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

M&A Trends 

Background 

Despite the Indian economy being hit by the second wave of the COVID-19 pandemic for a large part of 2021, the contained nature of the lockdowns, well-timed policy and credit measures announced by the Government and better adaptation of people to work-from-home protocols, helped moderate the impact of the pandemic on the economy and led to the resurgence of optimistic sentiments within the investor community. The inflow of foreign direct investment (FDI) is indicative of this revival as India attracted USD27.37 billion in Q1 of 2021, which is 62% higher than the FDI for the corresponding period of the preceding year.

M&A deal activity remained largely unhindered in 2021 as the year recorded over 394 M&A deals (excluding PE deals) worth a total of approximately USD40.6 billion, amounting to a 39% rise in the aggregate M&A deal volume and a 22% rise in the M&A deal value in comparison to 2020. Similar to 2020, domestic deals continued to dominate M&A deal activity and consolidation-driven deals remained the favoured choice in retail, food-tech, software development and the IT solutions segment.

The year so far has witnessed nine deals in the billion-dollar category, mainly in the banking and finance, IT & ITeS, energy and natural resources and manufacturing sectors, such as Piramal Capital and Housing Finance Limited’s acquisition of Dewan Housing Finance Limited for USD5.1 billion, PayU’s acquisition of Billdesk for USD4.7 billion (which marks one of the largest deals in India’s digital payments space), Adani Green Energy’s acquisition of SB Energy for USD3.5 billion (which represents the largest acquisition in the renewable energy sector in India) and JSW Steel’s acquisition of Bhushan Power & Steel Ltd for USD2.7 billion (the Piramal deal and the JSW Steel acquisition both being under the framework of the Insolvency and Bankruptcy Code, 2016) and Tata Sons’ proposed acquisition of Air India (through its wholly-owned subsidiary – Talace Pvt. Ltd.) from the GoI for USD2.4 billion. The public M&A space has also shown sustained activity, led by the acquisition of a minority stake in Adani Green Energy Limited by Total SE for USD2.4 billion. The year also witnessed PNB Housing calling off the proposed investment by The Carlyle Group (which would have increased its stake from 32% to over 50%) on account of issues with the valuation process flagged by SEBI and the subsequent withdrawal of the open offer by The Carlyle Group.

Key Industries 

2021 proved to be a banner year for the Indian start-up ecosystem in more ways than one – with an acceleration in M&A volumes, 39 start-ups entering the unicorn club (as opposed to only nine start-ups in 2020) and a massive jump in initial public offerings activity by start-ups in the technology and e-commerce sector.

In line with 2020, the ed-tech sector maintained strong momentum in M&A deal activity which can be gauged from Byju’s acquisition spree entailing the acquisition of nine start-ups including, inter alia, Aakash Educational Services for USD1 billion (marking the largest ed-tech acquisition in the world). The regulatory crackdown on China’s ed-tech firms over the last few months coupled with the rapid digitisation in India, has seemingly accelerated the shift in tech investors looking at India more favourably.

Driven by the pandemic, the pharma and healthcare, e-commerce, retail and consumer, and hospitality and leisure sectors also continued to work actively in tandem with each other. Noteworthy deals include Tata’s acquisition of India’s largest e-grocery player, BigBasket.com, from Alibaba group for USD1.2 billion in the e-commerce space, the acquisition of Sanofi India Limited by Universal Nutriscience Private Limited and the acquisition of a controlling stake in Thyocare Technologies Limited by Pharmeasy.

Still unclear on China 

In April 2020, against the backdrop of the onset of the COVID-19 pandemic and the worsening geopolitical issues with China, the Government of India had introduced Press Note 3 of 2020 (PN3) requiring that investments from and acquisitions by an entity based in a country which shares a land border with India, or where the “beneficial owner” of the investment is situated in a country which shares a land border with India, will be subject to prior Government approval.

The issuance of PN3 without any guidance on how to interpret the term “beneficial owner” caused much confusion. It not only raised a question mark over investments coming in from Hong Kong and Taiwan, but even US institutional investors who have raised monies from Chinese LPs found it challenging to make investments in India. In addition, PN3 did not differentiate between: (x) controlling and non-controlling investments; (y) fresh investments and follow-on investments on a pro-rata basis in existing portfolio companies; and (z) direct investments into an Indian company and indirect investments into an offshore company which has an Indian subsidiary, all of which contributed further to the uncertainty. It interestingly, however, did not restrict on-market investments by Chinese investors under the “foreign portfolio investment” regime which was supposedly the trigger for introducing PN3.

Notably, in the aftermath of PN3, the Government received the maximum number of foreign direct investment approval proposals from countries sharing a land border with India. It is understood that specialised inter-ministerial committees have been formed to deal with PN3 proposals and that the proposals are also being fast-tracked and reviewed proactively once submitted. However, even after a year and a half, not much has moved in terms of either the issues set out above being clarified or approvals being granted by the Government.

Whilst India is not an outlier in its attempts to regulate investments from China, the lack of clarity, even after over a year and a half, around the scope of PN3 and the subsequent stonewalling of applications for approvals has significantly disrupted the start-up ecosystem, particularly for entities in the tech sector, which has recently been the largest beneficiary of significant cheques drawn by Chinese investors.

Delisting made easier 

On 6 December 2021, the Securities and Exchange Board of India (SEBI) notified certain amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Regulations), which seek to simplify and streamline the pricing regime and delisting process for control transactions involving Indian listed companies. The recent amendments come on the back of the suggestions made by a sub-group of SEBI’s Primary Market Advisory Committee in June this year, which were followed by the proposal being approved by SEBI at its board meeting in late September. Crucially, the amendments enable incoming acquirers to make a delisting offer at a fixed price, rather than being subject to the default price discovery process using the reverse book building mechanism under the separate delisting regulations. If an acquirer falls short of the 90% delisting threshold but nonetheless crosses the non-public shareholding threshold of 75%, the new rules allow such an acquirer a further 12-month window to make another attempt at delisting without having to sell down to comply with the minimum public shareholding norms. The new rules, however, stop short of completely overhauling the existing regime – the new rules are meant to benefit only new acquirers, and not existing promoters / controlling shareholders of Indian listed companies; even new acquirers will be reliant on securing the support of two thirds of the public shareholders to successfully delist the target, and risk having to pay a much higher delisting price in case of failing to delist the first time around. Having said that, the amendments improve the prospects of “take private” deals in the Indian market, and represent a step in the right direction.