Dipankar Bandyopadhyay and Priyanka Devgan of Verus assess the M&A regulatory framework in India
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
In 2015, the Indian M&A market registered a slower performance compared to 2014. This was due to various factors, including a volatile rupee. Deal-making in the information technology, energy, mining and utilities sectors was comparatively higher. M&A activity was primarily driven by cross-border inbound transactions, with investors from Japan and the US taking the lead.
A number of deals displayed so-called earn-out structures. The competition regulator showed an unprecedented level of activity as it received notifications in respect of a number of transactions. The securities market regulator introduced significant regulatory changes aimed at making going- private transactions easier. The government also worked hard to dissipate concerns around retrospective taxation. Overall the M&A market was consistent with the slow and steady growth of India in 2015.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
2016 promises to be a more robust year for M&A, supported by an active domestic market. The government's push to develop India as a global manufacturing hub, the impending introduction of a new bankruptcy regime and a more liberal foreign direct investment (FDI) policy are expected to boost M&A deal making in 2016.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
The Securities and Exchange Board of India (Sebi) regulates M&A in listed securities in India;
generally, the Ministry of Corporate Affairs (MCA) regulates all companies through the Companies Act 2013. However, significant corporate actions related to M&A are still governed by Companies Act, 1956;
the Reserve Bank of India (RBI) regulates cross-border M&A through the Foreign Exchange Management Act 1999 (FEMA), the Foreign Investment Promotion Board (FIPB) and the Department of Industrial Policy and Promotion (DIPP);
the antitrust regulator, the Competition Commission of India (CCI), depending on the nature, size and effect of M&A transactions, has the authority to regulate public M&A transactions in India;
the Income Tax Department regulates any transaction involving public M&A through the Income Tax Act, 1961 (ITA) or the operation of Double Tax Avoidance Agreements (DTAA) with foreign countries.
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Sebi enforces compliance with the takeover regulations through tender offer and disclosure requirements prescribed under the Sebi (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations).
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
Friendly acquisitions are usually structured either as share purchase transactions or through court driven amalgamations. In certain cases, acquisitions can also be structured through a court process under the Sick Industrial Companies Act 1985 or through an asset transfer process.
Indian public companies usually have substantial promoter shareholding making it difficult to stage hostile takeovers. Only a shareholder holding 25% or more shares or voting rights of the target company can make a voluntary offer. However, if a primary tender offer (including a voluntary offer) is made, any person could make competing bids. In other words, a hostile offer can only be structured through a competing offer mandated under the Takeover Code by an existing shareholder.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
The structure depends primarily on the following factors: (i) the activities of the target and foreign investment restrictions governing the sector; (ii) requirements to obtain licenses, if any; (iii) consent of the lenders; (iv) the CCI's approval; (v) the preservation of tax benefits; and (vi) requirements to launch a mandatory offer.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Typically, a bidder could complete the tender offer process in 8-12 weeks. However, the timeline to complete an acquisition depends on regulatory approvals, including the approval of the CCI.
A competing bid could be made within 15 days of the date of the detailed public statement made by the acquirer who has made the first tender offer, unless such offer is conditional as to the minimum level of acceptances.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
There is no restriction on the price that can be offered to a seller by an acquirer, except when the acquirer is non-resident. In this case, the acquirer cannot pay less than the fair market value.
A share swap is generally permitted. However, government approval is required to pay consideration by shares by/to a non-resident, if the target carries out certain regulated business.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
The Takeover Regulations require an acquirer triggering the mandatory tender offer provisions to make an offer for at least 26% of shares held by public shareholders. Even if none of the shares is tendered in a public offer, the acquisitions can be completed under the current law.
Currently, an acquirer who obtains the approval of 90% of shareholders by value of shares of the target company held by persons other than the acquirer or its nominees or subsidiaries can buy out the dissenting minorities. However, given the complex conditions that are part of the squeeze out provisions, such a transaction is rare in India. As such, an alternative strategy like selective reduction of capital is employed for squeezing out minorities.
3.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Any person holding more than 25% of the voting rights in a company must make an open offer for 26% of the total shares of the target company. A person holding shares between 25 and 75% can acquire more than five percent of the voting rights, unless they make an open offer for such shares. No person can acquire a number of shares that would take their shareholding to more than 75% (ie. the promoter shareholding threshold for listed companies).
The Takeover Regulations envisage disclosure obligations on the acquirer in case of any change in his shareholding/voting rights. Any person holding five percent or more of the shares must disclose any acquisition/disposal representing two percent or more of shares/voting rights. Continual disclosures must be made by shareholders holding 25% or more voting rights, as of the 31st day of March, every year, within seven days from the end of financial year. Details of encumbered shares must also be disclosed.
The acquirer must pay to public shareholders the higher of the negotiated price paid to the seller and other prices calculated using a prescribed formula linked with the market value of shares of the target. Any premium paid by the acquirer to the seller must be added back to the price paid by the public shareholders as well.
3.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
An acquirer can make a conditional offer based on the minimum level of acceptances subject to the following:
(i) the acquisition document should contain a condition that if the desired level of acceptances is not received, the acquirer shall not proceed with the transaction; and
(ii) the acquirer and persons acting in concert shall not acquire any shares of the target during the offer period.
In the case of such conditional offers, an acquirer is not entitled to appoint any director representing them on the board of directors of the target company.
Whole or part of the consideration payable to public shareholders must be deposited in an escrow account and payments are thereafter, made by the bank.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
In any share transaction, the rate of tax on capital gains depends on whether the gains are long-term (shares held for more than 12 months) or short-term.
4.2 Are there special considerations in cross-border deals?
Capital gains in cross-border deals are a concern, especially in cases of indirect transfer (transfer of foreign securities, which derives substantial value from underlying Indian assets). Capital gains made by a foreign shareholder by selling shares of an Indian company are subject to DTAA. In appropriate cases, it is advisable to obtain an advance ruling and include tax indemnity in the acquisition structure.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
In India, hostile takeovers are rare (see 3.1). One of the pre-emptive strategies the promoter undertakes to thwart a hostile takeover is consolidating their shareholding by continuous creeping acquisition under the Takeover Regulations.
Pending a tender offer, the target cannot initiate major corporate actions without obtaining majority shareholders' approval. Further, during this period, the board of directors of target must act in the ordinary course consistent with past practice. As such, the scope of mounting a defence to a competing offer is limited. The only viable measure appears to be the issue of shares on conversion of existing convertible securities.
5.2 How do targets use anti-takeover defences?
Takeover defences, if any, are usually taken by promoters or majority shareholders of the target. The target does not usually employ these defences.
5.3 Is a target required to provide due diligence information to a potential bidder?
There is a requirement for the target to permit a due diligence opportunity to a potential hostile bidder; however, no such practice exists.
5.4 How do bidders overcome anti-takeover defences?
Anti-takeover defences could be overcome by instituting court proceedings against the target or its directors or by offering a higher price than the primary tender offer.
5.5 Are there many examples of successful hostile acquisitions?
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
The Takeover Regulations do not prohibit a person from launching a competing offer, after the launch of the primary tender offer.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Since a hostile offer does not need the agreement/support of the target, deal protection measures for the primary tender offer are not relevant.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the antitrust notification thresholds in your jurisdiction?
Any acquisition of shares, voting rights or assets that exceeds specific thresholds, acquisition of control, and mergers or amalgamations (all are broadly categorised as combinations) crossing certain thresholds require the approval of the CCI.
However, antitrust thresholds are not typically applicable in cases of intra-group mergers, mergers of two enterprises where one exercises 50% shares/voting rights of another enterprise such that such transaction does not result in transfer from joint to sole control, etc.
7.2 When will transactions falling below those thresholds be investigated?
Irrespective of the thresholds, any transaction that has caused or is likely to have an appreciable adverse effect on competition in India may be investigated by the CCI.
7.3 Is an antitrust notification filing mandatory or voluntary?
An antitrust notification filing is mandatory in India, if a combination exceeds the thresholds.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
A combination filing must be made within 30 days of approval of a proposal of merger or amalgamation by the board of directors or of execution of any agreement for acquisition or acquiring control of enterprise, whichever is earlier.
A penalty of up to one percent of the total turnover or assets, whichever is higher in the case of a combination, can be levied on the person or enterprise responsible for the same.
7.5 How long are the anti-trust review periods?
Typically, within 30 days from the date on which notice is given in respect of a combination, the CCI provides a prima facie view on whether the combination would have an appreciable adverse effect on competition in India. Unless the CCI has passed an order approving or rejecting a combination, a combination will be considered effective after 210 days from the day on which notice was given.
7.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
The CCI can review deals taking place outside India, if the threshold requirements under the Competition Act 2002 are met regardless of whether they have a local competition effect.
7.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Typically, a foreign bidder is free to acquire shares and assets unless the activities of the Indian target form part of a licensed sector (for example, air transport services, defence production, and insurance). In such cases, conditions of license or approval in respect of ownership or management must also be complied with. Share acquisitions usually do not trigger employee compensation unless simultaneous lay-off/retrenchment is planned.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
Key legislation includes: the Indian Penal Code 1860; the Prevention of Corruption Act 1988; and the Right to Information Act 2005.
8.2 What are the potential sanctions and how stringently have they been enforced?
These sanctions (both pecuniary and penal) have been heavily enforced recently. However, cases reported of such instances are rare.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
In 2015 and in the first quarter of 2016, there have been significant changes in the regulatory regime affecting public M&A activities. These changes pertain to companies laws, securities laws and competition laws. Simultaneously, the government has liberalised the exchange control regime which is expected to ease cross-border M&As especially in the manufacturing sector.
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About the author
Dipankar Bandyopadhyay is an experienced M&A lawyer and head of the corporate practice at Verus. Bandyopadhyay advises on public and private M&A, private equity, venture capital and financing matters. Bandyopadhyay has represented both acquirors and sellers on several complex, cross-border, public M&A transactions, a number of which have been recognised as leading transactions in the jurisdiction. Bandyopadhyay regularly advises on structuring of M&A deals from the perspective of complex regulatory environment in India. He has advised Idea Cellular, TAQA, HSBC, AXA SA, India Carbon and Suzlon on M&A matters in India.
About the author
Priyanka Devgan is an associate with Verus. Her principal areas of practice are M&A and corporate finance. She often advises clients on the regulatory aspects of M&A transactions, including tender offers, insider trading and competition law aspects.