Monday, April 4, 2016

M&A Trends in 2015: Focus on “ease of doing business” [ABA India Update]

[The following post is contributed by Satyajit Gupta, Principal - M&A/ Corporate at Advaita Legal. Views are personal, and comments are welcome]

With the National Democratic Alliance (“NDA”) gaining a decisive majority in the 2014 general elections, the expectation was that India would experience dramatic growth in all sectors, as the Government and administration would leave behind the policy paralysis that had been the hallmark of the previous regime. In an unpredictable global economy where the Indian economy has shown resilience, the NDA government has set about making radical and positive reforms to boost foreign investment and create a business friendly climate in India. In 2015, the Indian economy saw an average growth of c. 7.5% making it one of the fastest growing economies in 2015. In fact, OECD has also pegged India’s growth rate at a healthy 7.4% for the next financial year in a report released recently.

However, in the reported M&A deals space, there appeared to be a slowdown with the total quantum dropping to USD 20 Billion, a dip of 40% compared to the deal volume of USD 33 Billion in 2014. To combat this, the Government has proposed several regulatory relaxations and liberalizations in the FDI policy, exchange control norms etc. and it is hoped that this forward looking outlook continues and drives the deal volume up. The Government’s focus is on ‘ease of doing business’ and its growth focused initiatives – ‘Start Up India’ and ‘Make in India’ are also enterprises to garner investor traction and contribute to the India growth story.

Company law reform

Compliances under the Companies Act, 2013 have been sought to be relaxed especially in relation to private companies, through amendments and exemptions. Private companies have been provided various exemptions ranging from exemptions in relation to general meetings (exemption for provisions under notice of meetings, statement to be annexed to notice, quorum for meetings, chairman of meetings etc.) to exemption from the requirement of a shareholders resolution (for exercising borrowing powers, disposing of an undertaking of the company, remitting any debt due from a director etc.). In terms of setting up of a company, the requirement of minimum paid-up capital has been removed, a consolidated form has been introduced to fast track the incorporation procedure and the requirement of a company seal and certificate of commencement of business have also been done away with.

Developments in anti-trust laws

The Competition Commission of India (“CCI”) has clarified that communication of a combination to a statutory authority per se cannot be considered as a trigger to file a notice with the CCI, however, public announcements under SEBI Takeover Regulations, can be considered as a trigger to file. The CCI has also introduced e-filing facility on December 1, 2015 to help it handle submissions related to combinations promptly and also to simplify the process for entities to submit information. The CCI also clarified the ambit of acquisitions ‘solely for investment purposes’, while also fining certain Zuari entities a hefty INR 30 Million for not notifying it in time for an acquisition which was strategic in nature (and which was picked up by the regulator due to a television interview).

Evolution in securities laws

In the securities law space, the Securities and Exchange Board of India (“SEBI”) overhauled the Insider Trading Regulations. Definitions of ‘insiders’, ‘connected persons’ and ‘unpublished price sensitive information’ have been widened under the new regulations. The new regulations have been made applicable to all securities as defined under Securities Contracts (Regulation) Act, 1956 except units of mutual funds. The regulations permit sharing of ‘unpublished price sensitive information’ in PE/ M&A backed diligences, introduce certain valid defences for insiders as well as the concept of trading plans.

Also, through amendments introduced in the SEBI Takeover Regulations and SEBI Delisting Regulations, acquirers have been allowed to delist the company pursuant to making an open offer provided he declares his intention of delisting at the time of making the detailed public statement of the proposed acquisition. SEBI has also granted exemption to certain transactions (e.g. conversion of debt into equity under a strategic debt restructuring scheme) from complying with the Takeover Regulations through amendments to the said regulations. Additionally, SEBI has notified new listing norms for start-ups on Institutional Trading Platform, thereby easing the norms for raising money for small enterprises.

FDI norms

Significant changes have been introduced in the year 2015-2016 by the Indian Government with regard to the foreign investment norms, to attract investment in sectors like defence, railways, insurance etc. A few examples are set out below:

·       Insurance and Pension - The foreign investment cap of the sector has been increased from 26% to 49%, however investment above 26% has been made subject to government approval. The Insurance Regulatory and Development Authority (“IRDA”) has also provided clarity on the ‘Indian ownership and control’ test required to be met by all Indian insurance companies and insurance intermediaries. The IRDA has defined ‘control’ to mean the right to appoint a majority of the directors or control the management or policy decisions.

·       Railway infrastructure - The foreign investment limit in construction, operation and maintenance of specified infrastructure projects like suburban corridor projects through PPP and high speed train projects, have been raised to 100% through automatic route.

·       Construction and development - Relaxations in the conditions of foreign investment in the sector have been introduced. These include easing of exit norms, removal of requirement of minimum capitalization and minimum land area.

·       Defence - Foreign investment in the sector has now been permitted up to 49% in the automatic route and investment above this level can be permitted on case to case basis where it provides the country access to modern state of the art technology.

·       Retail trading – Various changes including removal of local sourcing norms for state of the art products has been brought in.

An interesting judgment to note was rendered by the Bombay High Court which evaluated a downstream FDI structure to rule that investment in the holding company was a ‘sham’ structured to invest downstream by way of redeemable instruments, which are not permitted by Indian FDI norms. The court held that it would not provide assistance to enforcement of transactions which are not compliant with the FDI norms.

Arbitration law reforms

In end-2015, the Government introduced amendments to arbitration law by way of ordinances (replaced by an amendment act), intended to ease the process of arbitration, impose timelines and rationalize costs. Some key changes include: (a) a twelve-month timeline for completion of arbitrations seated in India; (b) flexibility for parties to approach Indian courts for interim reliefs in aid of foreign-seated arbitrations; and (c) introduction of ‘costs follow the event’ regime.


The medium to long term macro-economic outlook for India has remained mostly promising and after the general elections in 2014, the outlook has only improved exponentially. However, the euphoria on the macro-economic front has not resulted in any high value deals in 2015. It is difficult to pin down the issues/ hurdles that are blocking large deals in India especially given the presence of large buyout firms as well as attractive (and perhaps, under-valued) targets. The large block of promoter holdings in Indian companies, non-availability of cheap and external credit and regulatory factors may be some factors impeding M&A deals in India.

Reforms in laws applicable to real estate sector, insolvency/ bankruptcy norms are still stuck in the legislative process. These need to be expedited to bring much-needed clarity and predictability in Indian laws impacting M&A. Further relaxations to FDI norms, quicker statutory approvals are also key to attracting further foreign enterprises to explore India as a target destination.

This has already been published in the ABA SIL M&A and Joint Ventures Committee Newsletter (issue 1/ 2016) as the India update

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