1 Deal structure
1.1 How are private and public M&A transactions typically structured in your jurisdiction?
Private and public M&A transactions typically fall within two broad categories, as follows.
Acquisitions by private arrangement: These are contractual agreements between a buyer and a seller, subject to receipt of the necessary regulatory approvals. They typically take the form of:
- share acquisitions;
- asset transfers; or
- business sales.
Share acquisitions can be undertaken through:
- a share purchase from existing shareholders; or
- the subscription of fresh shares.
In an asset transfer, the buyer agrees to purchase identified assets from the seller with individual values assigned to each asset and with no concomitant transfer of employees. A business sale involves the transfer of an undertaking or a business unit as a going concern for a lump-sum consideration, without values being assigned to the individual assets and liabilities, including transfer of employees.
Tribunal-based M&A: This involves the formulation of a scheme of merger/amalgamation, demerger or business sale by operation of law, which must be sanctioned by the National Company Law Tribunal (NCLT) through a court process. The process for such transactions is statutorily prescribed and involves:
- approval by sectoral regulators;
- approval by shareholders and creditors (in specified majorities); and
- approval by the stock exchanges and the Securities and Exchange Board of India, for schemes involving listed companies.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
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1.3 What factors commonly influence the choice of sale process/transaction structure?
The choice of transaction structure is driven by various factors, including:
- the nature of the target;
- the time and costs associated with each structure;
- tax efficiency;
- comfort with court process;
- commercial objectives;
- funding considerations (ie, cash or non-cash); and
- administrative efficiency.
2 Initial steps
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
The M&A process typically commences with the execution of a term sheet or a memorandum of understanding which records the preliminary understanding, broad scope and intention of the parties with respect to a proposed transaction. The term sheet is usually non-binding (save for certain provisions such as exclusivity, confidentiality governing law), unless the parties specifically agree otherwise.
In addition to a term sheet, confidentiality arrangements are typically executed by the contracting parties in order to secure information exchanged during the course of due diligence and negotiations. Such agreements contain standard exceptions (eg, disclosure required by applicable law or information already in the public domain).
In the context of a transaction involving a listed company, corporate resolutions may be required before due diligence information is shared, and a term sheet is usually non-binding to avoid triggering mandatory tender offer requirements. Under the Indian takeover regulations, a mandatory tender offer is triggered if a party agrees to acquire shares/voting rights above certain thresholds or agrees to acquire control.
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
Indian law does not restrict the payment of break fees. Under Indian contract law, a party that suffers a breach is entitled to receive, from the defaulting party, compensation for any foreseeable loss or damage which is not remote, consequential or indirect.
In formulating a fixed break fee, the parties should ensure that it is a genuine pre-estimate of loss and does not amount to a penalty. This will ensure the effective enforcement of the same.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
Acquisition financing takes place through debt and equity.
In the past, in the case of foreign investments, investors looked to borrow offshore, as leveraged buyouts are not permitted in India. The Indian exchange control regulations restrict the creation of a direct encumbrance over shares of an Indian company as security against such offshore borrowing.
In the case of domestic investments, Indian banks are not permitted to lend for capital market activities. Funds are therefore raised from the market (both equity and debt); or the purchaser makes acquisitions through internal accruals.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
Apart from the buyers and sellers, the following key advisers are also involved at the preparatory stage:
- financial advisers or bankers, which help the buyer and seller to navigate the negotiations and advise on the key commercials of the transaction;
- tax advisers, which advise on the structuring of the transaction in the most tax-efficient manner. Tax structuring takes into account the tax benefits available under the Income Tax Act, 1961, as well as indirect tax laws and the implications of the double taxation avoidance treaties, if any, in case of cross-border M&A;
- external legal advisers, which assist in the structuring and negotiation of the transaction documents and advise the parties on signing, conditions precedent and closing the transaction. The legal advisers may be both Indian and foreign in cross-border M&A; and
- external consultants for specific tasks such as valuation, title verification in case of immovable property and background checks of employees. For instance, if a transaction involves the sale and purchase of significant assets in the form of immovable property, local experts in the area where the property is located are often engaged to verify title.
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
Indian law restricts a public company from directly or indirectly, by means of a loan or guarantee and through the provision of security or otherwise, providing any financial assistance in connection with the purchase or subscription of shares in the company or in its holding company.
While adviser costs in India are typically borne by the respective parties, the target bears adviser costs only if it is a party to the transaction. The Indian courts have not had the opportunity to opine on whether adviser costs are tantamount to financial assistance.
3 Due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.
Commercial/corporate: Corporate due diligence includes:
- verifying the constitutional documents of the target;
- reviewing material contracts, such as agreements with related parties, financing agreements, supplier and customer agreements;
- reviewing permits and business licences, and corporate minutes;
- filing with the regulatory authorities (eg, the Reserve Bank of India, the Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs); and
- verifying share title, corporate registers and corporate structure.
Financial: Financial due diligence includes:
- reviewing whether the financials of the target have been prepared and maintained in accordance with applicable Indian accounting standards, and present a true and fair view of the target;
- conducting financial integrity checks; and
- identifying lender-related issues and contingent, extraordinary and unfunded liabilities.
Litigation: Litigation due diligence is typically qualified by a quantum-based materiality threshold and an analysis of litigation above such threshold is undertaken. Expert opinions are also sought in certain scenarios involving sector-specific litigation (eg pharmaceuticals or telecommunications), or in high-value litigation or litigation which could potentially affect the transaction.
Tax: Tax due diligence typically involves:
- examining the tax filings of the target;
- assessing the risk profile of tax litigation;
- examining tax benefits and exemptions;
- verifying whether the target is in compliance with the conditions on which such benefits and exemptions have been granted; and
- satisfying material tax liability.
Employment: Employment due diligence typically involves:
- template-based examination of employment letters;
- examination of employee benefit plans, stock option plans and schemes;
- review of registrations, licences and returns under key employment laws;
- review of contracts with key employees; and
- identification of existing employee claims, disputes and unfunded employee liability.
IP and IT: IP and IT due diligence typically involves:
- checking IP litigation;
- examining trademark registrations;
- reviewing IP-related objections;
- evaluating patents, designs and copyright;
- identifying infringements; and
- assessing whether all material IP is duly licensed or registered.
Data protection: Data protection due diligence typically involves:
- examining the sufficiency of data protection consents and policies;
- evaluating past data protection breaches;
- examining the contractual framework for the collection and processing of data; and
- examining preparedness for proposed amendments to Indian data protection law.
Cybersecurity: Cybersecurity due diligence typically involves examining:
- data collection and storage policies;
- integrity checks and breaches; and
- complaints filed with enforcement agencies.
Real estate: Real estate due diligence typically involves:
- review of title documents, notifications and government orders to assess present ownership;
- identification of liens, encumbrances and third-party interests;
- review of land use rights; and
- review of encumbrance certificates, mutation extracts and real estate-related litigation.
3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?
In India, typical public searches in relation to a due diligence exercise on a target include:
- examining filings made by the target with the Ministry of Corporate Affairs for a limited look-back period (usually three to five years);
- where the target is listed, examining filings with the stock exchanges and SEBI for a limited look-back period (usually three to five years);
- examining records of the Indian patent office and trademark registry;
- examining litigation records on the websites of the high courts and the Supreme Court of India; and
- examining real estate records with relevant government authorities.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
Yes, the practice of sellers providing a vendor due diligence report is becoming common, especially in auction/bid transactions.
While the provision of reliance is a matter of negotiation (especially when the buyer also conducts its own due diligence), in most scenarios vendor due diligence reports are provided on a non-reliance basis and a buyer can rely on such report only if the transaction is consummated. In most cases, liability is limited to the amount of fees actually received by the adviser for the due diligence report.
4 Regulatory framework
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?
Regulatory approvals will depend on:
- the industry in which the target operates;
- the nature of the acquisition;
- whether the acquirer is a non-resident; and
- whether the target is listed or unlisted.
For example, the acquisition of up to 74% of the shares of a brownfield pharmaceutical company by a non-resident is permitted under the automatic route (ie, without approval from the government of India); and acquisitions beyond 74% require approval from the government of India. Investments in the insurance sector beyond 5% (issuance or transfer) require approval from the Indian insurance regulator. The acquisition of a banking company in India requires approval from the Reserve Bank of India (RBI).
The acquisition of shares/voting rights/assets/control of an enterprise also requires prior clearance from the Competition Commission of India (CCI) if certain assets or turnover thresholds prescribed in the Competition Act, 2002 are met. The government of India, through the Ministry of Corporate Affairs, issued a notification on 27 March 2017 stating that a combination will not require prior notification to, and approval of, the CCI if:
- the value of the assets being acquired or merged does not exceed INR 3.5 billion in India; or
- the turnover does not exceed INR 1 billion in India.
Similarly, schemes of arrangement must be approved by the National Company Law Tribunal (NCLT) and, in case of listed companies, by the stock exchanges. Offer documents relating to transactions that trigger a mandatory tender offer must be approved by the Securities and Exchange Board of India (SEBI).
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
In India, the primary regulators of M&A activity are SEBI, the RBI, the NCLT and the CCI. SEBI is India's securities law regulator and compliance with SEBI regulations is necessary for prescribed categories of transactions involving listed companies (eg, mandatory tender offers, buybacks, delisting). The RBI is India's central bank and regulates foreign investment into India. Foreign investments into India must comply with the mandatory pricing guidelines issued by the RBI and may also require RBI approval in some instances. The NCLT regulates schemes of arrangement; and the CCI is India's competition regulator.
Additionally, sectoral regulators may have the power to regulate certain types of M&A deals in regulated sectors. For instance:
- the Insurance Regulatory and Development Authority of India regulates investments in the insurance space and must approve share acquisitions beyond a certain threshold in the insurance sector;
- foreign investments beyond certain thresholds in the brownfield pharma sector require prior approval from the Department of Pharmaceuticals; and
- certain categories of investments in the aviation sector require prior approval from the Ministry of Civil Aviation.
4.3 What transfer taxes apply and who typically bears them?
The most common form of transfer tax is stamp duty. In some cases, transfer charges are payable for conveyancing of immovable property.
In terms of the central and most state stamp laws, instruments executed in India are chargeable with stamp duty at statutorily prescribed rates. Instruments executed outside India and relating to any property situated in India, or any matter or thing done or to be done in India, and which are received in India, are also liable for payment of stamp duty. As states have enacted different stamp laws, the stamp duty payable on instruments varies from state to state. However, certain kinds of stamp duty are uniformly applicable throughout India. For instance, stamp duty on a transfer of shares is calculated at the rate of 0.015% of the value of the shares being transferred and is payable by the seller if the shares are traded off exchange. If the shares are traded on exchange, the stamp duty is paid by the buyer. In case of a merger, amalgamation or demerger, in most states the order of the NCLT is chargeable with stamp duty.
Stamp duty can be a significant transaction cost, especially where the duty is calculated on an ad valorem basis or is uncapped.
5 Treatment of seller liability
5.1 What are customary representations and warranties? What are the consequences of breaching them?
The representations and warranties provided by the seller in the acquisition documents will typically cover:
- title to shares;
- due capacity and authority;
- absence of conflicts; and
- similar fundamental matters.
Financial investors typically limit warranty coverage to fundamental matters and do not provide business-related warranties. If business warranties are being provided, they will usually cover matters such as:
- corporate organisation, authority and capitalisation;
- financial statements;
- contracts, leases and other commitments;
- employment matters;
- compliance with laws and litigation;
- environmental protection; and
- anti-bribery and anti-corruption.
Under Indian law, if a person enters into an agreement on the basis of a misrepresentation, that agreement is voidable at the option of the non-misrepresenting party. M&A documents usually provide for indemnification and other equitable remedies in case of breach of warranties, subject to negotiated caps and limits. Specific indemnity is sometimes provided where specific risks are identified in the due diligence.
5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?
Sellers typically limit their liability in several ways, including by:
- including de minimis provisions;
- setting cure periods;
- capping the indemnity amount;
- stating that indemnity is the sole monetary remedy for breach;
- fixing claim/survival periods for different buckets of warranties (eg, seven years for tax warranties, 12 months to three years for business warranties);
- providing disclosure letters;
- including knowledge qualifiers; and
- setting materiality thresholds.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
Historically, warranty and indemnity insurance has not been common in India. However, warranty insurance is now gaining popularity due to financial investor-related exits. Warranty insurance can be either buy-side or sell-side. Under a buy-side policy, the buyer claims directly under the insurance policy; under a sell-side policy, the buyer raises a claim against the seller, which in turn raises a claim under the policy. Common exclusions include:
- knowledge, which includes information provided by due diligence documents;
- transfer pricing;
- consequential losses; and
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
Apart from warranty protection, examination of the seller's annual accounts for a certain look-back period can also verify their substance and help the buyer to derive comfort. Another approach that is commonly used in scenarios involving a special purpose vehicle seller is to seek indemnity/claim protection from the parent entity of the seller.
In other cases, escrow agreements are entered into or purchase consideration is held back by the buyer to satisfy potential claims. In an escrow arrangement, a certain percentage of the purchase consideration is deposited into an escrow account and is released to the seller after the expiry of an agreed period or the achievement of specified milestones. An escrow arrangement involving a resident and non-resident is subject to limitations under Indian foreign exchange regulations which allow only 25% of the total consideration to be held back/placed in escrow for a maximum period of 18 months from the date of the acquisition documents.
5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
Sellers do provide confidentiality, non-compete or non-solicitation covenants post-closing, especially where the buyer perceives a risk of the seller competing with the target. However, under Indian law, agreements that restrain anyone from practising a lawful profession, trade or business of any kind are not enforceable. The limited exception to this general principle is that a person that sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business within specified local limits and time periods, as long as the limits specified are reasonable with respect to the nature of the business.
Indian competition law also stipulates that agreements which cause or are likely to cause an appreciable adverse effect on competition are anti-competitive. An agreement in restraint of trade is void; the courts do not distinguish between a partial or full restraint of trade. However, the courts have upheld non-compete clauses that operate during the subsistence of a contract, to the extent that the restraint is reasonable. The Supreme Court of India, in deciding on the validity of non-compete clauses, has held that restraints which operate during the term of the contract are designed to fulfil the purpose of furthering the contract and are incidental to the main contract, and consequently are reasonably necessary to render the main contract effective. While there is a general reluctance on the part of the Indian courts to enforce non-compete clauses which survive the termination of a contract, these are quite common in M&A transactions. The typical operational period of such clauses included in M&A documents is two to three years from closing.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
Yes, in scenarios where there is a time gap between signing and closing, MAC clauses are a common feature in M&A contracts. They give the buyer the right to walk away from the acquisition before closing if intervening events have a material adverse effect on the target. As in other jurisdictions, the scope of MAC events is heavily negotiated in India, with buyers looking for a broad MAC clause and sellers seeking to narrow the scope and operation of the MAC clause.
Bring-down diligence is not very common in India, and the common practice is to repeat warranties at closing along with providing an updated/closing disclosure letter. This, coupled with the standstill obligations that exist between signing and closing, provides comfort to the buyer.
6 Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
By way of background, the Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (‘Takeover Regulations') govern the direct and indirect acquisition of control and substantial shares or voting rights of listed companies. The Takeover Regulations require the acquirer of control over, or 25% or more of the shares/voting rights of, a listed company to make a mandatory tender offer (MTO) of minimum 26% to the public shareholders of the company.
In case of a direct acquisition, a public announcement of the MTO must be made on the date on which the acquirer agrees to acquire shares/voting rights/control over the listed company. In an indirect acquisition, the public announcement must be made within four working days of:
- execution of the agreement for the primary acquisition; and
- the date on which the intention or decision to make the primary acquisition is publicly announced.
Within five working days of the public announcement, a detailed public statement must be published; and within five working days thereafter, a draft letter of offer must be submitted to SEBI. Once SEBI has cleared the draft letter of offer, a letter of offer is sent to the public shareholders and the offer is opened for a period of 10 working days. Typically, the entire MTO process takes three to four months to complete. In an indirect acquisition, the detailed public statement can be made after closing of the primary transaction.
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
Acquirers can purchase shares of a target in advance of triggering an MTO. However, acquirers should be mindful of disclosure requirements when purchasing shares, including the requirement to publicly disclose:
- acquisitions which take their shareholding in a target to 5% or more of the target's voting capital; and
- subsequent acquisitions or disposals of more than 2% of the target's share capital.
Ordinarily, an acquirer must complete a triggered MTO before consummating the underlying acquisition. However, an acquirer may consummate the underlying acquisition before completing the MTO if it deposits the entire open offer consideration in an escrow account. In this scenario, the acquirer can consummate the acquisition 21 working days after publication of the detailed public statement, to ensure that there are no competitive bids.
While acquirers can purchase shares in the target during the MTO, this is subject to specified limitations, including:
- a blackout period that precedes the tendering period until its expiry;
- requirements that such shares be deposited in an escrow account; and
- restrictions on the mode of acquisition of the shares.
Acquisitions of shares at a price higher than the offer price of the MTO will result in an automatic increase in the offer price to the higher amount.
In terms of the SEBI Takeover Regulations, an acquirer that holds 5% or more of the shares of a listed company must periodically disclose its aggregate shareholding to the company and to the stock exchanges in formats prescribed by SEBI. Similarly, listed companies must disclose details of their shareholding pattern to the stock exchanges on a quarterly basis. These disclosures include the identities of large shareholders.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to ‘sell out')? What kind of minority shareholders rights are typical in your jurisdiction?
The protection of minority shareholders is one of the stated objectives of the Companies Act. Additionally, certain laws enacted by SEBI grant rights to minority shareholders of listed companies. These include:
- the ability to block special resolutions (ie, shareholders that hold more than 25% of voting capital can veto resolutions requiring a 75% majority of shareholder votes);
- information rights;
- inspection rights;
- remedies for oppression and mismanagement;
- class action proceedings;
- minimum prescribed corporate governance standards;
- majority of minority shareholder approval for all material related-party transactions, in addition to approval by the audit committee (for listed companies); and
- shareholder consent by special resolution for the sale, disposal or lease of more than 20% of the assets of a material subsidiary in a financial year, with some exceptions (for listed companies).
While the Indian regulatory framework does not restrict majority and minority shareholders from mutually agreeing to buyout terms and implementing the buyout, the compulsory squeeze-out of minority shareholders without their consent can be challenging.
That said, a few options are available for a squeeze-out, including:
- a delisting offer (which, as set out above, tends to be based on a minority shareholder determined price); and
- a selective reduction of capital through a National Company Law Tribunal (NCLT) process.
As both processes require confirmation by regulators (SEBI and the NCLT) and consent from shareholders, implementation of a mandatory squeeze-out can be challenging, particularly if minority shareholders raise objections.
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
Under the SEBI Takeover Regulations, two working days before the detailed public statement is published, an acquirer must deposit the following amounts in an escrow account:
- 25% of the first INR 5 billion payable under the MTO; and
- 10% of the balance payable under the MTO.
These amounts are computed assuming full acceptance of the MTO. These amounts must be deposited regardless of the form of the escrow (ie, cash, bank guarantee or freely tradable securities). If the escrow is created by way of a bank guarantee or deposit of securities, at least 1% of the total consideration payable under the MTO (assuming full acceptance) must be in the form of a cash deposit.
6.5 What threshold/level of acceptances is required to delist a company?
The SEBI (Delisting of Equity Shares) Regulations 2009 (‘Delisting Regulations') govern the delisting of listed companies from stock exchanges. Delisting from Indian stock exchanges is by way of a reverse book-building process.
The Delisting Regulations prescribe a floor price and public shareholders are invited to offer their shares in the delisting at a price above the floor price which is determined at their discretion.
The discovered delisting price is the price quoted by the largest block of public shareholders. For the delisting to succeed, the delisting price, if accepted, should result in the acquirer holding 90% of the share capital of the company, when taken together with the pre-existing shares held by the acquirer and participation in the reverse book building from at least 25% of shareholders holding shares in dematerialised form (in certain scenarios). The acquirer is free to increase the delisting price in order to reach the 90% threshold.
If the acquirer accepts the discovered delisting price and meets the thresholds, the delisting offer is successful. The Delisting Regulations also allow the acquirer to make a counter-offer to the public shareholders. The delisting offer, at the accepted counter-price, is successful if the post-offer acquirer shareholding, taken together with the shares accepted through eligible bids at the counter-offer price, reaches 90%.
In terms of the Delisting Regulations, following completion of the delisting, minority shareholders that continue to hold shares in the company have an exit period of one year from the date of delisting to tender their shares to the acquirer (at their option) at the delisting price.
6.6 Is ‘bumpitrage' a common feature in public takeovers in your jurisdiction?
‘Bumpitrage' is not a common feature in public takeovers. That said, there have been instances of funds which are typically associated with bumpitrage acquiring minority positions in Indian listed companies.
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
The MTO price depends on whether the open offer is triggered by a direct or indirect acquisition. In brief, the Takeover Regulations provide for the open offer price to be the highest of:
- the price of the listed company's shares as set out in the acquisition agreement;
- the trading price of the listed company's shares for specified lookback periods;
- the price at which the acquirer and persons acting in concert have purchased the listed company's shares over specified periods; and
- where none of the above applies, the price determined by the acquirer and the merchant banker taking into account prescribed parameters such as book value, comparable trading multiples and other customary valuation parameters.
In case of an indirect acquisition or deemed direct acquisition where certain parameters are met, the acquirer must compute and disclose the per share value of the listed company taken into account for the acquisition, along with a detailed description of the methodology adopted for such computation in the letter of offer. If this per share value is higher than the price identified in the bullets above, this will be the offer price.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
The Takeover Regulations provide for the withdrawal of an MTO only under certain circumstances. One circumstance enumerated is if "any condition stipulated in the agreement for acquisition attracting the obligation to make the open offer is not met for reasons outside the reasonable control of the acquirer, and such agreement is rescinded, subject to such conditions having been specifically disclosed in the detailed public statement and the letter of offer".
While it is possible to terminate/rescind the underlying transaction based on the contractual agreement between the parties, SEBI is reluctant to permit withdrawals of MTOs. It will ordinarily permit withdrawal of the MTO only if statutory/regulatory approvals are not received. Therefore, there are no significant precedents where SEBI has permitted withdrawal of an MTO because of contractual material adverse clause-related conditions.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
In terms of the Takeover Regulations, an MTO is made to all shareholders of the listed company, other than the acquirer, persons acting in concert with it and the parties to any underlying agreement, including persons deemed to be acting in concert with such parties, for the sale of shares of the listed company. Public shareholders choose to participate in an MTO and are not compelled to participate. Shareholder irrevocable undertakings to accept the MTO is not customary.
7 Hostile bids
7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?
Hostile bids are permitted in India and the Securities and Exchange Board of India Takeover Regulations cover such competitive bids. A hostile bid will usually be implemented by an acquirer:
- making a voluntary mandatory takeover offer (MTO) to public shareholders after it has accumulated a large block of shareholding in the target; or
- undertaking a competitive bid to an MTO triggered by another acquirer.
The Takeover Regulations allow competing offers to be launched during a subsisting MTO process. A competing offer can be made by any person other than the original acquirer and must be for a minimum number of shares equal to the sum of the shares held by the original acquirer and the number of shares to be purchased by the original acquirer under the triggering transaction and the original offer. No restrictions apply to the number of competing offers, provided that all of the offers are made within the timeframe prescribed. Competing offers are subject to the same schedule of activities and tendering period as the original offer; and during the pendency of competing offers, no new directors may be inducted to the board of the target. The original acquirer and the competing offeror may revise the terms of their offers as long as the revisions are favourable to the target's shareholders.
7.2 Must hostile bids be publicised?
Yes, under the Takeover Regulations, hostile bids must be published and follow the general disclosure requirements and timeline of a regular MTO. If the hostile bid is pursuant to an ongoing MTO, the announcement of the same is required to be made within 15 working days of the date of the detailed public statement made by the acquirer which has made the first public announcement.
7.3 What defences are available to a target board against a hostile bid?
There are no statutorily prescribed defences against a hostile bid. The most effective defence against a hostile takeover in an Indian company is substantial promoter shareholding. Indian companies have considered various strategies to avert a hostile bid, including:
- the white knight strategy (ie, where the target seeks out a friendly investor to take over the controlling stake in order to prevent a hostile takeover from the hostile bidder);
- trusts that guarantee lifetime chairmanship provisions and long-term rights of the promoters to nominate a certain percentage of the board of directors; and
- the incorporation of a contractual term that prevents a hostile bidder which succeeds in taking control of the target from using its brand name or expanding its shareholder base.
8 Trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
The COVID-19 pandemic has cast uncertainty on the M&A landscape in India. Barring a few big-ticket investments in the telecoms and technology sectors, the first half of 2020 witnessed a slowdown in investor activity, as the focus was on cash conservation. According to a PwC report titled Deals in India: Annual Review and Outlook for 2020, at an aggregate level, deal values amounted to little over $80 billion across around 1,268 transactions – a 7% increase in terms of value as compared to 2019. Of that total deal value, 25% was attributable to inbound investments in Jio Platforms.
As businesses tried to remain afloat in 2020, this created a number of consolidation and expansion opportunities. For instance, Reliance Retail Ventures agreed to acquire the retail, wholesale, logistics and warehousing business of Future Group for $3.3 billion. Given that the pandemic has adversely affected a plethora of businesses, the current market is ripe for the acquisition of stressed assets at attractive values. Thus, the distressed M&A sector could see increased activity from strategic players and funds trying to make the best out of this distressed situation.
The biggest Indian M&A deals of 2020 included:
- Jio Platforms Ltd-Facebook Inc ($5.7 billion);
- Jio Platforms Ltd-Google LLC ($4.5 billion);
- Future Enterprises Ltd (retail, wholesale, logistics)-Reliance Retail Ventures ($ 3.3. billion);
- Lummus Technology-Haldia Petrochemicals Ltd and Rhone Capital LLC ($2.7 billion); and
- GMR Airports Ltd-Groupe ADP ($1.5 billion).
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
The Indian government liberalised the foreign direct investment (FDI) regime through the Budget 2021 and increased the FDI limits from 49% to 74% of paid-up equity capital in the insurance sector.
On 22 April 2020 the Indian government notified an amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Pursuant to the amendment, prior government approval is now required for:
- investments in an Indian company by an entity of a country which shares a land border with India, or where the beneficial owner of an investment into India is situated in any such country or is a citizen of any such country; and
- the direct or indirect transfer of ownership of any existing or future foreign direct investment in an entity in India, resulting in the beneficial ownership falling within the restriction above.
The countries which share a land border with India are Afghanistan, Bhutan, Bangladesh, China (including Hong Kong), Myanmar, Nepal and Pakistan. The amendment does not specify a minimum threshold for investment restrictions to apply; given this ambiguity, any investment from such a jurisdiction may constitute ‘beneficial ownership' and accordingly trigger the requirement to obtain prior government approval. However, the prevalent market practice is to obtain approval only if the beneficial ownership is in excess of 25%.
9 Tips and traps
9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?
The closing of M&A transactions, like all other transactions, has its own vagaries. The most important aspect of closing an M&A transaction is to be organised. The first step in organising the closing process is to put together a closing checklist, which allocates responsibility to various parties and identifies timelines within which actions must be completed. Drafts of closing documents should be pre-agreed in advance of closing and signatures and similar should be obtained in advance. Timely calls and meetings with all parties are an absolute must to get to closing in an organised fashion. Matter such as the timing of fund remittance, foreign exchange conversions, bank account details and signatory availability should be considered well in advance of closing.
Co-Authored by Aditya Prasad, Principal Associate and Simran Jain, Associate.
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