INDIA (DOMESTIC FIRMS): An Introduction to Corporate/M&A: Highly Regarded
Navigating the Indian Mergers and Acquisitions Landscape: A Comprehensive Guide
Current trends in the Indian M&A market
India’s deal landscape in 2023-24 exhibited resilience, adaptability, and cautious optimism amidst global economic challenges. There was a drop in M&A activities, however, both businesses and investors retained confidence, indicating potential for a recovery in deal values. Nevertheless, there was a significant surge in inbound deals fuelled by interest from strategic buyers, particularly global investors from the Netherlands, the US, and Germany. On the outbound front, M&A deal value experienced a notable decline, but volumes remained relatively stable due to healthy cash flows among corporates and relaxed regulations for PEs. The revival of PE investments, increased activity in the financial services sector, growth in clean energy M&A, automotive-driven activity in manufacturing, ESG integration, a shift towards growth funding, and a revival in venture capital investments, signal increased interest in innovative and high-growth ventures.
Sectors are seeing the most M&A activity
The emphasis on FinTech, e-commerce, and auto components drove the intensification of strategic inbound deals in sectors such as financial services, technology, media & telecom, and manufacturing in the previous year. Key sectors such as e-commerce, renewable energy, technology (including AI and semiconductors), healthcare and biotechnology, banking, financial services and insurance, infrastructure, and EVs and EV infrastructure are set for significant investment and M&A activity in the forthcoming year.
The primary drivers of M&A in India
A conducive policy environment that facilitates foreign participation, the consolidation of sectors that enables market expansion for potential players, and a stable economy that is in alignment with the global economy have all contributed to enhanced M&A activities in India. From an entity perspective, India offers economies of scale, potential for financial gain in the form of new market, and an expanded customer base, operational efficiency, diversification, or ESG (Environmental, Social, and Governance) integration owing to India's growing demand for clean energy solutions.
The common legal pitfalls to avoid in Indian M&A transactions
Pitfalls can range from regulatory issues to a lack of necessary due diligence. In addition, issues such as mistakes in negotiations and overrated synergies, deficiency in a strategic plan, lack of adequate communication, shareholder dissent, culture mismatch, human resource matters, geographic restrictions, and difficulty with integration are some other reasons for the failure of M&A deals. External factors such as market position, competition, financing situation, and credit in the company’s lending may also affect an M&A transaction. Moreover, the understanding that multiple regulations apply to the same business is commonly overlooked, optimistic interpretations are taken by various stakeholders, such as auditors, advisors, and banks, which may not be in line with the regulatory intent. Even though good advice is available in plenty, not accessing such good advice is another pitfall to avoid. More information can be found here.
The main regulations and compliance requirements for M&A in India
Key regulations governing M&A transactions in India include the Companies Act, 2013, that provides for approval procedures, disclosures, and transactions involving foreign entities, the Competition Act, 2000, which sets thresholds, regulates combinations, and deters unfair competition through the involvement of the Competition Commission of India (CCI), Foreign Exchange Management Act, and related regulations such as the Non-Debt Instrument Rules, Overseas Direct Investment Regulations, and the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 that govern substantial acquisitions of shares and takeovers in India.
Apart from the above, the Indian Contract Act, 1872, Specific Relief Act, 1963, Insolvency and Bankruptcy Code, 2016, Income-tax Act, 1961, Indian Stamp Act, 1899, exchange laws, Foreign Direct Investment (FDI) policy circulars, penal laws, sector-specific regulations, and other regulations issued by the Securities and Exchange Board of India (SEBI) also have a bearing on M&A transactions.
The Indian legal system and cross-border M&A transactions
Mergers between an Indian company and a foreign company located in a permitted jurisdiction are governed by the provisions of the Companies Act, 2013, the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016 (Companies Rules) and the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018. In addition, provisions relating to sectoral caps, pricing guidelines, entry routes, and reporting requirements of the foreign exchange management laws of India, i.e., FDI policy-related circulars and notifications, and provisions of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, Foreign Exchange Management (Overseas Investment) Regulations, 2022, and Foreign Exchange Management (Overseas Investment) Rules, 2022, must be adhered to in the case of M&A transactions. Further, when it comes to mergers pursuant to Section 234 of the CA 2013 read with Rule 25A of the Companies Rules, a prior approval is required from the Reserve Bank of India (RBI) in cases of cross-border mergers if they are not in compliance with the Merger Regulations. Moreover, provisions of Sections 230-232 of the CA 2013 read with the Companies Rules must be complied with for the merger to be sanctioned by the National Company Law Tribunal (NCLT). In addition to this, some transactions, even though offshore, will have implications in India given the presence of an Indian subsidiary or parent. Even in such instances, the Indian regulations will have to be complied with, including compliance with Press Note 3 of 2020.
Sector-specific regulations or restrictions on foreign investments
Under the Foreign Exchange Regulations, FDI in certain sectors falls under the 'automatic route,' allowing investments up to 100% or a specified cap without requiring prior government approval. Conversely, FDI in other sectors requires prior approval from the relevant government ministry or department and/or the RBI. Sectors such as atomic energy, gambling, lottery business, and chit funds are prohibited from receiving any FDI.
The key legal and regulatory changes in the M&A realm from the past year
The past year has been quite interesting for M&A activity as well as legal and regulatory changes that will impact deal activity in India. The Securities and Exchange Board of India introduced several key amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 pertaining to enhanced disclosures to stock exchanges and investors, the introduction of mandatory listing of non-convertible debentures by listed issuers, the mandatory dematerialization of AIF units for all AIFs having a corpus of five billion or more by the end of January 2024, the introduction of the concept of “MSM REITs,” and the revised “offer for sale” framework. Additionally, SEBI has issued numerous consultation papers and proposals for various reforms, including social stock exchanges and crowdfunding.
Further, the Indian competition law landscape underwent numerous significant changes in 2023. For instance, the Indian Competition (Amendment) Act made substantial changes to the extant law. Further, the following key draft regulations have been released that are pending enactment:
- CCI (Combinations) Regulations, 2023, are intended to replace the existing CCI (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011
- CCI (Settlement) Regulations
- Digital Personal Data Protection Act, 2023 (DPDPA) (which seeks to amend the existing data protection regime in India)
The key strategic considerations for a successful M&A in India
Acquirers must take relevant advice on law, tax, and compliance, as well as evaluate commercial aspects, conduct detailed due diligence, and identify potential issues such as costs, cultural conflicts, and customer impact. It's crucial to ascertain obligations, litigation risks, and contingent liabilities before finalizing deals. Factors such as price parameters must be based on an analysis of the target’s market and prospects, while target companies should explore multiple bids to secure the best offer, not only in terms of consideration but more importantly in respect of a secure transaction falling squarely within the legal and tax framework. Similarly, establishing a roadmap with milestones and deadlines is essential to keeping the M&A process on track, as negotiations can extend over months or years. Similarly, when acquiring a foreign company, differences in accounting standards, labour laws, tax laws, and environmental regulations must be taken into account, especially India's strict laws on cross-border data transfers. In addition, all the aspects discussed above have to be taken into consideration while drafting the transaction documents.