Kotak Investment Banking’s Sourav
Mallik talks deal-making in the year ahead
The continuing emergence of Asia as a global player was a
consistent theme in M&A throughout 2015. Booming values and
volumes coincided with major legal developments across the
continent, as governments and regulators look to tackle
corruption and boost transparency. Joint managing director and
head of M&A at Kotak Investment Banking Sourav Mallik
discusses India’s contribution to the boom, and
provides invaluable advice to dealmakers eying up the rising
star of the emerging markets.
Asia overtook Europe in M&A activity this year
despite some economic uncertainty, with China contributing
nearly 50%. What, in your opinion, has been driving that
Acquisitions have risen, primarily because the companies -
especially Chinese companies - are being driven by their
shareholders to produce growth.
Companies are also taking advantage of low interest rates
across the globe to finance their acquisitions, through bridge
loans, term loans and bonds, for example. Given low prices in
both crude and commodities, large corporates with large war
chests are striving to consolidate their market positions.
What are buyers in your region most looking for in
a seller right now?
We are seeing many wanting to gain access to the Indian
domestic market to establish better geographical synergies, and
this applies to both products and cost, too.
When establishing the individual seller, buyers are
definitely looking for high standards of corporate governance
Merger control is bigger and more global than ever
before. How do you navigate the web of regimes around the
Early analysis of possible areas of conflict during the
early stages of a deal is essential. Buyers and sellers should
build a rationale as to why a transaction should be approved by
merger control regulators, and establish potential divestments
at this early stage, too.
What issues should foreign buyers be aware of when
structuring M&A deals in your region?
It’s important that foreign buyers identify the
right strategy for entering India, be it through a greenfield
investment or acquisition, or joint venture (JV). Greenfields
are not an easy route for a multinational wanting to make
inroads in India.
It is generally more suitable to enter by way of an
acquisition - supported by a professional Indian management
team, of course, or through a JV, though this comes with
significant handholding by Indian promoters.
The buyers’ understanding of the social
environment in India is also important, and there should be a
good effort to familiarise oneself with it. Decision-making in
many family-owned established businesses is often influenced by
succession issues and family arrangements, so this must be
taken into account.
Stature considerations - such as deferred exits to promoters
and titles - are also an issue. At times, providing titular
positions to promoters may mitigate social concerns and
facilitate a smoother transition.
There are sector-specific laws and regulations that
influence everything from media and telecoms to insurance and
finance, as well as environmental requirements to be adhered
to. A grasp on the attitude and role of the relevant competent
authority is key here. An imperative to demonstrate willingness
to explore, and operate under, new structures to meet local
legal requirements is a good approach to take in some of the
more tightly regulated markets.
Competition laws and takeover regulations can also impact
the structure and timing of a deal. Takeover regulations can be
an obstacle to the existing partnership strategy, for example,
shareholders’ arrangements require detailed
consolidation, which is highly relevant for minimum
Getting the transaction structure right depends on the
commercial objectives of the acquirer and various other
financial, tax, legal and regulatory considerations. Buyers
should also establish if they want to proceed with an asset or
business purchase, or a share purchase.
What are the key regulatory developments of recent
times that most affect M&A activity?
One of the most significant changes has come from many
sectors - including insurance, defence, banking and financial
services, construction, single-brand retail, broadcasting and
civil aviation - being opened to foreign direct investment.
There have also been changes to tender offer regulations,
including amendments to the exchange settlement mechanism.
There have been plenty of developments in the merger control
space. Ranbaxy and Lafarge have tested the system in recent
times, and anti-circumvention provisions (Regulation 9(5)) have
had a significant impact. Non-complete clauses being
restricted, and gun jumping between signing and closing, as
seen in the Thomas Cook deal, have also changed the face of
The Securities and Exchange Board of India (Sebi) and the
Reserve Bank of India (RBI) have been very efficient in
circulating news, particularly surrounding developments in the
put and call option space. Past performance has been given
weight over future prospects when it comes to return on equity
Sebi’s insider trading regulations, released in
2015, clarified important definitions. These included: an
insider, to be determined by the scope of frequent
communication; unpublished price sensitive information (UPSI),
to be assessed as what is generally available; and trading -
though we are unsure as to whether the creation and invocation
of a pledge is included in this. We are also unsure of its
position on two-step board processes, timelines and the
The Companies Act, 2013, introduced a special resolution
provision for unrelated shareholders to enter into certain
transactions with related shareholders, as well as carve-outs,
be it on an arm’s length or ordinary course of
business basis. Audit committee approval and justification for
this in the board’s report is also now needed, and
minority exits were granted. We are unsure of the impact
minority exits may have on minimum public shareholding
requirements, as well as the additional burden this could place
Sebi has been very busy; it also made significant amendments
to its listing agreements. On related party transactions, these
take a broader scope than the Companies Act - for example there
are no carve-outs, audit committee approval is required for all
related party transactions, and special resolution with the
related party is not permitted. It also requires the majority
of minority approval for related party transactions.
The general anti-avoidance rule (GAAR) aimed at reducing tax
avoidance has also had a significant impact. In the future, the
incoming goods and services tax will also be an issue.
What impact do you see rising interest rates having
on activity in 2016?
In 2006, 2007 and 2008, several Indian companies went
shopping for acquisitions, within India and abroad. They
completed capital projects and made significant investment
decisions, but took on debt and leverage, and currently have
high levels of foreign debt on their balance sheets.
Their markets, both home and overseas, did not perform well.
Europe went downhill and Indian domestic business also suffered
slightly. They were stuck with debt, with borrowings on the
balance sheet and little in the way of revenues, so now they
have too much leveraged debt on their balance sheets.
Hence they will have to either raise equity or sell
something to raise money fast. In 2016, we think these
companies will try to raise equity and identify companies from
their subsidiaries to sell off to raise capital.
What would you say are the critical success factors
in a successful transaction?
Key critical success factors for investing or undertaking a
transaction in India include choosing the right partner, as
well as getting the transaction structure right. This depends
on the commercial objectives of the acquirer, of course, as
well as relevant financial, tax, legal and regulatory issues.
Also consider the extent of the stake to be acquired and the
method of payment, be it cash or stock.
Tax issues in particular must be understood. The choice of
acquisition vehicle - be it a local holding company, foreign
parent company or intermediate holding company in a
tax-favoured jurisdiction to minimise double taxation. Stamp
duty may also need specific evaluation during transactions.
The nature of the transaction structure may necessitate
multiple ancillary legal agreements, so ensure that these
reflect one’s commercial understanding. Always
endeavour to provide for possible scenarios in the foreseeable
future. The style of negotiation could end up being the
difference between winning a bid or coming out as a
Joint managing director and head of M&A,
Kotak Investment Banking
T: +91 22 433 601 05
Sourav Mallik is joint managing director and head
of the M&A advisory practice at Kotak Investment
Banking. He joined the Kotak Mahindra Group in 1999.
During his career as an investment banker, he has advised
a wide range of clients on their growth strategies,
M&A and restructuring plans. This includes Lafarge,
CRH, CIE Automotive, Hitachi, Toshiba and Kokuyo on their
India entry and acquisition strategies; Owens-Illinois on
restructuring of their India business; Abbott
Laboratories on their India growth and consolidation
strategy; Godrej Consumer, United Breweries, Mastek,
Mahindra Systech and GE Shipping on restructuring and
many more. Mallik’s outbound M&A
expertise has been built by liaising with international
investment banks across Japan, Europe, the UK and the
He is a specialist in M&A advisory, deal
structuring, restructuring, valuations, joint ventures
and India entry services. He is also very familiar with
the regulatory framework for M&A (including
cross-border M&A). Mallik was a member of the
Sebi’s Takeover Regulations Advisory
Committee, which recommended a new set of takeover
regulations for Indian listed companies in 2010.