Back to Global Rankings

INDIA (DOMESTIC FIRMS): An Introduction to Corporate/M&A

Contributors:
Touchstone Partners Logo
View Firm profile

Background 

2020 was an unprecedented year marked by global disruption, market volatility and of course a pandemic which had an unquantifiable humanitarian and economic impact. As was the case with most countries, the series of strict lockdowns imposed in the early days of the pandemic in India had (and in some cases, is continuing to have) severe economic aftershocks. Manufacturing and other ancillary activities took a major hit with thousands being rendered jobless and the GDP contracting by around 24% in Q1 of 2020-21 – the sharpest drop in over four decades. However, since then the economy has shown signs of returning to normalcy with the stock markets in particular being extremely bullish.

Needless to say, M&A activity showed a similar trend where, in the early months of 2020, deal value and volume contracted rapidly (with Q1 of 2020-21 witnessing the lowest number of quarterly deals since 2011) as investors were cautious and focused on cash conservation. However, spurred by the changing global supply chain dynamics and the rapid emergence of consolidation opportunities, M&A activity picked up over Q3 and Q4 of 2020-21.

M&A trends 

Overall, 2020 recorded over 350 M&A deals (excluding PE) worth a total of approximately USD37.5 billion. Whilst there was a 33% rise in the aggregate M&A deal value compared to 2019, the number of M&A deals was the lowest since 2011. The surge in value can be largely attributed to the bumper fund raise by Mukesh Ambani led Jio Platforms, which grabbed global headlines by raising over USD20 billion from a combination of technology companies and institutional financial investors. The second half (or what came to be known as the “unlock phase”) of 2020 also saw around eight other deals in the billion dollar club, mainly in the infrastructure and energy sector, such as Adani’s acquisition of the Krishnapatnam port for USD1.4 billion, BP’s investment of USD1 billion in the fuels and mobility joint venture with RIL, and Groupe ADP's strategic investment in GMR Airports for USD1.4 billion.

A number of organizations were also forced to hive off their non-core or distressed assets to maintain economies of scale, which in turn created a number of M&A opportunities. The real estate sector especially witnessed noteworthy consolidations and buyout deals. For example, the acquisition by the Embassy Office Parks REIT of Embassy TechVillage’s assets for USD1.3 billion was the single largest commercial property deal of the country and made Embassy REIT the holder of the largest office/commercial space in Asia.

The pandemic also served as a watershed moment for the EdTech sector, which received four times the amount of funding as compared to 2019. Byju’s acquisition of WhiteHat Jr – which was less than two years old at the time – for USD300 million was the biggest deal in this sector so far. The software and tech industry, buoyed by the increased reliance on internet and computer technology during the pandemic, was also one of the biggest beneficiaries in 2020 in terms of M&A activity. According to an “investment trends monitor” issued by the United Nations Conference on Trade and Development, whilst global FDI collapsed in 2020 by 42%, India witnessed a 13% increase in FDI “boosted by interest in the digital sector”. The USA was the most active jurisdiction for incoming foreign investment in Indian M&A both in terms of value and volume, followed by Japan and the UK.

Eye on China 

One notable regulatory challenge that emerged was the decision of the government to drastically clamp down on investments from China. In April 2020, owing to increasing geopolitical issues and border tensions with China, the government by way of Press Note 3 of 2020 announced that all investments from an entity based in a country which shares a land border with India, or where the beneficial owner of the investment in India is situated in a country which shares a land border with India, will need prior approval. Whilst on the face of it, the requirement was introduced with a view to “curbing opportunistic takeovers/acquisitions of Indian companies”, given the broad brush nature of the language, acquisition of minority stakes and further infusion of funds in existing portfolio companies have also been restricted. The Press Note also includes references to “beneficial ownership” to ensure that indirect investments are also captured. However, the lack of a precise definition of what constitutes “beneficial ownership” (which seems to be by design) has put potential investors with even minority Chinese backing in a difficult spot. India had witnessed an increased interest from Chinese investors especially over the last 5–6 years with some reports suggesting that investment from China has gone up five-fold since 2014. Most of these investments were being made in the Indian tech space and new age start-ups. In fact, a recent report by a foreign policy think tank has estimated China linked investments in India’s tech start-up sector alone at USD4 billion, with Chinese investors holding significant stakes in around 18 out of India’s top 30 unicorns. Reportedly, since the introduction of the Press Note, a couple of hundred applications worth over INR12,000 crores are pending with the government. Recent press reports however suggest that the government is now gearing towards clearing some of these proposals and there are also whispers that minority investments in certain “non-sensitive” sectors may be brought back under the automatic route.

Steps towards revival 

One significant outcome of the disruption in global supply chains has been the launch of India as the next global manufacturing hub. In addition to announcing various government incentive schemes for manufacturing in India, sweeping reforms were made to the Indian labour law regime, which has historically been a complex maze of dated and ill coordinated legislations. The labour laws are now being streamlined by integrating around 29 existing central labour laws into four labour codes, with certain key amendment being made to increase the ease of doing business in India. Corporate tax rates have also been slashed (as a result of this amendment the Indian corporate tax rate is now lower than the global average) and the dividend distribution tax has now been done away with.

Conclusion 

On balance, while despite the historic global economic slowdown and uncertainty there was a rise in the total M&A deal value on the back of the multi-billion dollar investments in Reliance entities, mid-segment and smaller corporations struggled to stay afloat. It is expected that 2021 will bring back momentum in the M&A space, with technology, e-commerce, healthcare and FinTech likely to be the key investment areas in the coming years.