Indian M&A activity during 2019 surpassed $67
billion in aggregate deal value. This meant that 2019 was
India's second-best year for deal activity despite a 34.4%
slowdown in deal value from 2018. Deal activity in 2019 was
driven by platform deals, portion buyout deals, distressed
asset acquisition opportunities and the continued
attractiveness of the technology sector.
Despite a decrease in deal value, inbound M&A activity
remained strong with $37.9 billion in aggregate deal value. On
the other hand, outbound M&A activity fell sharply to $1.9
billion. Private equity (PE) buyouts surpassed their 2018
levels and reached $19.6 billion in deal value, while PE exits
fell to $7.9 billion. Domestic M&A activity halved in value
from $56.4 billion in 2018 to $29.1 billion in 2019.
Historically, private M&A deals have led the Indian
market. In recent years, however, public M&A has
accelerated, and public market exits in 2019 were up
approximately 45% from 2018.
Consolidation across sectors has been a key feature of
M&A activity in 2019. India's rapidly evolving distressed
asset regime has also contributed significantly to
consolidation opportunities. Another key trend was a preference
for platform transactions, especially in the infrastructure
sector. Infrastructure investment trusts (InvIT) were the
platform of choice in two of the largest M&A deals of 2019.
Real estate investment trusts (REIT) matured as an investment
platform, with the listing of India's first REIT. More REITs
are expected in 2020. Control transactions and buy-outs are
gaining more popularity, with better governance, consolidation,
enhancing value and deleveraging being the key drivers.
PE influence on M&A activities has been on the rise,
driven primarily by deals in technology, financial services,
energy, and infrastructure sectors. 2019 was partial to PE
buyout deals with fewer PE exits being registered. Sovereign
welfare funds and pension funds have shown continued interest
in renewables and infrastructure in addition to late stage
start-ups, e-commerce, pharmaceuticals and logistics.
Among the notable transactions, Arcelor Mittal together with
Nippon Steel Corporation acquired Essar Steel India under the
insolvency resolution process for $6 billion, making it the
largest deal by value for 2019. This highlights the positive
impact of India's revamped insolvency regime on investor
confidence on distressed assets. A consortium led by Brookfield
Infrastructure Partners invested $3.7 billion to acquire the
telecom tower assets of Reliance Jio through Reliance Tower
Infrastructure Trust, an InvIT. With the increased appetite for
platform transactions, this deal is a significant milestone
towards establishing InvITs as a viable platform structure.
LEGISLATION AND POLICY CHANGES
The key legislation and regulations governing Indian M&A
- Companies Act, 2013: Administered by the
Ministry of Corporate Affairs (MCA), the Companies Act is the
primary legislation governing companies and mergers.
- Securities Regulations: The securities
markets are regulated by the Securities and Exchange Board of
India (SEBI). The SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (Takeover Code) governs
substantial stake acquisitions in publicly listed companies.
The SEBI (Delisting of Equity Shares) Regulations, 2009
governs take-private transactions.
- Foreign Exchange Management
Act, 1999 (FEMA): Administered by the Reserve Bank of India
(RBI) and the Government of India, FEMA, the rules issued by
the Government of India thereunder as well as the associated
RBI regulations regulate capital inflows and outflows.
- Competition Act, 2002: The Competition
Commission of India (CCI), the regulator established under
the Competition Act, accords anti-trust approvals.
- Income Tax Act, 1961:
Administered by the Income Tax Department, the Income Tax Act
along with double tax avoidance treaties entered into by the
Indian government govern the tax treatment of M&A
- Insolvency and Bankruptcy
Code, 2016 (IBC): Administered by the National Company Law
Tribunals, the IBC regulates auction sales under a corporate
insolvency resolution process.
Recent legislative changes include a reduction in corporate
tax rates. The standard corporate tax rate in India is 30%,
however, tax laws now permit companies to opt for a lower
corporate tax rate of 22% subject to certain conditions.
Separately, a concessional rate of 25% has been extended to
companies with a turnover of up to INR4 billion (~$56 million)
(as compared to the earlier ceiling of INR2.5 billion).
Further, a preferential tax rate of 15% has been introduced for
new domestic manufacturing companies (set up and registered on
or after October 1 2019 and commencing manufacturing on or
before March 31 2023).
The government has removed foreign investment caps in
insurance intermediaries. The existing cap of 49% on foreign
ownership of insurance intermediaries (such as insurance
brokers) has been done away with.
Approval from CCI is required for Indian M&A deals above
certain thresholds. A 2019 amendment has introduced a 'green
channel' merger control route which affords deemed approval for
certain transactions having a low impact on competition.
Going forward, there are a few other recent legislative and
regulatory changes that may impact M&A activity. One is the
imposition of stamp duty on transfer and issuance of
dematerialised shares – such transfers and issuances
were previously exempt from stamp duties. This change will
impact transaction costs for M&A deals (particularly public
M&A). Another is the introduction of the Personal Data
Protection Bill, 2019 (PDP Bill). When passed, the PDP Bill
will regulate the collection, disclosure, sharing and
processing of personal data in India and the processing of
personal data outside India with respect to goods/services
offered to individuals located in India. The PDP Bill is
expected to have a significant impact on fintech, e-commerce,
financial services, and healthcare sectors. A third development
is the inclusion of private unlisted InvITs under SEBI's
existing InvIT regime. Private unlisted InvITs enjoy
significant business flexibility and are subject to
significantly lower regulatory compliance as compared to listed
InvITs. Private unlisted InvITs are expected to feature
prominently in Indian deals going forward.
Some common mistakes made by foreign investors dealing with
the Indian M&A market are: (i) the failure to undertake
detailed due diligence, especially in highly regulated sectors;
(ii) inadequate mapping of expectations (commercial or legal)
in transaction documents, specifically with respect to
governance structures; (iii) significant shareholders being
categorised as 'promoters' under Indian securities laws, which
leads to onerous compliance and liability exposure; (iv)
disengaging advisors at the end of the negotiation stage,
rather than the last mile, which could expose investors to
closing and post-closing compliance complications; and (v)
excluding recourse to the Indian courts for interim relief in
case of dispute resolution through foreign arbitration.
With constant risk of overnight insolvencies, pending and
potential material litigations, as well as corporate fraud
– a detailed due diligence exercise and an assessment
of corporate governance standards in acquisition targets
(particularly deals involving legacy related party
transactions) becomes indispensable.
Legal, regulatory and tax advice should be sought at the
outset to identify regulatory hurdles and approval processes
before transaction terms are crystallized, specifically the
impact of anti-trust and exchange control regimes. Information
exchanged should be within the bounds of anti-trust law
especially when the deal is negotiated between competitors.
Handling of unpublished price sensitive information in case of
publicly listed targets is also a major pain point.
In PE control transactions, taking warranties on holding
cost/period of acquisition of sale shares (supporting tax
deduction claims), adoption of new accounting standards,
insolvency risk in group companies, and sectoral compliance is
imperative. Representation and warranty insurance is also more
frequent in M&A deals. For cross-border M&A, exchange
control regime limits (on floor price and deferred payments,
and recourse to escrows/indemnities) are vital
In the future, data analytics and document automation tools
coupled with artificial intelligence are expected slash
timelines for completing due diligence. Digital technology
could also be a game changer for post-merger integrations
(workforce, operations, corporate processes, etc.).
Mergers and amalgamations require sanction of the National
Company Law Tribunal.
An acquirer can choose two ways to secure control in a
publicly listed company, by triggering either a voluntary or
mandatory tender offer. Under the Takeover Code, barring
certain exemptions, an agreement for the acquisition of 25% or
more voting rights or control of a publicly listed company
requires the buyer to tender a public offer to further acquire
at least an additional 26% of target shares. Acquirers should
also ensure that minimum public float (prescribed at 25%) is
maintained at all times, unless the target is delisted pursuant
to the transaction. Delisting has proved to be challenging in
India and is consummated through a reverse book-building
process to determine offer price, yielding a significant
premium. If the discovered price is unacceptable, an acquirer
may make a counter-offer which must not be lesser than the book
value (which comes with its own set of challenges).
Customarily, hostile takeovers of publicly listed entities
in India have been scarce. However, 2019 witnessed India's
first hostile takeover in the IT space when Larsen & Toubro
successfully launched a bid to take over Mindtree.
Public takeovers may require mandatory regulatory approvals,
including from sector-specific regulators and anti-trust
approvals. These regulatory approvals may be conditional or may
prescribe additional compliance. While there is limited scope
to attach specific conditions in a public tender offer, the
Takeover Code permits offers to be conditional upon a minimum
level of acceptance (subject to deposit of the offer amount in
an escrow), and acquirers may also make takeovers subject to
receipt of statutory approvals.
Further, if the transaction underlying a takeover offer is
terminated because an essential condition is not met for
reasons outside the acquirer's control, the acquirer is
permitted to withdraw the offer subject to such condition
having been disclosed in the offer documents.
Break fee provisions are at a nascent stage in India.
Payments of break fee and reverse break fee do not have an
origin in the legal framework but can be contracted upon. Lack
of legal backing may impose regulatory hurdles such as a
requirement of prior approvals from the RBI and SEBI.
The completion accounts mechanism is commonly used for price
adjustments in private M&A transactions in India, though an
increase in the use of locked-box pricing mechanisms has been
seen in recent years. Earn-out and escrow structures are also
gaining popularity – however, in case of cross-border
deals, exchange control regulations impose certain limitations
on these structures.
Warranty and indemnity insurance is not very common in India
and both enforcement timelines and premiums on insurance
coverage are substantially higher than in matured markets.
However, due to an increase in cross-border transactions,
difficulties in estimating litigation durations, and buyers
seeking seller credit-risk mitigation, the market for such
insurance products is growing rapidly.
There is no practice of private takeover offers in India, as
private companies are required to impose restrictions on the
transfer of shares. Transactions involving the exercise of
contractual rights, such as tag-along and drag-along rights by
the selling majority investor or the sale of pledged shares by
lenders, are notable exceptions. The MCA has recently (February
2020) notified rules for operationalizing National Company Law
Tribunal driven private takeovers. The rules enable
shareholders having a 75% or more stake in a company to buyout
the minority subject to certain conditions, including
compliance with specified pricing norms.
Indian law usually governs private M&A transactions
– however, cross-border transaction documents for
dispute resolution generally provide for foreign-seated
arbitration (in Singapore, New York or London).
Despite global headwinds and weak
macroeconomic indicators, M&A activity in India is expected
to show resilience this year due to recent business-friendly
reforms such as attractive tax policies, the removal of certain
sectoral caps on foreign investment and other proposed
regulatory reforms. Continued divestment of state-owned assets,
growing confidence in the insolvency regime, growing appetite
for buyout deals and domestic consolidation are likely to fuel
M&A activity, while new investment vehicles such as InvITs
and REITs are likely to feature more prominently in 2020.
Mumbai and New Delhi, India
T: +91 22 4079 1062, +91 11 4259 9290
Harsh Pais is a partner at Trilegal with a focus on
M&A. Harsh advises extensively on cross-border
acquisitions (involving public and private targets) and
joint-ventures. In addition, he provides strategic
counsel to clients on matters involving change of
control transactions, corporate governance, securities
laws, troubled joint ventures and crisis
Harsh has been ranked as a leading lawyer for
M&A and private equity in India by Chambers and
Partners, IFLR1000 and RSG. He has experience at a
major international law firm in New York and is
additionally qualified in the UK and New York.
T: +91 80 4343 4610
Clarence Anthony is a partner at Trilegal. He
focuses on M&As, JVs and advisory mandates in
highly regulated sectors such as insurance and banking.
Clarence has advised on numerous complex cross-border
transactions, including HIG Capital's acquisition of
Medusind, Aon's exit from its India JV, Macnica's
strategic investment in Crowdanalytix and DEG's
investment in Suryoday Small Finance Bank.
Clarence was previously seconded as head of legal
and compliance at Embassy Office Parks REIT, India's
only real estate investment trust. Clarence is an
alumnus of GLC, Mumbai, a solicitor admitted by the
Bombay Incorporated Law Society and is additionally
qualified in the UK.
Senior associate, Trilegal
City, Country: New Delhi, India
T: +91 11 4163 9393
Varun Agarwal is a senior associate at Trilegal. His
primary focus is public and private mergers and
acquisitions, joint-ventures and private equity
transactions. Varun has advised several funds,
development finance institutions and multinational
corporations such as Ontario Teachers' Pension Plan
Board, DEG, LGT Lightstone Aspada, Kois Invest SA, The
Coca-Cola Co, CFLD International, Wilmar Sugar Holdings
and Franklin Templeton on their India-facing
transactions, operations and regulatory matters.
Varun is an alumnus of NALSAR University of Law,
Hyderabad. He is a member of the Bar Council of
Maharashtra and Goa, India.