the vaccination program. As a result, 2020–21 has seen record IPO activity. Major Indian indices such as NIFTY and SENSEX have mirrored their global counterparts and have broken records. Markets are expected to continue this momentum, with several major IPOs lined up in the coming year. The government’s disinvestment target of INR1.75 trillion is expected to further drive this momentum — with IPOs of several large government companies, such as the Life Insurance Corporation, in the pipeline. New and emerging concepts in foreign markets, such as special purpose acquisition companies (SPACs), are also attracting attention from Indian companies and, going forward, several startups can be expected to use this route to explore an offshore listing.
The telecom sector has witnessed immense upheaval in the last few years, with major judicial verdicts impacting the companies’ revenues, significant price corrections for customers and several incumbents bowing out and even being pushed to insolvency. Today only three major players are left standing in the industry. Bharti Airtel recently partnered with Radware to offer cloud security services to enterprise customers. Vodafone PLC made equity infusions in Vodafone Idea to stem ongoing operational and debt concerns for the company. Vodafone Idea is also currently planning to raise further capital through equity and debt fundraising. BSNL — the only major government entity in this sector — recently partnered with Skylotech India to launch a satellite-based Internet of things (IoT) network in India to provide increased access to affordable and innovative telecom services and products across customer segments. As the industry gears up to roll out 5G services in India, many such strategic mergers and further investments can be expected in the industry.
The infrastructure sector is expected to be a focus of the coming year. The government’s flagship National Investment and Infrastructure Fund has raised USD100 million from New Development Fund. The government also approved infusion of INR60 billion as equity into a new debt platform to raise up to INR1.1 trillion for financing infrastructure projects by 2025. These moves are expected to catalyse major infrastructure developments and employment growth in the coming years.
The pharmaceutical industry is another which had a fair share of big–ticket investments in 2020. Some of these include Carlyle's USD490million investment in Piramal Pharma, KKR's USD414 million investment in JB Chemicals, Carlyle's USD210 million investment in Sequent Scientific, ChrysCapital's USD132 million investment in Intas Pharmaceuticals and Advent International's USD 128million in RA Chem Pharma. The Serum Institute of India secured USD150 million funding from Gavi, the Vaccine Alliance, and the Bill and Melinda Gates Foundation, for the manufacturing and delivery of 100 million doses of vaccines. As the Indian government and other governments around the world focus on battling the pandemic, this sector is expected to attract more investment and M&A activity in the coming months.
The Way Forward
Macroeconomic indicators such as gross domestic product (GDP) saw severe contraction in the last two quarters of 2020, but are quickly regaining lost ground as normal consumption patterns return. The Indian government is also actively taking steps to reduce the fiscal deficit and arrest consumer inflation, expected to further drive demand in the economy.
These factors will likely set the tone for M&A activity in the coming few months. Investors are once again bullish on India’s future, and corporate deal-making is set to lead the way to meet the government’s ambition of a USD5 trillion economy in the next few years.