At the recent COP26 summit in Glasgow, India made the twin commitment of reaching net-zero emissions by 2070, and to procure 50% of its energy requirements from clean and renewable energy sources within this decade.
These are remarkable commitments from a country which is home to 1.4 billion people and is the 3rd largest emitter of green-house gases. Further, given that India is yet to emit the majority of its emissions (as millions will continue to move out of poverty in the coming decades and increase their electricity consumption), it has been considered by many as being over ambitious.
However, these commitments are a practical necessity given the increasingly frequent and intense climate-change events being witnessed in India. Moreover, the Government of India (“GoI”) has signaled its political will to meet these commitments by rolling out various policies and schemes to this end.
In this note, we consider the opportunities this announcement opens up for renewable energy (“RE”) players and provide an overview of the legal and regulatory framework that companies will have to navigate to enter the Indian RE market.
GoI's plan and incentives
Currently, India's energy mix comprises predominantly of coal, oil and gas, which account for more than 2/3rd of its energy supply. To source 50% of its energy requirements from RE sources by 2030, India will need to increase RE generation capacity to 500 gigawatts (GW) from the current 150 GW (which has increased by 50 GW in the last three months alone). The Indian Central Electricity Authority has issued a report which indicates that the incremental RE will be sourced primarily from solar and wind energy.
To support this plan, the GoI has announced several schemes and incentives aimed at the RE sector, including by providing low-cost credit, production linked incentives and import duty exemptions to solar power companies; setting up a single window clearance mechanism for issuing all requisite licenses; imposing RE purchase obligations on state electricity commissions; and implementing central auctions for the development of “ultra-mega solar parks”. The government has also initiated the development of dedicated RE transmission and distribution networks (‘Green Corridors') within the country and, along with the UK, proposed setting up a global ‘Green Grid' for efficient use and deployment of RE generation sources.
Notwithstanding these incentives, India also presents a compelling business case based on its demand and supply dynamics. It has a robust demand profile, with electricity consumption projected to double from 2020 to 2040, and given its location in the solar belt, India is favourably placed to enjoy an abundant supply of solar energy. India also has significant (and untapped) wind and tidal RE.
These factors combine to present a great opportunity for companies to set up and expand their RE operations in India. This is not lost on two of India's largest conglomerates, Reliance Industries and Adani Group, and both have committed significant capital to develop and enhance their RE generation capacity in the coming decade. ReNew Power, India's leading RE producer, has recently completed a NASDAQ listing to raise around US $1 billion.
The business case for foreign players is equally compelling, as is represented by increasing inflow of foreign direct investment (“FDI”) in the RE sector. RE has attracted ~2% of the total FDI since April 2000, and more than 50% of this FDI has been received in the past five (5) years. The GoI has permitted 100% FDI in this sector under the ‘automatic' route (i.e., no prior Government approvals are required). Further, dividends are freely repatriable. This has led to India being ranked third on the attractiveness of its renewable energy investment and deployment opportunities by Ernst & Young (up from 7th last year).
To participate in India's RE journey, several foreign RE and energy companies, including Total Energies, Areva Solar, ENEL, and Ostro have recently made investments in, partnered with, or acquired, Indian companies active in the RE sector. In this section, we provide a brief overview of the legal and regulatory requirements for undertaking an inbound M&A transaction in India.
As a general note, the applicable legal provisions will depend on the nature of transaction contemplated (i.e., whether a merger or an acquisition), and whether the target entity is public listed company and/or has any foreign shareholding.
- Corporate Law
The Indian Companies Act 2013 (Companies Act) is the primary legislation that governs companies in India, including in respect of issue and transfer of shares of a company, and the process for ‘merger' of such companies.
If the transaction contemplated is an acquisition of share, it may be carried out by a transfer of existing shares of the target company or by subscribing to newly issued shares of the target company. It could also be structured as an asset/business purchase. In each case, the necessary corporate approvals, as specified under the Companies Act would need to be obtained.
Where the transaction constitutes a ‘merger', the merging companies are required to prepare a detailed scheme of merger, which needs to be separately approved by the shareholders and the creditors of the companies (by a 75% majority each), and finally sanctioned by the National Company Law Tribunal (“NCLT”). The NCLT approval process requires notices to be sent to various government authorities and sectoral regulators (as applicable) in order to receive their objections, if any. The timeline for completion of a merger is generally longer than that for an acquisition.
- Securities Law
If the companies (particularly the target) involved in the M&A transaction include a public listed company, additional compliances are triggered under the Securities and Exchange Board of India's (“SEBI”) legal and regulatory framework, most notably the SEBI Takeover Code.
If the ‘acquirer' acquires shares, voting rights, or control in a listed ‘target' company in India (either directly or indirectly, and including acquisitions undertaken jointly with ‘persons acting in concert') which exceed the thresholds specified in the Takeover Code (i.e., initial acquisitions of more than 25% of the target's shares, or additional acquisitions of 5% shares in a year thereafter), the acquirer is required to make a mandatory open offer (“MTO”) for acquiring at least 26% of the total shares of the target company from the public shareholders – the timing, pricing and procedures for undertaking the MTO are closely regulated in the Takeover Code. The Takeover Code also contains exceptions to the MTO requirement, including where the acquisition is made pursuant to an NCLT approved merger scheme or an insolvency resolution plan (see, Section C.5 below). In addition, the Takeover Code allows the acquirer to make a ‘voluntary' open offer, provided that the ‘public float' is not reduced below 25%.
If the target company is proposed to be ‘taken-private', the acquirer may delist the company in accordance with the SEBI Delisting Regulations, provided that the acquirer declares this intention at the time of making the open offer.
Where the transaction involves a subscription of newly issued shares of a listed company, the SEBI's ICDR Regulations would be applicable, which, in addition to regulating the price, timing and mechanisms for such ‘preferential allotment', provide for a lock-in period of one (1) year for the shares issued (in case the acquirer is the promoter of the target company, or part of the promoter-group, the lock-in period is three (3) years).
Finally, compliance with SEBI regulations prohibiting ‘insider trading' should also be carefully considered and ensured, including while conducting due diligence on the target.
- Foreign Exchange regulations
The Reserve Bank of India's (“RBI”) Foreign Exchange Regulations are applicable where one or more parties to the M&A transaction is a non-resident and these regulate the price at which securities of an Indian company may be issued to a non-resident and/or transferred from a resident to a non-resident. However, the pricing guidelines do not apply to a sale of shares between two non-residents.
As noted above, FDI in the renewable energy sector is permitted up to 100% without requiring prior government approval. However, any FDI from entities incorporated in a “country which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country” (i.e., Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan) will require prior government approval (this restriction also applies to transfer of shareholding to investors from such restricted countries).
In case the acquirer is an Indian company which is foreign owned and controlled (based on the level of foreign investment), any further investment by such acquirer into an Indian target would be considered as ‘indirect FDI', and would need to be undertaken in compliance with RBI's Downstream Investment Regulations.
- Competition law
Under the Competition Act, 2002 (Competition Act), M&A transactions the parties to which satisfy certain specified asset or turnover thresholds (i.e., “combinations”) require the prior approval of the Competition Commission of India (“CCI”). It is the acquirer's responsibility to notify the ‘combination' to the CCI (except in case of a merger, where both parties are required to notify jointly). Failure to notify a transaction before completion, or integrating the businesses prior to receipt of CCI approval, could result in a ‘gun-jumping' penalty being levied on the parties.
The Competition Act provides certain exceptions, including in respect of ‘small targets' and ‘competition-neutral transactions' (e.g., non-strategic or minority acquisitions). In addition, for transactions where there are no overlaps between the parties to combinations (including their group companies), the notification may be filed under the ‘Green Channel' and would be deemed to be approved by the CCI upon filing.
For all other ‘combinations', the CCI will examine the transaction to consider if it is likely to cause an ‘appreciable adverse effect on competition' (“AAEC”), and if not, it will approve the combination. If the CCI considers that the combination may cause an AAEC, it may require modifications to be made to, or reject the, combination – no combination has been rejected by the CCI to date.
- Acquisition under corporate insolvency resolution process
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted to provide a framework for a time-bound resolution of corporate bankruptcy and creates an opportunity to acquire stressed companies at a lower valuation than in ordinary circumstances.
For an acquirer (resolution applicant), the IBC acquisition process commences by submitting a resolution plan in respect of the target (corporate debtor). If the plan is found to satisfy the specified criteria, it is considered and voted upon by the committee of creditors of the corporate debtor (the owners/management of the target are not involved in this process). Once approved by the committee of creditors, the resolution plan is filed for filed approval before the NCLT.
An acquisition under the IBC is exempt from the provisions of the Takeover Code, the ICDR Regulations, and the Companies Act (seeking shareholders' approval). However, if the IBC acquisition constitutes a ‘combination' under the Competition Act (see Section C.4 above), it is mandatory for the acquirer to obtain the CCI's approval prior to submitting the plan for consideration by the committee of creditors
As noted above, M&A in India is governed by a settled legal and regulatory framework, and investor confidence in this jurisdiction is reflected in the M&A deal data for Q3 2021, which reflects a 66.4% year-on-year growth and reached $48.6 billion, an all-time high. Moreover, the speed and extent of India's recovery from the COVID induced economic slow-down is indicative of the economic resilience of this market, and is evidenced by the Indian Rupee, which has been one of the least volatile currencies since the pandemic.
In light of the economic resilience, stable legal framework, and strong political will, it is expected that the RE sector in India will witness significant growth over the coming years and meet (if not surpass) the clean energy goals announced at the COP26 summit.
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