Corporate M&A 2022 Comparisons

Indian companies attempted to address the difficulties they faced during the pandemic and restructured their business models through M&A and disinvestments. Despite the difficult and unpredictable circumstances experienced due to the pandemic, India continued to overperform in its deal activity in 2021 as compared to the previous years, even those before the spread of COVID-19.

M&A deal activity in India picked up pace significantly over the course of 2021. According to PwC, 2021 saw USD48.9 billion in M&A deals, higher than the immediately preceding years. Similar to 2020, domestic deals continued to dominate the M&A market. The value of outbound M&A deals in 2021 reached USD8.2 billion, and consolidation-driven deals, as observed by PwC, were favoured.

With rising market confidence in 2021 and less severe waves of COVID-19, the demand for M&A transactions grew strongly, with a specific focus on sectors such as technology, digital and data-driven assets. According to Bain & Company, M&A deals in India are the highest they have been, with participation from new investors and 80% of the deals constituting first time buyers as compared to 51% in 2015. The investor community is positive about the recent decisions of the government of India (“GOI”) such as the schemes introduced under the AtmaNirbhar Bharat Mission to revive the economy and make it more resilient. Some of the crucial themes that emerged in 2021 were the different methods of valuation of assets, an increase in digital and technology M&A deals and a reduced focus on ESG matters.

COVID-19 and Lockdowns

At the start of 2021, the market and businesses expected the economy to return to normality with the hope that sectors such as aviation, tourism, hospitality and services would be able to grow again, such sectors having been severely affected by the restrictions introduced in the first wave of the pandemic. However, as the first half of 2021 progressed, India was faced with the devastating effects of the second wave of COVID-19. During the initial days of the pandemic, buyers had leverage in certain sectors and demanded deferred considerations, earn-outs and swaps on account of the pandemic leading to valuation uncertainties. However, the markets turned more optimistic and deal making gained fresh momentum in the second half of 2021.

In 2021, certain sectors such as the technology, fintech, healthtech, edutech, deep tech, data and technology-related sectors continued to garner traction and saw significant M&A deals, such as the merger between Zee Entertainment and Sony Pictures Networks India, and the acquisition of 1MG by Tata Digital. M&A trends remained positive with renewed faith in the economy in spite of the horrendous second wave that India witnessed.

China–India Relations

A ban on Chinese apps and websites, introduced in June 2020 and made permanent in January 2021 for national security reasons, led to acquirers scouting for sales of these banned platforms operating in India to non-Chinese entities. Investor interest in acquiring stakes in Indian alternatives to such apps also increased. Furthermore, the restrictions imposed in relation to investments from bordering countries also made certain existing investors from such jurisdictions explore exit opportunities, which will eventually lead to a large exodus of Chinese investors from India.

Thrasio Model

The Thrasio model, whose principal business is to acquire brands, has gained increased popularity in India and companies implementing this model have already acquired several small scale businesses. Some of the premier companies that have adopted this model in India such as G.O.A.T Brand Labs, Globalbees and Mensa Brands, have raised significant funding at high valuations in the recent past. In fact, Mensa Brands achieved the status of a unicorn (a company with a valuation of USD1 billion and above) in a record time of six months from its incorporation and Globalbees joined the unicorn club in less than one year from its incorporation. The acceptance of this business model will lead to increased M&A for small-scale companies and direct to consumer brands in several segments including lifestyle, personal care, apparel, and home and décor.

Warranty and Indemnity Insurance

A trend that is gaining traction in India is obtaining warranty and indemnity insurance in M&A deals based on the risk appetite and cost effectiveness of a deal across varied sectors.

While there were certain traditional sectors that saw M&A deal activity in the past 12 months, such as in the aviation sector where the Air India group was acquired by the Tata group for INR180 billion, there was also a focus on new sectors, which saw significant M&A deal activity. M&A deals in such new sectors included the acquisition of Capco by Wipro Limited for USD1.5 billion, several acquisitions completed by Byju’s in the edtech sector, the acquisition of a majority stake by Tata Digital in BigBasket, Reliance New Energy Solar’s acquisition of REC Solar Holdings for USD771 million, the merger between Zee Entertainment and Sony Pictures Networks India with one of the objectives being to develop their digital platforms, and the acquisition of a majority stake by Tata Digital in 1mg for over USD220 million, in the healthtech sector.

While the pandemic affected several sectors in India, one of the worst affected was the services sector and as a result, its share in India’s gross value added fell by 2% in 2021–22 from the previous year. Other sectors that were also severely affected by the COVID-19 pandemic include aviation; micro, small and medium-sized enterprises; and tourism.

Companies are usually acquired by purchasing existing shares from shareholders or subscribing to new shares, for cash consideration/non-cash considerations, to be paid in part or in full on an immediate or a deferred basis. Share swaps, issuance of employee stock options to eligible employees, are prevalent as non-cash consideration, though in 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 transfer of assets or “business as going concern” is also common, with the latter being preferred for being tax efficient. Acquisitions carried out only through the transfer of intellectual property and recruiting resources from the target have also gained momentum.

M&A in India does not have a single 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 (“Companies Act”), Indian Contract Act, 1972, Income Tax Act, 1961 and Competition Act, 2002 typically apply across all M&A activity. Furthermore, regulations framed by Securities and Exchange Board of India (“SEBI”), the Foreign Exchange Management Act, 1999 and the rules and regulations framed thereunder 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 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 and the Insurance Regulatory and Development Authority of India, and the concerned central and state ministries, also come into the picture for the approvals and consents required for deals involving their respective industries.

Foreign investment into Indian entities 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 under the automatic route can attract foreign investment without government approval. Sectors which are 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 which define the extent of a 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 which set the base price for investments and subsequent transfers; and
• reporting conditions which 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 shares/capital/profits in the investing entity and/or test of exercise of control (through shares, voting, board seats or influencing management and policy decisions).

Since April 2020, 347 proposals have been made seeking approval for investments by investors from countries sharing a land border with India. While 2020 did not see much movement in approvals, in the last year 66 out of the 347 proposals were approved in multiple sectors including automobile, chemicals, pharma, and computer software and hardware.

In India, any transaction involving an acquisition (of shares, control, voting right or assets) or merger or amalgamation which 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 and approval of the CCI is required for such combinations, subject to certain exemptions mentioned below. The CCI may either 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, impose obligations on the parties which could be (i) behavioural in nature; or (ii) 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 INR3.5 billion in India or the value of the consolidated turnover is less than INR10 billion in India for a period of five years, until 29 March 2022 (“de minimis exemption”).
• 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; while such combinations are exempted from requiring prior notification, they need to be notified to the CCI within seven calendar days of their completion.

The de minimis exemption provides for speedy conclusion of transactions and has given an impetus to M&A activity in the country. Recently, in March 2022, the GOI has extended the de minimis exemption for a period of another five years (ie, until 29 March 2027).

The Indian law on merger control sets out the categories of combinations which are ordinarily not likely to cause AAEC concerns, and therefore not need to be notified. However, this is a self-assessment test required to be carried out by the parties to the combination. Of particular importance to financial sponsors or investors (who are not registered financial institutions as above) are certain categories of exemptions provided under Schedule I of the CCI (Procedure in regard to the transaction of business relating to Combinations) Regulations, 2011. Such list includes:

• acquisition of less than 10% of voting shares (with no special rights);
• a 25% or 50% holder acquiring further shares/voting not leading to acquisition of sole/joint control or transfer of sole/joint control, respectively; and
• acquisitions within the same group where sole or joint control remains within the group.

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. It is applicable to those combinations in which there are no vertical, horizontal or complementary overlaps between the target enterprise and 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 the same. Under the green channel route, the CCI’s acknowledgement receipt acts as its approval order. This is important to financial investors who acquire minority positions and have no control or overlaps between their group and 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 saving scheme with employer contribution;
• the Maternity Benefit Act, 1961 which regulates the employment of women for a certain period before and after childbirth and to provide for maternity and other benefits;
• the State specific Shops and Commercial Establishments Act, which regulates the conditions of work and employment of the employee;
• the Employees’ State Insurance Act, 1948, intended to provide health insurance to workers; and
• the Payment of Gratuity Act, 1972, which is a form of retirement benefit provided for employees who serve for a specified duration.

New Labour Codes

The following four new labour codes for which the GOI is currently in the process of framing rules, were scheduled to come into effect from April 1,2021. However, their implementation has been deferred for the time being:

• 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 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, pursuant to an acquisition, if an employee is terminated or there is a change in the terms of their employment which is 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 include a national security review when being evaluated for foreign direct investment (“FDI”) approval. The Ministry of Home Affairs’ approval is also required for the manufacturing of small arms and ammunitions. Furthermore, 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 for opening 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 for opening a branch/liaison office in Jammu and Kashmir, North East region and the Andaman and Nicobar Islands.

Delisting of Equity Shares

SEBI notified the SEBI (Delisting of Equity Shares) Regulations, 2021 which apply to delisting of equity shares of listed companies from recognised stock exchanges. Furthermore, these regulations also provide for delisting of a listed subsidiary pursuant to a scheme of arrangement in accordance with Regulation 37.

Reforms in the Telecom Sector

Reforms in the telecom sector included the liberalisation of the FDI cap to 100% automatic route, increase in the tenure of spectrum and revision in calculation of adjusted gross revenue. The result of these reforms were that that TMT recorded 210 M&A deals in the past year. The largest of these deals was the acquisition of Billdesk by PayU Payments for USD4.7 billion.

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. The Fast Track Merger Rules were amended to extend applicability of the fast track merger framework to start-up companies.

Foreign Portfolio Investor Regulations

Recently, SEBI has amended the SEBI (Foreign Portfolio Investors) Regulations, 2019 to provide that a resident Indian, not being an individual, may also be an applicant (for the certificate of registration as a foreign portfolio investor (“FPI”)) provided they fulfil the conditions in Regulation 4 (c).

Insolvency and Bankruptcy Code (IBC)

In light of the pandemic, the IBC was suspended from operation by the GOI until 24 March 2021 in order to assist businesses in dealing with the lingering difficulties caused by the pandemic and to avoid opportunistic acquisitions by creditors. Owing to the decline in COVID-19 cases, the suspension of the IBC was not extended by the GOI.

Foreign Investment

The FDI caps for certain sectors have recently been liberalised. The GOI has permitted FDI holdings of up to 100% in insurance intermediaries and 74% in insurance companies, which was previously heavily regulated. Furthermore, 100% FDI is permitted under the automatic route in the petroleum and natural gas sector, in the event of an in-principal approval for strategic disinvestment of a public sector undertaking (PSU) has been granted by the GOI. The definition of indirect foreign investment was revised to include an explanation stating that an investment made by an Indian entity which is owned and controlled by non-resident Indian(s), on a non-repatriation basis, will not be considered for calculation of indirect foreign investment.

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.

Through the Press Note 1 of the 2022 Series, while allowing 20% FDI in Life Insurance Corporation of India under automatic route, the GOI 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 and introducing non-resident employees’ eligibility to receive share-based employee benefits in body corporates established/constituted under any Central or States Acts (beyond employee stock options). While the former should boost non-valuation based funding from non-residents in the start-up ecosystem, the latter will go a long way to create non-employee stock options share-based incentives for non-resident employees.

Dispute over the Assets of the Future Retail Group

The planned acquisition of the assets of Future Retail Group (“FRG”) 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 (SIAC), staying the asset sale from FRG to Reliance claiming it was in violation of its commercial arrangements with FRG. FRG contested the arbitration order before the Indian courts, which is currently stayed. The proceedings are pending before courts and multiple regulatory authorities in India, which has delayed the acquisition for a significant period.

In relation to CCI proceedings, last year, for the first time, the CCI invoked its residual powers 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 to provide its prior written consent in relation to matters under FCPL’s shareholders’ agreement with Future Retail Limited (“FRL”) (“FRL Rights”). However, the CCI observed that Amazon had taken contradictory stands regarding the nature of the FRL Rights before the CCI and other judicial forums. Before the CCI, Amazon had stated that the FRL Rights and investment were to protect its investment in FCPL and to enhance Amazon’s existing portfolio of investments in the payments landscape in India, while in other judicial forums/its own records, the FRL Rights were claimed to be “special” and “material” with the objective to become the single largest shareholder of FRL at the time when FDI opens up in the retail sector. Hence the, CCI found Amazon guilty of misrepresentation and 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 inter-connected steps of a combination;
• maintaining consistency in submissions before various forums; and
• observing good house-keeping practices while drafting internal documents.

Amazon has appealed this order and it is pending before the appellate tribunal.

Eaton–Schneider Dispute

The CCI had conditionally approved the acquisition of Larsen & Toubro’s electrical and automation vertical (“L&T”) by Schneider Electric India Private Limited (“Schneider”) and MacRitchie Investments Pte. Ltd. In this regard, the CCI also appointed a monitoring agency to overlook the implementation of certain behavioural conditions imposed by it, noting the antitrust concerns. The monitoring agency called for the bidders to place their interest for the acquisition of L&T. However, Eaton Power Quality Private Limited (“Eaton”), was disqualified from participating in the process since it did not submit the requisite documents within the stipulated time. Eaton approached the CCI to permit it to participate in the bidding process, which the CCI allowed (“Original Order”). Schneider approached the CCI to review the Original Order on the grounds that firstly, Schneider was not heard by the CCI before passing the Original Order and secondly, the bidding process had reached the negotiation stage. Accordingly, the CCI reversed the Original Order (“Review Order”). Eaton approached the Delhi High Court aggrieved by this decision noting that the CCI does not have such wide review powers. The Delhi High Court agreed with this argument and held that firstly, the Original Order was not sustainable in law as Schneider was not heard before passing such order, and secondly, the review powers of the CCI are limited to administrative orders and not adjudicatory orders. Hence, the Review Order was not sustainable in law as well.

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2013 (“Takeover Code”) were amended in December 2021 (the “December Amendment”), which has resulted in 2 significant changes.

New Delisting Regime

A new regime for a delisting pursuant to a tender offer under the Takeover Code

The recent amendments to the Takeover Code permit only a third party acquirer to make a tender offer with a view to delisting the Target Company under the Takeover Code under a more onerous regime for delisting under the SEBI (Delisting of Equity Shares), 2021 (the “Delisting Regulations”) subject to the following.

Only third-party acquirers acquiring sole control of a target company can make direct delisting offers under the Takeover Code

This route to delisting of the shares of a target company is not available to any person who in the two years preceding such offer was/is:

• a promoter/controlling shareholder of the company;
• any person associated with the promoter/controlling shareholder of the target company;
• any person holding 25% or more of the issued and outstanding equity shares of the company); and
• any acquirer, who will have joint control over the target company with an existing promoter/controlling shareholder of the target company.

Consequently, any promoter/controlling shareholder or any shareholder of the target company holding at least 25% of the shares of the company can undertake a delisting only in accordance with the provisions of the Delisting Regulations (ie, where the public shareholders determine the delisting price by way of a reverse book-building, which results in a higher delisting price).

Competing offers

A delisting offer is not permitted if a competing offer is made.

Fixed price delisting

The acquirer is required to set out an indicative price for such a delisting offer, which sets out a suitable premium along with a rationale and justification for such the indicative price (which can be revised upwards before the tendering period starts for such a delisting offer). The indicative price is subject to a floor price being the higher of:

• the tender offer price under the Takeover Code; and
• the book value of the target company based on the latest consolidated and standalone financial statements of the target company per the latest quarterly financial results filed by the target company.

This allows an acquirer to make a fixed price delisting offer, unlike the delisting under the Delisting Regulations.

Treatment of tendered shares

The acquirer’s delisting offer will be successful if the Acquirer receives a tender of shares resulting in the Acquirer holding 90% of the outstanding equity shares of the company at the indicative price.

If the shares tendered are less than the threshold mentioned above or if the public shareholders reject the delisting offer, the acquirer will need to acquire all the shares tendered at the tender offer price computed in accordance with the Takeover Code.

Second attempt at delisting following a failed delisting

In a further change, if the shares tendered under such a delisting offer result in the acquirer holding more than 75% of the shares of the target company, the acquirer can:

• retain such excess shares; and
• launch a subsequent delisting offer in accordance with the provisions of the Delisting Regulations within 12 months of the completion of the first tender offer.

This second delisting offer is deemed successful if the shares tendered at a price acceptable to the acquirer results in the acquirer holding:

• 90% of the outstanding equity shares of the target company; and
• having acquired more than 50% of the residual public shareholding in the target company.

If the second delisting offer was unsuccessful (either if the tenders didn’t reach the threshold set out above or if the delisting price was not acceptable to the acquirer), the acquirer will have 12 months from the failure of the second delisting offer to pare down its stake in the target company to 75% by way of prescribed transactions only.

Prior to the recent amendments, any such acquirer was required to:

• pare down its shareholding in the target company to 75% by way of prescribed transaction only within one year of the completion of a tender offer; and
• launch any delisting offer in accordance with the Delisting Regulations only after having complied with the stipulation that the minimum public shareholding in an Indian listed company needs to be at least 25% of the outstanding equity shares (“minimum public shareholding requirements”).

Scaling Down of Offer Size

Acquirers making tender offers can now scale down the number of shares that they are bound to acquire under the tender offer under the Takeover Code to ensure that they do not breach the minimum public shareholding requirement following the completion of the tender offer.

Prior to this recent amendment, any such acquirer was bound to:

• acquire the exact number of shares tendered as part of the tender offer; and
• pare down its shareholding in the target company to 75% by way of prescribed transactions only within 1 year of the completion of a tender offer.

This scaling down of shares to be acquired in the tender offer is subject to certain conditions.

Only third-party acquirers acquiring sole control of a target company are eligible to scale down acquisition of tendered shares. This scaling down option is not available to any person who in the two years preceding such offer was/is:

• a promoter/controlling shareholder of the company;
• any person associated with the promoter/controlling shareholder of the target company;
• any person holding 25% or more of the issued and outstanding equity shares of the company);
• any acquirer, who will have joint control over the target company with an existing promoter/controlling shareholder of the target company.

Scaling down has to be proportionate; any scaling down purchase of tendered shares will also require scaling down proportionately the acquisition of shares under the underlying transaction.

Stakebuilding is more relevant for listed public companies than for private companies. With regard to listed companies, it is possible to acquire up to a 25% stake without being required to make a mandatory tender offer to the other shareholders.

Additionally, 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 of voting rights should disclose every purchase or sale of shares representing 2% or more of shares or voting rights;
• disclosure by persons acquiring 25% or more of shares or voting rights in a financial year;
• annual disclosure by promoters of their aggregate shareholding;
• promoters should disclose details of shares encumbered by them, or any invocation or release of such encumbrance;
• 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.

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.

Reporting thresholds are prescribed by laws/regulations issued by SEBI that are applicable to all listed Indian companies. Furthermore, persons are not allowed to trade when in possession of unpublished price sensitive information (“UPSI”).

Indian exchange control regulations don’t permit non-resident acquirers to acquire shares on the floor of a registered Indian stock exchange, unless they are registered with the 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, 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 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 anti-trust laws or to shareholders and creditors in the case of 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 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. Any corporate action pursuant to M&A which involves acquiring shares/voting rights/control is automatically considered material and required to be disclosed without applying the test of materiality, and as soon as reasonably possible (not later than 24 hours from the occurrence of event).

Also, 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 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 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 GOI 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 case of acquisitions is the definitive or binding agreement (including binding term sheet); whereas in the case of mergers, it is the board approval of the proposal relating to a merger or amalgamation. Recently, in March 2022, the GOI has extended the relaxation for a period of 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 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 which proposes to enter into a transaction may request, in writing, a consultation with the officials of the CCI, about the notification requirement for a transaction. Such consultation is informal and not binding on the CCI. The parties can hold such a consultation with the CCI on a no-names 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, the market practice on 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 legal, business and financial due diligence on the target to ensure that the affairs of the target are compliant with the regulatory framework and 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, within their scope, review of capital, regulatory compliance, business contracts, disputes and litigation, financings, real estate, etc.

The pandemic has resulted in a higher number of virtual due diligence exercises being undertaken, increasingly relying on technology due to the lack of access to the physical documents of companies on account of the lockdown restrictions. There is now 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 pandemic-driven liquidity crunches and movement restrictions, along with a greater focus on data privacy and cybersecurity 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 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.

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;
• 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).

For listed companies, a mandatory offer will be triggered on acquisition of (i) 25% or more of the voting rights; (ii) control, either directly or indirectly; or (iii) 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 for 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. Furthermore, selection of the form of consideration also depends on various aspects such as the mode of financing and the incidence of taxation.

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:

• 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
• networking capital adjustments.

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

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)). A 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.

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 (i) be verified and approved by a SEBI-registered merchant banker, who is running the tender offer process; and (ii) certified by a practicing 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 and sparsely used in investment transactions. These are not typical in M&A transactions involving listed companies.

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.

Furthermore, the pandemic has rendered the M&A space more buyer-friendly due to undervaluation and increased need for company funding; as a result, target companies are more desirous of deal certainty. 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.

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

Acquirers seek appointment of nominee directors (typically in proportion to their shareholding in the Target Company).

Additionally, 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 on a poll.

The most commonly used squeeze-out method in India is the reduction of share capital. This 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 at least 75% of the shareholders of the company and the National Company Law Tribunal (NCLT). Judicial review by the NCLT is limited to ensuring the fairness of the scheme and the NCLT doesn’t normally opine on the commercials of the deal.

There are no express restrictions on an acquirer obtaining irrevocable commitments to tender or vote by 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, public announcement of an open offer must be made by the acquirer on the date when binding acquisition agreements are executed/put into place. 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 the case of an issuance by a listed entity.

In addition, if the transaction requires CCI approval then relevant disclosures such as details of the 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 the case of non-residents).

While bidders are not required to submit financial statements, brief audited profit and loss accounts and balance sheets of the acquirer and concert parties are required to be disclosed in a prescribed format in the letter of offer and detailed public statement that are required to be produced by the acquirer in accordance with the provisions of the Takeover Code. If such statements are not audited, then they will have to be subject to a limited review by the statutory auditors. Any such audited statements subject to limited review cannot be more than six months old.

Key terms of the transaction documents need to be included in the detailed public statement and letter of offer, both of which are prepared following standard formats prescribed by SEBI.

Additionally, transaction documents are open for inspection during the tendering period in respect of the tender offer. These documents are kept available for inspection at the offices of the merchant banker running the tender offer process.

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.

In the case of unlisted companies, there are no specified duties prescribed or imputed 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, no alienation of material assets or change in capital structure, etc, when a takeover offer is open. The general accepted principle in Indian jurisprudence is that a director has a fiduciary duty to act in the best interest of the company and there is no presumed fiduciary duty towards shareholders but courts have upheld the same in certain special circumstances. The law mandates directors to act in good faith for the benefit of the members as a whole and in the best interest of the company, its employees and shareholders, and the wider community, as well as to consider protection of the environment. Accordingly, the directors should have a clear road map and understanding of the intended goal of a business combination.

Companies with a large stakeholder base (including holders of any securities) or with turnover/net worth above the prescribed threshold, 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. The Indian Takeover Regulations also require a committee of independent directors to provide written, reasoned recommendations on the open offer to shareholders of the target company. Furthermore, directors are required to ensure that their interests do not conflict with that of the company and any interested director is not allowed to participate in a meeting for matters in which they have an interest.

There is no set mechanism requiring a board of directors to form a judgment in relation to a merger/acquisition or takeover in the case of unlisted companies.

However, 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. In instances of takeovers, the courts tend to uphold the commercial wisdom of shareholders who have ratified a scheme of merger or amalgamation with the requisite majority prescribed under the law, unless that action is proven to be manifestly unfair.

Given the limited powers of the board, 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 usually 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 is allowed to seek external professional advice at the expense of the target company and also use SEBI-registered merchant bankers for advice.

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 having malafide intent.

Furthermore, SEBI has issued stringent disclosure rules for shareholder advisory firms (also known as proxy advisors) to address any concerns around conflict of interest and has prescribed a code of conduct for proxy advisers, which includes disclosures on conflicts of interest and how such conflicts are to be managed.

Indian Takeover Regulations do not recognise the term “hostile offer”, and 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 compared to negotiated transactions.

In hostile tender offer scenarios, the ability of directors to use defensive measure is constrained, by the Takeover Regulations’ requirements, which mandate that once a tender offer has been triggered (ie, 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 (ie, sale of material assets, borrowings and buy-backs) 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 offers, Indian companies have adopted techniques such as seeking “white knights” – ie, 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.

Furthermore, as mentioned in 2.3 Restrictions on Foreign Investments, the GOI, 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.

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 require directors to perform 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 board of directors are not required to approve a tender offer under the Takeover Code, since the regulations view the tender offer as a transaction involving the acquirer and the shareholders of the company. Although the Takeover Code requires 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, they 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 via special resolution.

Disputes largely arise in cases of a disparity in the price paid for acquisition; if there is allegation of minority-shareholder oppression; procedural irregularities; or conflict of interest between existing shareholders, company and acquirer. Hence, in the absence of these factors, disputes are uncommon. In light of the pandemic, an increasing number of M&A deals have witnessed parties litigating on force majeure and material adverse event clauses.

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 at 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 being called off or put on hold. Transactions which were too far along were being examined for force majeure applicability.

The dispute between FRG, Reliance Industries group and Amazon is discussed in detail in 3.1 Significant Court Decisions or Legal Developments. 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 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 promoters and companies 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. Furthermore, the slew of documents involved in various stages of the financing of a company as well as obtaining necessary approvals for the chosen method of acquisition or merger makes it crucial to assess in detail every consent and waiver requirement for future deals. For example, an existing shareholder of a company attempted to block a deal for an acquisition of the target on the basis that the right of first refusal was not provided to them, and there were procedural irregularities in relation to the extraordinary general meeting conducted for such acquisition.

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 unfairly prejudiced. The Companies Act provides for the institution of class action suits against any fraudulent management or conduct in the affairs of a company. This provision was introduced in the wake of several instances of corporate fraud. Furthermore, if the affairs of a company are being conducted in a manner prejudicial to the public interest, 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 according to the provisions of the Companies Act.

The views of activist shareholders towards the M&A space depends on 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 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. Aggrieved shareholders are empowered under the Companies Act, subject to certain thresholds, to approach the NCLT to move against decisions of the company.