IFLR India M&A Forum 2016

14 September 2016, Four Seasons Mumbai

Key Takeaways

Focus: regulatory developments
Dispute settlement has always been a key concern when conducting M&A deals in India, and this has been a major focus of the present government with the passage of the Commercial Law.

Foreign private equity managers have never felt uncomfortable with the depth of management that India has, and that may have restricted the deal flow into private equity.

The biggest hurdle facing foreign investors doing business in India has always been one revolving around the enforcement of contracts. In the first budget this year, the government set the processes for implementing the Commercial Code, but counsel argue that it is a long way before the Code takes full effect.

The arbitration and conciliation amendments, which came into effect earlier this year, is expected to speed up the finalisation of a dispute award to one year and impose obligations on all concerned parties and arbitrators.

Market participants expect the Bankruptcy and Insolvency Code to be enforced by March 2017. As well, they expect the new law to place a resolution similar to the UK in having an administrator take charge of an insolvent company, and oust the promoter manager in control. 

Cross-border M&A: trends, opportunities and practical tips

India has been an M&A bright spot this year in that the first half of 2016 saw an increase in both M&A and private equity (PE) transactions in terms of deal value and volume, with M&A and PE deals combined totaling $21.8 billion.

There remains a huge amount of uncertainty as far as the Indian government’s defense procurement is concerned. Foreign investors seeking to set up a 51% FDI joint venture in the defense manufacturing space, while being possible, still face the dilemma of whether they should wait until there is greater clarity around state defense procurement.
Fifty percent of M&A deals struck in the last two years have been inbound M&A, and an India determined to provide an easier business environment has driven up the valuations of a lot of companies which are up for sale.

In the post-Brexit period, there is a lot of liquidity in the global market which is chasing very few deals in India, but the country is currently a sweet spot with a lot of capital chasing. 

For foreign investors, exiting a joint venture in India remains very difficult under a tight capital-control framework, in that even though they have received an arbitration award over a JV stake sale, the capital control will render taking money offshore impossible.

Navigating the private equity landscape

The market for private equity in India is very strong with stability on a lot of different fronts, especially on the tax front. But the amount of money raised has gone down and this has to do with many investments made being largely unrealised.

Capital invested in India in the 2007-2010 period is still stuck in investments, with people seeing a lot of peer-to-peer PE secondary transactions, which are large-stake deals where the promoter is jointly selling with the private equity investor at times.

Companies struggling with rising distressed debt are being forced by their banks to undergone re-organisation by selling their non-core assets, with every single large Indian conglomerate having undergone a major corporate restructuring in the past year.

Some of the joint ventures formed recently, which involved sovereign funds and large strategic investors in India, have resulted in more intelligent forms of capital going after larger opportunities both on the credit, the infrastructural and the real estate side.   

While a slew of regulatory changes aimed at boosting private equity activity has been introduced in the past year, there remains a lack of clarity over the taxability of indirect transfer tax provisions and the enforceability of auction agreements.

Taking advantage of liberalised FDI rules
While the banking sector, boosted the Indian central bank’s relaxation of restrictions on the establishment of fully-licensed foreign bank branches, is an attractive one, it is private equity money that has been streaming into the said sector.

Amendments made in recent months to the SARFAESI Act 2002 has made a lot of stringent security enforcement powers available to non-banking financial companies. Such a development has raised the question, outside of debt aggregation, of what the unique selling points are now for asset reconstruction companies any longer. 
The value of an ARC’s license has been diluted following the slew of regulatory reforms in recent months, with ARCs now having only two major powers: the first right of refusal when it comes to aggregating debt from multiple banks and to write a participatory note, or security receipts, to buy into the underlying loan.

Foreign investment regulations are now no longer about whether it is the automatic or the approval regime. Because the conditionalities have become very complex in that you can have a sector on the 100% automatic route but, due to special reasons, it could become subject to approval by the Foreign Investment Promotion Board.

Which much of the public focus has been on the build-up of investment assets onshore, very little attention has been given to the three-year lock-in on those assets. Questions need to be asked about whether the lock-in will prevent the raising of capital against the assets.

Tax issues to consider when structuring your M&A and PE transactions

One of the outstanding issues facing foreign and domestic investors when structuring an M&A deal in India is lack of clarity over the computation of the tax liability in cases where there is an Indian Rupee (INR) gain.

For foreign residents, short-term capital gains are subject to tax on a foreign exchange (forex) basis, while long-term gains on the transfer of unlisted securities and shares of a company are required to be computed in INR.
One of the key issues that has been bothering foreign investors the most is the amount of uncertainty in tax that affects transaction costs, and there is a need for clearer rules to be introduced to address that.

India has long had a dispute resolution regime in place, but there remains issues surrounding foreign taxation and the regime doesn’t cover some of these issues.

Technology: the growth of e-commerce and start-ups
There is growing activity in the Indian e-commerce space with tech companies setting up logistics networks with an eye to potentially spin them off for capital-raising.

The fundamentals in India are very solid in that the number of web-users in the country reached a total of 317 million by the end of 2015, up 49% from the year before. Sales in the e-commerce space stood at $16 billion last year and the figure is expected to have reached $120 billion by 2021.  

While e-commerce in India has been tremendously well-funded in recent years, differentiation has yet to be established in that e-commerce platforms have failed to work on differentiating their products and services from their competitors’.

On the tech side, the ownership of intellectual property and data security are two key areas that foreign investors need to pay close attention to when conducting due diligence on an investment undertaking in India.

Best practices in joint ventures
Parties should be fully clear about what kind of shareholdings they want to have in a joint venture (JV). JV parties sometimes don’t give this a thought and sign the term sheets without take their expected shareholdings and rights into consideration.

India’s amendment of the Mauritius Treaty, which now exempts Mauritius residents from a capital gains tax on transfer of Indian securities, has resulted in a lot of investment being moved to Singapore, which has a piggyback provision on the Mauritius Treaty. 

In a joint venture, the whole governance set-up and the level of transparency around it, as well as the transfer of pricing are important, and the failure of parties involved to conduct full disclosure could significantly disrupt the process of the undertaking. 

Technology-led or regional expansion-driven partnerships are the two broad areas that have brought joint ventures together in India in recent years.

Exiting a joint venture in India is generally painful because, even though both parties are Indian, liquidating a company often takes three to four years to complete. 











Supporting Organisations






Media Partners

The magazine

Winter 2019/2020

ESG survey: Fifty shades of green

Environmental, social and governance concerns are no longer an afterthought – but opinions and standards still vary

International briefings

Quick Poll

Is consolidation a good thing for the EU financial sector?

Women in Business Law Group

IFLR's Wibl networking group provides a platform for inclusive debate around fostering female talent in the profession.

Visit its LinkedIn page to find out more, and IFLR's awards page for details on the annual ceremonies.