Restrictions on Outbound Acquisitions

Although outbound acquisitions by Indian companies have increased significantly in recent years, there is a concern that domestic Indian laws governing the acquirers are yet to keep up to speed with developments in the business arena. Recognising this concern, the Confederation of Indian Industry (CII) has submitted a memorandum to the Department of Industrial Policy and Promotion, Government of India listing various factors that restrict the framework for overseas acquisitions by Indian companies. This CII News Update contains a useful summary of the issues highlighted. These include:

– Lengthy court-driven process for amalgamations in India;

– Inability of an Indian company to amalgamate with a foreign company (as the current provisions under Sections 391-394 only permit a foreign company to amalgamate with an Indian company);

– Shareholder approval requirements under Section 372A of the Companies Act for investments exceeding 60% of net worth or 100% of free reserves of the acquirer;

– Prohibition on multi-level subsidiaries that is currently being discussed in the context of the new Companies Bill;

– Difficulties in using acquirer’s shares as currency for acquisition (due to restrictions on stock-swap transactions) – although a DIPP discussion paper considers proposals to alleviate this concern going forward;

– Restrictions in the proposed merger control regime under the Competition Act, 2002;

– Restrictions imposed by RBI on the amount of cash that can be used for acquisitions (currently pegged at 400% of the acquirer’s net worth).

Added to this is the unavailability of a dual listing regime for Indian companies, which restricts large overseas acquisitions. The failure of the Bharti-MTN transactions has partly been attributed to this.

While there have been a number of changes in the last few years that have facilitated overseas acquisitions by Indian companies, the above list suggests that a number of hurdles continue to exist. There is a need for streamlining the regime for such acquisitions through a holistic approach rather than a fragmented application of various diverse legal provisions to outbound acquisitions.

For a general discussion of the legal and other factors governing outbound acquisitions by Indian companies, please see this paper by Afra Afsharipour.