Although quieter compared to the remarkable highs of 2022, the M&A market in India in 2023 still saw robust levels of deal making, aided by a stable regulatory environment and driven by continued business confidence and investor optimism about India’s long-term growth prospects and strong macroeconomic factors.

Overall deal value and deal volume of USD136 billion and 1,271 deals, respectively, reflected a drop of 27% and 16%, respectively, compared to levels from 2022 (source: Deloitte). However, these levels were still favourable compared to the average levels from the past decade (source: Bain). The sectors with significant activity were:

• healthcare and pharma;
• financial services;
• infrastructure (particularly renewables);
• technology;
• retail and consumer products; and
• automotives.

Top M&A deals included:

• Walmart’s USD3.5 billion acquisition of Flipkart shares;
• Siemens AG acquiring a further 18% of its Indian arm, for USD2.28 billion;
• Surakshas Realty's USD2.5 billion distressed acquisition of Jaypee Infratech; and
• Temasek’s acquisition of a 41% stake in Manipal Health Enterprises, for USD2 billion.

Resilient Deal Making and a Focus on the Domestic Market

Despite drops in deal value and volume compared to the remarkable levels seen in 2022, deal making in 2023 was resilient, with domestic deal making dominating both deal values and volume (57% and 71%, respectively) (source: GT). Most acquisitions were led by mid-market and conglomerate buyers (source: Bain). 2023 also saw a greater proportion of inbound deals (85 against 61 in 2022), with 90% high-value deals reaching more than USD100 million (source: GT).

All these factors reflect the continuing confidence and faith of investors and businesses in the domestic market.

More Private Investment in Public Equity (PIPE) Deals

A buoyant stock market coupled with conducive macro-economic factors saw a rise in PIPE deals in India in 2023, as investors, attracted by market-based valuations and liquidity, poured USD8.4 billion into listed India equities, in 111 deals, representing more than twice the total value and nearly twice the total number of PIPE deals in 2022 (source: EY).

The increased interest in PIPE deals presented an interesting contrast to the more cautious approach in private deals, particularly with regard to valuation.

Reverse “Flips”

Foreign-domiciled, India-focused start-ups continued to show interest in reverse “flipping” their holding structures back to India. Many of these start-ups had initially “flipped” their holding structures outside India, seeking more favourable taxation and regulatory environments, but the attractive valuations promised by Indian capital markets, amongst other factors, are proving to be strong incentives in prompting a change of domicile back to India.

Record Year for Exits by Financial Investors

2023 reportedly had the highest number of exits by financial investors in the Indian market, with over 70 exits for a combined value of nearly USD11 billion, and foreign PE and VC investors accounting for about 83% of those exits (source: Nuvuma).

Indian Businesses Benefit from “China Plus One”

Deal making in several sectors, particularly healthcare, indicated continued and growing interest from multinationals and foreign investors, who, as part of the “China plus one” diversification strategies, appear keen to reduce their dependencies on Chinese manufacturing and supply chains.

M&A activity in 2023 in India was well dispersed across industries, indicating the country’s strong GDP growth and favourable demographics. The following sectors stood out.

Healthcare and Pharma

At USD4.6 billion, India led the Asia-Pacific region in deal values in the healthcare sector in 2023 (source: Bain), driven by increased healthcare spending, traditional strengths in pharma manufacturing and the proliferation of health-tech. The shifting focus of certain private equity investors, away from China’s historically strong healthcare sector, was also an important factor.

Financial Services

Deal volumes rose in 2023, largely driven by consolidations and restructurings involving banks and non-banking financial companies, as well as increased investments in insurance and fintech. A stable regulatory environment and the tremendous growth potential of the Indian market fuelled deal making. Top deals included:

• Rapyd Financial’s USD610 million acquisition of PayU;
• Zurich Insurance’s USD671 million acquisition of Kotak General Insurance;
• the USD1.105 billion acquisition of HDFC Credila by BPEA EQT and Chrys Capital; and
• General Atlantic’s USD350 million investment into PhonePe.

Infrastructure

The infrastructure sector accrued an increased share of total deal value in 2023. The surge was led by renewables, which accounted for more than half of the total investment in 2023, with investors' interest driven by the demand potential of renewable energy, low production costs and encouraging policies and financial incentives like production-linked incentives. For a second year, India remained one of the most attractive markets for clean energy in Asia, accounting for 20% of deal value in the region (source: Deloitte).

Technology

Deal values in the technology sector were less impressive compared to 2022 (a 41% reduction), but this was in line with global scepticism on tech valuation and a more cautious approach shown by investors (source: Deloitte). A positive trend noted, however, was the increased focus on emerging technologies, such as AI and machine learning, and a shift towards SaaS. Siemens A.G.’s USD2.28 billion investment into Siemens India was the largest deal in the sector.

Retail and Consumer Products

This sector was buoyed in terms of deal value with several marquee deals, including Titan’s USD564 million acquisition of Caratlane, Godrej Consumer’s USD345 million acquisition of Raymond’s FMCG business and Carlyle’s USD300 million acquisition of VLCC. Growing demand in tier II and III cities and increasing gross merchandise value levels has played a key role in driving deal making.

Automotive

Automotive components and electric vehicle (EV) verticals in particular saw increased deal values and volume compared to 2022 levels. Large, marquee deals dominated deal values, including Samvardhana Motherson’s USD578 million acquisition of SAS Autosystemtechnik and USD345 million acquisition of Yachiyo, and the Temasek-led founding round of USD390 million in Ola Electric. Growing demand for EVs and the consequent impact on the EV value chain, coupled with consolidation in the auto components sector driven by capacity expansion and technology upgradation, ensured a good year for deal making in the sector (source: Deloitte).

Companies are usually acquired by purchasing shares from existing shareholders or by subscribing to new shares, for either cash consideration or non-cash consideration, paid in part or in full on an immediate or a deferred basis. Share swaps and the issuance of employee stock options to eligible employees are prevalent as non-cash consideration, although, in the case of swaps, part consideration to be paid in cash is preferred for meeting tax liabilities. Court-approved mergers are preferred in limited cases involving immovable properties, regulated assets or tax considerations, since the process is time consuming.

Acquisition by way of a transfer of assets or of a “business as a going concern” is also common, with the latter being preferred as it is more tax efficient. Acquisitions carried out only through the transfer of intellectual property and recruiting resources from the target are also no longer uncommon.

M&A activity in India does not have a single primary regulator as it is governed by various pieces of legislation, depending on the mode of acquisition and the industry involved. The following acts typically apply across all M&A activity:

• the Companies Act, 2013;
• the Indian Contract Act, 1872;
• the Income Tax Act, 1961; and
• the Competition Act, 2002.

Regulations framed by the Securities and Exchange Board of India (SEBI), the Foreign Exchange Management Act, 1999 (FEMA) and the rules and regulations framed under FEMA may also be applicable, depending on the form and/or residential status of the parties. As a consequence, several regulatory 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 (RoC) under the Ministry of Corporate Affairs, 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 and the Insurance Regulatory and Development Authority of India, and the central and state ministries concerned, are also relevant for the approvals and consents required for deals involving their respective industries.

Foreign investment into Indian entities is governed by foreign exchange laws regulating capital account transactions and is permitted through two routes: the automatic route and the approval route. Sectors under the automatic route can attract foreign investment without government approval, whereas sectors under the approval route require prior government approval. Foreign investment is entirely prohibited in certain sectors, such as lotteries and tobacco production.

Foreign investments in India largely have to comply with:

• sectoral caps that define the extent of shareholding one can acquire in a company operating in a particular sector;
• conditions prescribed for investing in a given sector, such as minimum capitalisation, sourcing conditions, etc;
• pricing guidelines that set the base price for investments and subsequent transfers; and
• reporting conditions that require foreign investments to be reported to the regulators.

FDI From Neighbouring Countries

Foreign exchange regulations in India were revised in 2020, making it mandatory to seek government approval for any direct or indirect investments where the investor or beneficial owner of such investment is based in 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, taking advantage of pandemic-related uncertainties. While “beneficial ownership” is not defined, in practice some AD Category-I banks in India apply the test of beneficial ownership based on whether a person holds 10% or more of the shares/capital/profits in the investing entity and/or the test of exercise of control (through shares, voting, board seats or influencing management and policy decisions).

Since April 2020, the Indian government has received proposals worth INR1 lakh crore seeking approval for investments by investors from countries sharing a land border with India. Approximately 50% of these proposals have since been approved in multiple sectors, including automobile, chemicals, drugs and pharmaceuticals, and computer software and hardware.

In India, any transaction involving an acquisition (of shares, control, voting right or assets), merger or amalgamation that breaches certain asset or turnover thresholds prescribed under Section 5 (Jurisdictional Thresholds) of the Competition Act, 2002 is referred to as a “combination” and is regulated by the CCI.

Prior notification to and approval from the CCI is required for such combinations, subject to certain exemptions (mentioned below). The CCI may approve the combination unconditionally or, if it concludes that the combination could potentially cause an appreciable adverse effect on competition (AAEC), it may either refuse to provide approval or, in order to eliminate AAEC concerns, it may impose obligations on the parties, which could be behavioural in nature or structural remedies, such as requiring disinvestment from particular business lines.

Exemptions

An exemption from the notification requirement has been provided for the following combinations.

• Combinations where the value of the consolidated assets of the target enterprise is less than INR4.5 billion in India or where the value of the consolidated turnover of the target enterprise is less than INR12.5 billion in India (“de minimis exemption”). The new de minimis exemption came into effect on 7 March 2024 and shall be applicable for a period of two years. It provides for the speedy conclusion of transactions and has given an impetus to M&A activity in India.
• Combinations entered into pursuant to investment agreements by public financial institutions, banks, SEBI-registered foreign institutional investors or SEBI-registered venture capital funds, pursuant to any covenant of a loan agreement or investment agreement. The Indian law on merger control sets out the categories of combinations that are ordinarily not likely to cause AAEC concerns, and therefore do not need to be notified. However, this is a self-assessment test required to be carried out by the parties to the combination. Certain categories of exemptions provided under Schedule I of the CCI (Procedure in regard to the transaction of business relating to Combinations) Regulations, 2011 are of particular importance to financial sponsors or investors (who are not registered financial institutions as above), including:
1. the acquisition of less than 10% of total shares or voting rights (with no special rights – ie, only rights of an ordinary shareholder);
2. the acquisition of additional shares or voting rights by an acquirer holding more than 25% but less than 50% (either before or after the consummation of the acquisition) of the shares or voting rights in the target entity, not resulting in the acquisition of sole/joint control in the target entity by the acquirer or its group;
3. the acquisition of additional shares or voting rights by an acquirer holding 50% of the shares or voting rights in the target entity where such acquisition does not result in a transfer from joint control to sole control by the acquirer; and
4. acquisitions within the same group where sole or joint control remains within the group.

The Competition (Amendment) Act, 2023 (“Competition Amendment Act”) received Presidential assent and was notified by the Ministry of Law and Justice on 11 April 2023. It proposes certain key amendments, including in relation to the regulation of combinations based on transaction value, reductions in the time limit for the approval of combinations by the CCI, and modifications of control for the classification of combinations. As per the notification, different dates may be prescribed for the notification of different provisions of the Competition Amendment Act. Accordingly, the subsequent notifications are awaited.

Expedited Processing

To make doing business in India easier, in August 2019 the CCI introduced a fast-track approval of combinations through the Green Channel route, which is applicable to those combinations in which there are no vertical, horizontal or complementary overlaps between the target enterprise and the acquirer group. Such a combination would be deemed to have been approved upon filing a Form I (ie, short-form notification) with the CCI, along with the prescribed declaration, and receiving an acknowledgment for such, subject to the CCI’s finding that the combination falls under the Green Channel scheme.

Under the Green Channel route, the CCI’s acknowledgement receipt acts as its approval order. This system has significantly reduced the time and cost of transactions. The Green Channel is expected to sustain and promote the speedy, transparent and accountable review of combination cases, strike a balance between facilitation and enforcement functions, create a culture of compliance and support economic growth. This is important to financial investors who acquire minority positions and have no control or overlaps between the activities of their group and those of the target enterprise.

The key pieces of labour legislation are:

• the Industrial Disputes Act, 1947, which deals with trade unions and workers' disputes;
• the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013;
• the Employees Provident Fund Act, 1952, which is a government-mandated social security scheme with employer and employee contributions;
• the Maternity Benefit Act, 1961, which regulates the employment of women for a certain period before and after childbirth and provides for maternity and other benefits;
• the State-specific Shops and Commercial Establishments Act, which regulates the conditions of work and employment of an employee;
• the Employees’ State Insurance Act, 1948, which is intended to provide health insurance to workers and requires employer and employee contributions; and
• the Payment of Gratuity Act, 1972, which regulates a form of end-of-service benefit provided for employees who serve for a specified duration.

New Labour Codes

The Indian Parliament has recently passed four labour codes:

• the Code on Social Security, 2020;
• the Occupational Safety, Health and Working Conditions Code, 2020;
• the Industrial Relations Code, 2020; and
• the Code on Wages Act, 2019.

The labour codes codify and consolidate 29 pieces of central labour legislation. They have been passed by Parliament and received Presidential assent, but they are yet to be brought into effect. Rules at both the central and state level have been published under the labour codes, but they have also not yet been finalised. The central government has recently requested states to align their draft rules under the labour codes with the central rules circulated by the Ministry of Labour and Employment, to ensure that there is minimal discrepancy between central and state rules. The government aims to use the first half of 2024 to complete this exercise, and it is expected that the labour codes will be brought into effect in a phased manner following this year’s general elections.

In M&A, it is crucial to ensure that all statutory payments under the 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, pursuant to an acquisition, if an employee is terminated or there is a change in the terms of their employment to be less favourable, the acquirer will have to take into account the retrenchment payments that might be paid to such workers.

National security considerations in M&A in India are reviewed on a sectoral basis. Foreign investment into media and defence includes a national security review when being evaluated for FDI approval. Approval from the Ministry of Home Affairs is also required for the manufacturing of small arms and ammunitions. As described in 2.3 Restrictions on Foreign Investments, investors from a bordering nation will require approval to invest into Indian entities.

An applicant who is a citizen of or is registered/incorporated in Pakistan will require RBI approval to open a branch/liaison office in India. Furthermore, an applicant who is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau will require RBI approval to open a branch/liaison office in Jammu and Kashmir, Northeast region and the Andaman and Nicobar Islands.

Delisting of Equity Shares

In August 2023, SEBI issued a consultation paper on the proposed amendments to the SEBI (Delisting of Equity Shares) Regulations, 2021, including:

• changes to the counteroffer mechanism under the reverse book-building process;
• determination of the reference date;
• the introduction of a fixed price route for delisting; and
• the manner of calculation of the floor price.

Reforms in the Telecoms Sector

The Telecommunications Act, 2023 (“Telecom Act”) received Presidential assent on 24 December 2023. Once rulemaking under the Telecom Act is completed and it is brought into force, it will replace the existing telegraph-centric laws governing telecommunications in India. In 2021, FDI in the telecom sector was liberalised – the government increased the FDI cap in the telecom sector from 49% to 100% under the automatic route.

Fast-Track Mergers

Section 233 of the Companies Act and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (“Fast-Track Merger Rules”) provide a procedure for fast-track mergers. In 2021, the Fast-Track Merger Rules were amended to extend the applicability of the fast-track merger framework to start-up companies. The Fast-Track Merger Rules were further amended as of 15 June 2023 to establish clear timelines for the relevant authorities for considering and deciding on the schemes, thereby reducing the overall time taken for approving fast-track mergers.

Mandatory Dematerialisation of the Shares of a Private Company

The Ministry of Corporate Affairs notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 on 27 October 2023, pursuant to which, inter alia, private companies not meeting the “small company” criteria as on 31 March 2023 have to ensure the dematerialisation of all shares by 30 September 2024. Any new issuance of securities by private companies after the applicable outer date for dematerialisation has to be undertaken in dematerialised form.

Foreign Portfolio Investor Regulations

In 2021, SEBI amended the SEBI (Foreign Portfolio Investors) Regulations, 2019 to provide that a resident Indian, not being an individual, may also apply for a certificate of registration as a foreign portfolio investor (FPI), provided they fulfil the conditions in Regulation 4 (c). In August 2023, SEBI tightened disclosure norms for high-risk FPIs (ie, FPIs meeting certain specified criteria). FPIs holding more than 50% of their Indian equity assets under management (AUM) in a single Indian corporate group or those holding more than INR250 billion of equity AUM in the Indian markets must now make additional disclosures of granular details regarding persons having any ownership, economic interest or control, unless the holdings were brought down to within the prescribed thresholds by the specified date.

Insolvency and Bankruptcy Code (IBC)

In 2022, the RBI allowed asset reconstruction companies (ARCs) to act as resolution applicants under the IBC. As a Resolution Applicant, an ARC can now undertake activities (including the acquisition of control of the corporate debtor) under the IBC that are not specifically allowed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (the “SARFAESI Act”), subject to certain conditions being fulfilled, including the ARC having minimum net owned funds of INR1,000 crore.

Foreign Investment

The FDI caps for certain sectors have recently been liberalised, with the government now opening India’s space sector for foreign participation. Previously, FDI was permitted in the “establishment and operation” of satellites only through the government approval route, subject to sectoral guidelines of the Department of Space or the Indian Space Research Organisation. The amendment now defines three different categories of space activities, each with an FDI limit of up to 100% under a mix of different routes of investments. This move aligns with a series of state-led initiatives aimed at boosting investments in the space sector.

In 2022, the government also notified certain other changes to its Consolidated FDI Policy Circular, 2020, including allowing convertible notes issuable to non-residents by start-ups for a period of ten years instead of five years, and introducing non-resident employees’ eligibility to receive share-based employee benefits in body corporates established/constituted under any Central or State Acts (beyond employee stock options). While the former should boost non-valuation-based funding from non-residents in the start-up ecosystem, the latter should go a long way towards creating non-employee stock option share-based incentives for non-resident employees.

Statutory Recognition of Overseas Investment/FDI Structures

The government has introduced a new overseas investment regime, comprising the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“OI Rules”), the Foreign Exchange Management (Overseas Investment) Regulations, 2022 and the Foreign Exchange Management (Overseas Investment) Directions, 2022. The overhaul of the framework governing overseas investments by Indian entities includes the facilitation (subject to certain limitations) of structures that were viewed unfavourably as “round tripping” under the previous overseas direct investment regime.

The new overseas direct investment regime has clearly established that investment in any foreign entity is restricted if such foreign entity has a step-down subsidiary (linked to “control” under the OI Rules) in India and such investment results in a structure having more than two layers of subsidiaries. This is a significant development as it permits a combination of overseas investment followed by FDI back into India, subject to being restricted to two layers.

Applicability of Angel Tax to Investments by Foreign Investors

Section 56(2) (vii-b) of the Income Tax, 1961 provides that, if companies issue shares to a “person being a resident” at a premium exceeding the face value of such shares, and if the aggregate consideration received from the resident exceeds the fair market value of said shares, then such excess amount received over the fair market value of the shares is taxable as “income from other sources”. As of 1 April 2023, angel tax is also leviable on investments by persons resident outside India.

Any premium paid above the fair market value of unlisted company shares by an investor – Indian or foreign – will now be subject to taxation. Furthermore, under the existing foreign exchange regime, the conversion price of convertible equity instruments subscribed by non-residents cannot be less than the fair market value of such shares. To counterbalance this requirement under the law, non-residents have traditionally subscribed to convertible equity instruments at a premium and paid subscription prices that are higher than the fair market value, to account for any future variation in the conversion price (for the enforcement of their economic rights, such as anti-dilution rights). It would now be a challenge for the investee companies to give effect to – and for non-resident investors to make use of – the valuation protection rights (such as anti-dilution by way of adjusting the conversion ratio and conversion price of such convertible security) without creating a tax exposure for the investee company.

Zee–Sony Merger

A legal battle in the M&A space has emerged in the wake of Sony Group’s decision to scrap the merger with Zee Entertainment, alleging breach of contract as the reason for terminating the merger. Sony also cited alleged failure by Zee to honour certain commercial terms of the deal and disputes over compliance issues. Zee moved the National Company Law Tribunal (NCLT) to seek the implementation of the merger and the outcome is pending. The merger would have created an Indian television giant with channels spanning sports, entertainment and news.

Dispute Over the Assets of Future Retail Group (FRG)

The planned acquisition of FRG's assets by Reliance Industries led to a heavily contested dispute between powerhouses Amazon, Reliance and FRG. Amazon obtained an emergency arbitration order from the Singapore International Arbitration Centre, staying the asset sale from FRG to Reliance, claiming it was in violation of Amazon's commercial arrangements with FRG. While the NCLT allowed FRG to convene a meeting of its shareholders and creditors in relation to the proposed acquisition by Reliance, the deal fell apart as the secured creditors of FRG voted against the proposed acquisition.

The CCI invoked its residual powers for the first time, to re-examine and suspend its approval of Amazon’s acquisition of a 49% shareholding in Future Coupons Private Limited (FCPL), more than one year after the combination had taken effect. Amazon had acquired certain rights, such as a requirement for its prior written consent in relation to matters under FCPL’s shareholders’ agreement with Future Retail Limited (FRL) (“FRL Rights”). However, CCI observed that Amazon had taken contradictory stands regarding the nature of the FRL Rights before the CCI and other judicial forums, and hence found Amazon guilty of misrepresentation and the suppression of material facts. In addition to imposing a penalty, the CCI suspended its earlier approval of the combination and directed Amazon to file a detailed notification in Form II afresh. Notably, this order sheds light on the importance of:

• making full, correct and complete disclosures regarding the rationale/objective and all interconnected steps of a combination;
• maintaining consistency in submissions before various forums; and
• observing good house-keeping practices while drafting internal documents.

Amazon appealed this order before the National Company Law Appellate Tribunal (NCLAT), which, in agreement with the CCI, observed that Amazon intentionally did not disclose the “real ambit and purpose” of the combination. The appeal against the NCLAT order is currently pending adjudication before the Supreme Court. While the Supreme Court stayed the CCI’s fine on Amazon in the case, the final outcome of Amazon’s appeal against NCLAT’s order is pending.

Revised Thresholds for De Minimis Exemption

Where the target being acquired, taken control of, merged or amalgamated meets the specified de minimis thresholds, an acquisition, merger or amalgamationis exempt from obtaining the CCI’s approval (the “de minimis exemption”). Earlier, the thresholds for applicability of the de minimis exemption were if the target has assets of less than INR3.5 billion or turnover of less than INR10 billion. The asset and turnover thresholds for the de minimis exemption have now been revised to INR4.5 billion and INR12.5 billion, respectively.

Significant Amendments Proposed to Competition Law

The Competition Amendment Act was enacted on 1 April 2023 and introduced several amendments to the Competition Act, 2002, including:

• the introduction of a “deal value threshold” (in addition to the existing asset value and turnover-based criteria prescribed under the Competition Act, 2002) for assessing notification requirement to the CCI;
• expanding the scope of cartel prosecution to hybrid anti-competitive agreements;
• enhanced penalty amounts for furnishing false information or failure to furnish material information; and
• shorter timelines prescribed for CCI approval.

The Competition Amendment Act has been partially implemented and some of the amendments are yet to come into force.

Data Protection

The Digital Personal Data Protection Act, 2023 (DPDPA) seeks to amend the existing data protection regime in India. It received Presidential assent on 11 August 2023 and is currently pending enactment, along with rules and regulations pertaining to certain procedural aspects envisaged under the new law.

The DPDPA’s scope is wider than that of the erstwhile Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011, expanding from “sensitive personal data” to “personal data”. Accordingly, any data that is related to or provides an insight into the personal identification of a person shall be protected under the auspices of the DPDPA. The DPDPA also prescribes more aggressive penalties in comparison to the extant regime. From an M&A perspective, it is important for parties (particularly acquirers) to ensure that the legal due diligence and documentation comply with the new legislation (once it is enacted).

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Code”) were amended in November 2022 (the “November 2022 Amendment”), resulting in one significant change.

Modification to Offer Price

The Takeover Code states multiple methodologies for the calculation of an offer price, one of which is the volume weighted average market price (VWAMP) for 60 trading days.

As per the November 2022 Amendment, a disinvestment through a change in control of public sector undertakings (PSU) by the central or state government would not be required to be calculated through VWAMP immediately prior to the date of public announcement. The amendment was made considering the unique nature of the transaction, with the process involved in a PSU disinvestment spanning a long period of time and requiring public announcements to be made at different stages.

These changes will help to provide investors with certainty over volatility in share price, and allow PSUs to operate on a level playing field with their private counterparts.

Stakebuilding is more relevant for listed public companies than for private companies. It is possible to acquire up to a 25% stake in a listed company without being required to make a mandatory tender offer to the other shareholders. Any stakebuilding prior to a mandatory tender offer can affect the offer price payable by the acquirer.

In addition, persons holding between 25% and 75% of the shares of a target company can acquire up to 4.99% in a financial year (April 1st to March 31st of the immediately succeeding year) without being required to make a mandatory tender offer.

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 controlled by promoter groups in India, since the promoters typically control the board of directors of listed companies.

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:

• disclosure by persons acquiring 5% of shares or voting rights;
• those persons holding 5% of shares or voting rights should disclose every purchase or sale of shares representing 2% or more of shares or voting rights;
• promoters should disclose details of shares encumbered by them, or any invocation or release of such encumbrance, provided such disclosure shall not be applicable where such encumbrance is undertaken in a depository;
• disclosure by a company of shareholders holding 1% or more of shares or voting rights; and
• the names of persons acting in concert with one another should be disclosed separately or on an aggregated basis (as applicable).

Insider trading regulations require insiders to make disclosures to the company from time to time regarding their shareholding. Insiders are also required to make disclosures to the company, at the time of acquiring or selling such shares, which will then be disclosed to the stock exchanges by the company.

Reporting thresholds are prescribed by laws/regulations issued by SEBI that are applicable to all listed Indian companies. In theory, it is open for a listed Indian company to provide a higher reporting threshold under its articles of association. Furthermore, persons are not allowed to trade when in possession of unpublished price sensitive information (UPSI).

Indian exchange control regulations do not permit non-resident acquirers to acquire shares on the floor of a registered Indian stock exchange unless they are registered with SEBI as an FPI (see 3.1 Significant Court Decision or Legal Developments). This limitation acts as a significant barrier to stakebuilding.

Antitrust laws enforced by the CCI can act as hurdles to stakebuilding, as can any industry-specific regulatory requirements (such as those relating to insurance companies or private banking companies).

Dealings in derivatives are allowed. Foreign currency derivatives, credit derivatives and options contracts are allowed to be traded through stock exchanges or over-the-counter markets, 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. 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 and the letters of offer that are dispatched to public shareholders require disclosures of the object, purpose and strategic intent of an acquisition, along with the acquirer’s future plans with respect to the target company.

Unlisted companies are not required to announce or disclose a deal, except under antitrust laws or in a court/tribunal-approved scheme of arrangement/merger/amalgamation, in which case such disclosures become mandatory to the tribunal and to members and creditors for the approval of such scheme.

In the case of listed companies, the mandate of disclosure 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 SEBI. However, any corporate action pursuant to M&A that involves acquiring shares/voting rights/control is automatically considered material and is required to be disclosed without applying the test of materiality, as soon as reasonably possible (no later than 24 hours from the occurrence of the 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 such events, including any decisions pertaining to fundraising. Accordingly, and in conformity with the prescribed timelines, the parties disclose the deal upon signing the definitive agreements.

Any premature announcement of the transaction is not advised, especially where it involves listed entities, since doing so may lead to speculation and result in a violation of the regulations that prohibit market manipulation and the sharing of UPSI.

As discussed in 2.4 Antitrust Regulations, the antitrust laws in India also require mandatory prior notification to the CCI. In June 2017, the government removed the requirement to notify a combination to the CCI within 30 calendar days from the execution of the “trigger document”, for a period of five years. The trigger document in acquisitions is the definitive or binding agreement (including binding term sheet); in mergers, it is the board approval of the proposal relating to a merger or amalgamation.

In March 2022, the government extended the relaxation for another five years. The parties can now notify a combination to the CCI at any time after the execution of the trigger document but before consummating any part of such a combination. Any such combination is then subject to a standstill provision and may be given effect only once the CCI has passed an appropriate order or once 210 days have passed from the date of such notification to the CCI. Accordingly, to ensure timely closing and shorter gestation periods, most acquirers approach the CCI on the day or shortly after the execution of the trigger document.

Any enterprise that proposes to enter into a transaction may request a consultation with the officials of the CCI, in writing, about the notification requirement for a transaction. Such consultation is informal and is not binding on the CCI. The parties can hold such a consultation with the CCI on a no-name basis if they wish to ensure the confidentiality of the transaction.

If the parties fail to notify a notifiable transaction prior to closing, or at all, the CCI has the power to impose a penalty of up to 1% of the combined asset value or turnover of the transaction, whichever is higher, on the acquirer.

As discussed in 4. Stakebuilding, market practice on the timing of disclosures is harmonious with the legal requirements, wherein companies disclose the deal upon entering into binding definitive agreements.

The acquirer generally insists on performing legal, business and financial due diligence on the target to ensure that the affairs of the target are compliant with the regulatory framework and that the target passes financial “health checks”. Depending on the nature and complexity of the transaction, and of the sector/business of the target, diligence may also be conducted on relevant technology or intellectual property using requisite experts. General diligence checks include reviews of capital, regulatory and statutory compliance, business contracts, disputes and litigation, financings, real estate, etc.

Companies are increasingly relying on technology, thereby resulting in a higher number of virtual due diligence exercises being undertaken. There is now an increased focus on exposure on account of potential contractual liabilities and other aspects of the target’s operations, such as cash flows and supply chain management, along with a greater focus on data privacy, cybersecurity and environmental, social and governance (ESG) concerns.

Exclusivity is usually demanded during the negotiation of the term sheet and between the signing and closing of the transaction. 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.

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;
• effect any substantial change in the financials of the company;
• do anything that would have a material adverse effect on the business of the company; or
• act in derogation of the obligations undertaken under the definitive agreements.

For private companies, 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 contains 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;
• the 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 ten to 12 weeks from the date of public announcement (excluding any time spent on negotiations).

For listed companies, a mandatory offer will be triggered upon the acquisition of:

• 25% or more of the voting rights;
• control, either directly or indirectly; or
• additional shares or voting rights, in a financial year, in excess of 5% by shareholders holding between 25% and 75% of the shares of a target company in a financial year (April 1st to March 31st of the immediately succeeding year).

Typically, cash is the consideration used for the acquisition of shares in public listed companies, even though the Takeover Code permits payment by way of listed securities issued by the acquirer or concert parties (ie, debt and equity or convertible securities that will convert into listed Indian securities). Listed company transactions in India are fixed price transactions, since the tender offer is required to be made to the public shareholders at the highest contracted acquisition price (ie, any adjustments will not apply to the tender offer).

Commonly used forms of consideration include cash, stock and options, or combinations thereof. The selection of the form of consideration also depends on various aspects, such as the mode of financing and the incidence of taxation.

SEBI has also allowed the acquirer to provide an unconditional and irrevocable bank guarantee for the entire consideration payable under the open offer, which will be an alternative to the existing requirement of depositing cash, subject to the approval of the RBI. However, such guarantee will need to be issued by a scheduled commercial bank that has an “AAA” rating from a credit rating agency registered with SEBI on any of its long-term debt instruments.

Due to the uncertainty surrounding company valuations, parties are opting for post-closing price adjustments to safeguard deal values. The adjustments to purchase price can take the following forms:

• deferring a portion of the consideration on the basis of a future contingency, subject to the applicable laws;
• earn-outs based on meeting certain milestone events;
• holdback and escrow mechanisms to account for a potential indemnity event, subject to the applicable laws; or
• working capital adjustments.

Other ways to address value gaps include using a lock-box mechanism.

Common conditions for a takeover offer include a minimum level of acceptance. The acquirer is bound to disclose all such conditions for a takeover offer in the detailed public statement and letter of offer.

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 – 25% (for the underlying transaction that triggered the tender offer) + 26% (mandatory tender offer size). However, in the case of a voluntary offer, the acquirer would be required to acquire at least the number of shares that would entitle them to exercise an additional 10% of the voting rights in the target company.

A shareholding in excess of 50% would enable a shareholder to pass ordinary shareholder resolutions, which can approve corporate actions such as a capitalisation of profit or an 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 that needs to be cleared to undertake key corporate actions such as sales of assets, mergers or making investments.

Indian companies are permitted to include higher thresholds in their charter documents for all or certain matters, or veto rights for significant shareholders.

Firm financial arrangements have to be made for fulfilling the payment obligations of an open offer. These financial arrangements have to be verified and approved by the SEBI-registered merchant banker who is running the tender offer process, and certified by a practising chartered accountant.

In addition, the acquirer has to open an escrow account and deposit an amount equal to 25% of the consideration of the first INR5 billion and an additional 10% of the balance consideration. Deposits can be in the form of cash, bank guarantees or frequently traded securities.

In India, deal security measures such as break-up fees are often used in acquisitions but rarely used in investment transactions. They are not typical in M&A transactions involving listed companies.

In the case of acquisitions as well as investments, parties agree to non-solicit and standstill provisions as a way of providing deal security.

While not a norm, in the post-pandemic era the M&A space has grown to be more buyer-friendly due to undervaluation, increasing the need for company funding; as a result, target companies are more desirous of deal certainty. Acquirers are mitigating 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 aspects of the target.

However, material adverse effect provisions exclude pandemic-related effects on the grounds that this is a known condition.

Acquirers seek the appointment of nominee directors, typically in proportion to their shareholding in the target company.

In addition, acquirers seek veto rights in respect of certain actions involving the target company. 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. However, a proxy does not have the right to speak at a meeting and is not entitled to vote, except in a poll.

The most commonly used squeeze-out method in India is the reduction of share capital, which involves a repurchase by the company of shares held by certain shareholders and a consequent cancellation of those shares. Such a scheme of reduction requires approval from the NCLT and at least 75% of the shareholders of the company. Judicial review by the NCLT is limited to ensuring the fairness of the scheme; the NCLT does not normally opine on the commercials of the deal.

There are no express restrictions on an acquirer obtaining irrevocable commitments to tender or vote by the principal shareholders of unlisted target companies.

Such commitments are not typical with respect to listed Indian companies as the regulators do not view them favourably on the basis that they can potentially skew shareholder democracy and influence voting outcomes.

Under the Takeover Regulations, the public announcement of an open offer must be made by an acquirer (in the scenarios mentioned in 6.2 Mandatory Offer Threshold) on the date of agreeing to acquire shares, voting rights or control over the target company, which is the date when binding acquisition agreements are executed. A public announcement has to be made by sharing information in the prescribed format with the relevant stock exchanges, which then publicise the information. A copy of the public announcement is also sent to the target company and SEBI within one working day of the public announcement.

Disclosures such as the object of the issuance, the number of issued shares, subscription by promoters/directors, the shareholding pattern and identification of the proposed allottee are required to be made to the shareholders as well as the RoC. Furthermore, SEBI and the relevant stock exchange are required to be informed in the case of an issuance by a listed entity, and the offer document is required to have all material disclosures to enable the applicants to take an informed investment decision.

Relevant disclosures have to be made if the transaction requires CCI approval, such as details of the nature of the business undertaken by entities, their market shares and financials.

The details of any issuance also need to be filed with the RoC and the RBI (in the case of non-residents).

Bidders are not required to submit detailed financial statements, but limited audited financial information – such as total revenue, net income, earnings per share and net worth (prepared in accordance with generally accepted accounting principles) and profit and loss accounts and balance sheets of the acquirer and concert parties for the past three years – is required to be disclosed in the letter of offer and the detailed public statement, which are required to be produced by the acquirer in accordance with the Takeover Regulations. If such statements are not audited, they become subject to a limited review by the statutory auditors. Any such audited statements subject to limited review cannot be more than six months old.

The key terms of the transaction documents, such as any conditions outside the acquirer’s control, any proposed change of control and other salient features, need to be included in the detailed public statement and letter of offer, which are prepared following standard formats prescribed by SEBI.

Transaction documents are open for inspection during the tendering period in respect of the tender offer.

Furthermore, if a proposed acquisition triggers the requirement to make a merger filing, then a copy of the relevant transaction documents has to be shared with the CCI as part of the filing. If the acquisition involves a sale of shares between residents and non-residents, relevant extracts of the transfer agreement need to be filed with the RBI.

For unlisted companies, there are no specified duties prescribed for an acquisition/business combination: the Takeover Regulations provide for the board of directors of the target company to ensure the running of the business in its ordinary course, and that there is no alienation of material assets or change in capital structure, etc, when a takeover offer is open. Directors of target companies who may be representing the acquirer (or its persons acting in concert) are precluded from being involved or voting in relation to the acquirer’s open offer. The general accepted principle under company law and in Indian jurisprudence is that a director has a fiduciary duty to act in good faith for the benefit of its members as a whole and in the best interest of the company. The law mandates directors to act in good faith in the best interest of the company, its employees and shareholders and the wider community, and also to consider protection of the environment.

The Indian Takeover Regulations require a committee of independent directors to provide written, reasoned recommendations on the open offer to shareholders of the target company, and the target company is required to publish such recommendations.

Companies that have a large stakeholder base (including holders of any securities) or a turnover/net worth above the prescribed threshold are obliged to constitute certain special committees of the board, but none are specific to business combinations.

Separately, Indian law mandates that directors disclose their interests in other entities annually and update such disclosures in a timely manner. Furthermore, directors are required to ensure that their interests do not conflict with those of the company, and any interested director is not allowed to participate in meetings nor vote on matters in which they have an interest.

There is no specific mechanism requiring a board of directors to form a judgement in relation to a merger/acquisition or takeover in the case of unlisted companies. In a takeover scenario pertaining to listed companies, the committee of independent directors is required to make recommendations only.

Under Indian law, the board is ultimately answerable to the shareholders and a sale or merger needs to be approved by the shareholders of the company. However, the boards of directors of merging companies are required to provide a report explaining the effect of a merger on each class of shareholders and other stakeholders.

Given its limited powers, the board of directors of a company in India will not be able to implement any of the commonly used takeover avoidance mechanisms without the consent of the shareholders.

Independent outside advice is typically obtained in the form of valuation certificates from independent auditors, opinions from legal counsel on compliance with applicable laws and due issuance of shares, and tax advice on complex structures.

In the case of listed companies, the committee of independent directors constituted to provide recommendations on the open offer is permitted to seek external professional advice at the expense of the target company, and can also seek advice from SEBI-registered merchant bankers.

As mentioned in 8.2 Special or Ad Hoc Committees, directors are required to disclose their interests in other entities annually and to update such disclosures in a timely manner. Furthermore, directors are required to ensure that their interests do not conflict with those of the company, and any interested director is not allowed to participate in meetings nor vote on matters in which they have an interest.

SEBI has issued stringent disclosure rules for shareholder advisory firms (also known as proxy advisers) to address any concerns around conflicts of interest, and has prescribed the framing of internal policies, limitations on trading and disclosures on conflicts of interest.

The Indian Takeover Regulations do not recognise the term “hostile offer”; a hostile bid is understood to be an unsolicited bid without any agreement with persons in control of the target company. Hostile tender offers are not common, due to complications in their implementation as compared to negotiated transactions. However, they have occurred in the recent past, with the most notable being the Adani Group’s open offer to acquire 26% of NDTV after VCPL (a lender of NDTV’s promoter holding company) in concert with Adani Group companies exercised its right to acquire 99.5% control in the promoter holding company, which in turn held 29.18% of NDTV, without the promoters’ consent.

In hostile tender offer scenarios, directors' ability to use defensive measure is constrained by the requirements of the Takeover Regulations, which mandate that, once a tender offer has been triggered, the business of the target company should be conducted in its ordinary course consistent with past practices; see 8.1 Principal Directors’ Duties. Furthermore, all the material decisions (ie, sale of material assets, borrowings and buybacks) are subject to shareholders’ approval, which makes it difficult for directors to implement any defensive mechanisms by themselves.

Hostile tender offers are not common, so it is difficult to identify any common defensive measures. Based on previous instances of hostile offers, Indian companies have adopted techniques such as seeking a “white knight” (ie, the aid of a friendly investor to buy a controlling stake in the target company, including by way of a competing offer) and issuing additional shares to dilute the interest of the bidder.

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 to perform their duties with reasonable care and diligence, to exercise independent judgement, and to act in the best interests of the company, its employees and shareholders.

The board of directors is not required to approve a tender offer under the Takeover Regulations, since the regulations view the tender offer as a transaction involving the acquirer and the shareholders of the company. Although the Takeover Regulations require the independent directors of the target company to pass on their recommendations in respect of the open offer to all shareholders of the target company, said directors cannot reject a tender offer. As stated in 9.2 Directors’ Use of Defensive Measures, directors are not in a position to thwart any acquisition bid, as all material decisions are subject to shareholders’ approval.

At the deal-making stage, term sheets are typically non-binding and parties can walk away if there is no consensus on the final deal terms. The relatively recent dispute between Zostel and Oyo highlights that obligations mentioned in a term sheet can be considered to be enforceable on a case-by-case basis, depending on the facts and circumstances of the case (including the conduct of the parties), irrespective of an express declaration to the effect that it is non-binding.

Having said that, at the deal-making stage, litigation is less common in India. Binding definitive documents are usually signed when there is a large degree of deal certainty, and parties often prefer a simultaneous sign and close method, unless regulatory approvals are involved. With the slower pace of courts in India and punitive, exemplary or indirect damages being off the table, it often makes little commercial sense to litigate unless there is a blatant dishonour of binding obligations.

Post-deal

There are several instances where acquirers have found out about irregularities and misrepresentations regarding the target after the acquisition. It is very common to have arbitration clauses in deal documents, and the parties present the disputes before selected arbitration fora rather than litigate before courts.

As noted in 10.1 Frequency of Litigation, disputes usually arise when the deal is concluded and there is a subsequent discovery of financial, governance or other irregularities that constitute a breach of representations. 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 Zee-Sony merger has hit a rocky road, despite securing NCLT approval, and the dispute between FRG, Reliance Industries group and Amazon is similarly ongoing (see 3.1 Significant Court Decisions or Legal Developments). Despite securing multiple regulatory approvals, the deal between Reliance Industries group and FRG ultimately fell through. 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 had instituted a case before the NCLT for Milkbasket’s refusal to register the transfer from Kalaari Capital. It was feared that, pending the legal dispute, none of the investors would be inclined to invest capital into the company. However, the Reliance group eventually acquired a 96.49% stake in Milkbasket.

These legal disputes should prompt parties to carefully review deal terms, and to examine how much they are willing to concede. The parties should also be careful about the positioning and views of the statutory authorities and their impact on the M&A deal. It is essential for investors to understand the importance of making full, correct and complete disclosures before regulators and maintaining consistency in submissions before various fora.

Shareholder activism in India is a recent phenomenon and is slowly growing into an effective tool. It is not specific to any industry or sector. Of late, institutional investors have begun to take interest and play a more active role in the management of companies and in improving corporate governance and ESG. Most cases of activism arise when the majority shareholders move forward with a deal that is unfairly prejudiced against the minority shareholders. The Companies Act provides for the institution of class action suits against any mismanagement or misconduct in the affairs of a company. Furthermore, if the affairs of a company are being conducted in a manner that is prejudicial to the public interest or the interest of any member or depositor of the company, or if any person or group of persons are affected by any misleading statement or the inclusion or omission of any matter in the prospectus, then proceedings may be instituted under the provisions of the Companies Act.

In the matter of Invesco Developing Markets Fund v Zee Entertainment Enterprises Limited, Invesco (a minority shareholder) had requisitioned a meeting of shareholders to consider certain matters, including the removal of non-independent directors. The board of Zee refused to call the meeting, stating that the object of the meeting was invalid. A division bench of the Bombay High Court ruled that the statutory rights of minority shareholders to requisition a meeting of shareholders ought to be respected, and that the board cannot sit in judgement of whether the meeting is valid as long as the procedural requirements and thresholds are met. This gives confidence to minority shareholders seeking to exercise their rights.

Other recent examples of shareholder activism include institutional investors calling out and holding management accountable for alleged financial irregularities and/or questionable governance practices in BharatPe, Zilingo and GoMechanic.

The views of activist shareholders towards M&A depend on whether there has been prejudicial treatment of minority shareholders and on the corporate governance structure of the company. When shareholder activism is met with a stalemate with management/founders, M&A is typically an option on the table to save the enterprise in question.

Shareholder activism has increased over the years following the pandemic, but it is hard to draw a direct correlation between the two as the increase could well be attributable to the expanded uncertainties surrounding the financial health of several industries affected by the pandemic.

Shareholder activism in India is still gaining traction in the corporate world and is not at the same level as seen in some other developed countries. 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. Under the Companies Act, subject to certain thresholds, aggrieved shareholders are empowered to approach the NCLT to move against decisions of the company.