M&A Trends in 2015: Focus on “ease of doing business” [ABA India Update]

[The following post is contributed by Satyajit Gupta, Principal – M&A/ Corporate at Advaita Legal. Views are personal, and comments are welcome]
With
the National Democratic Alliance (“NDA”)
gaining a decisive majority in the 2014 general elections, the expectation was
that India would experience dramatic growth in all sectors, as the Government
and administration would leave behind the policy paralysis that had been the
hallmark of the previous regime. In an unpredictable
global economy where the Indian economy has shown resilience, the NDA
government has set about making radical and positive reforms to boost foreign
investment and create a business friendly climate in India. In 2015, the Indian
economy saw an average growth of c. 7.5% making it one of the fastest growing
economies in 2015. In fact, OECD has also pegged India’s growth rate at a
healthy 7.4% for the next financial year in a report released recently.
However, in the reported M&A deals space, there
appeared to be a slowdown with the total quantum dropping to USD 20 Billion, a
dip of 40% compared to the deal volume of USD 33 Billion in 2014. To combat
this, the Government has proposed several regulatory relaxations and
liberalizations in the FDI policy, exchange control norms etc. and it is hoped
that this forward looking outlook continues and drives the deal volume up. The Government’s
focus is on ‘ease of doing business’ and its growth focused initiatives – ‘Start
Up India’ and ‘Make in India’ are also enterprises to garner investor traction
and contribute to the India growth story.
Company law
reform
Compliances
under the Companies Act, 2013 have been sought to be relaxed especially in
relation to private companies, through amendments and exemptions. Private
companies have been provided various exemptions ranging from exemptions in
relation to general meetings (exemption for provisions under notice of
meetings, statement to be annexed to notice, quorum for meetings, chairman of
meetings etc.) to exemption from the requirement of a shareholders resolution
(for exercising borrowing powers, disposing of an undertaking of the company,
remitting any debt due from a director etc.). In terms of setting up of a
company, the requirement of minimum paid-up capital has been removed, a
consolidated form has been introduced to fast track the incorporation procedure
and the requirement of a company seal and certificate of commencement of
business have also been done away with.
Developments in
anti-trust laws
The Competition
Commission of India (“CCI”) has
clarified that communication of a combination to a statutory authority per se cannot be considered as a trigger
to file a notice with the CCI, however, public announcements under
SEBI Takeover
Regulations, can be considered as a trigger to file. The CCI has also introduced e-filing facility on December 1,
2015 to help it handle submissions related to combinations promptly and also to
simplify the process for entities to submit
information. The CCI also clarified the ambit of acquisitions ‘solely for
investment purposes’, while also fining certain Zuari entities a hefty INR 30
Million for not notifying it in time for an acquisition which was strategic in
nature (and which was picked up by the regulator due to a television
interview).
Evolution in securities laws
In the securities law
space, the Securities and Exchange Board of India (“SEBI”) overhauled the Insider Trading Regulations. Definitions of
‘insiders’, ‘connected persons’ and ‘unpublished price sensitive information’
have been widened under the new regulations. The new regulations have been made
applicable to all securities as defined under Securities Contracts (Regulation)
Act, 1956 except units of mutual funds. The regulations permit sharing of
‘unpublished price sensitive information’ in PE/ M&A backed diligences, introduce
certain valid defences for insiders as well as the concept of trading plans.
Also, through amendments
introduced in the SEBI Takeover Regulations and SEBI Delisting Regulations, acquirers
have been allowed to delist the company pursuant to making an open offer provided
he declares his intention of delisting at the time of making the detailed
public statement of the proposed acquisition. SEBI has also granted exemption
to certain transactions (e.g. conversion of debt into equity under a strategic
debt restructuring scheme) from complying with the Takeover Regulations through
amendments to the said regulations. Additionally, SEBI has notified new listing
norms for start-ups on Institutional Trading Platform, thereby easing the norms
for raising money for small enterprises.
FDI norms
Significant changes have
been introduced in the year 2015-2016 by the Indian Government with regard to
the foreign investment norms, to attract investment in sectors like defence,
railways, insurance etc. A few examples are set out below:
·       Insurance and Pension – The foreign investment cap of the
sector has been increased from 26% to 49%, however investment above 26% has been
made subject to government approval. The Insurance Regulatory and Development
Authority (“IRDA”) has also provided
clarity on the ‘Indian ownership and control’ test required to be met by all
Indian insurance companies and insurance intermediaries. The IRDA has defined ‘control’
to mean the right to appoint a majority of the directors or control the
management or policy decisions.
·       Railway infrastructure – The foreign investment limit in
construction, operation and maintenance of specified infrastructure projects
like suburban corridor projects through PPP and high speed train projects, have
been raised to 100% through automatic route.
·       Construction and development – Relaxations in the
conditions of foreign investment in the sector have been introduced. These
include easing of exit norms, removal of requirement of minimum capitalization
and minimum land area.
·       Defence – Foreign investment in the sector has now been permitted
up to 49% in the automatic route and investment above this level can be
permitted on case to case basis where it provides the country access to modern
state of the art technology.
·       Retail trading – Various changes including removal of local
sourcing norms for state of the art products has been brought in.
An
interesting judgment to note was rendered by the Bombay High Court which evaluated a downstream FDI structure to rule that
investment in the holding company was a ‘sham’ structured to invest downstream
by way of redeemable instruments, which are not permitted by Indian FDI norms.
The court held that it would not provide assistance to enforcement of
transactions which are not compliant with the FDI norms.
Arbitration law reforms
In end-2015, the Government introduced amendments to
arbitration law by way of ordinances (replaced by an amendment act), intended
to ease the process of arbitration, impose timelines and rationalize costs.
Some key changes include: (a) a twelve-month timeline for completion of
arbitrations seated in India; (b) flexibility for parties to approach Indian
courts for interim reliefs in aid of foreign-seated arbitrations; and (c) introduction
of ‘costs follow the event’ regime.
Conclusion
The medium to long term macro-economic outlook for
India has remained mostly promising and after the general elections in 2014,
the outlook has only improved exponentially. However, the euphoria on the
macro-economic front has not resulted in any high value deals in 2015. It is
difficult to pin down the issues/ hurdles that are blocking large deals in
India especially given the presence of large buyout firms as well as attractive
(and perhaps, under-valued) targets. The large block of promoter holdings in Indian
companies, non-availability of cheap and external credit and regulatory factors
may be some factors impeding M&A deals in India.

Reforms in laws applicable to real estate sector,
insolvency/ bankruptcy norms are still stuck in the legislative process. These
need to be expedited to bring much-needed clarity and predictability in Indian
laws impacting M&A. Further relaxations to FDI norms, quicker statutory
approvals are also key to attracting further foreign enterprises to explore
India as a target destination.



This has already been published in the ABA SIL M&A and Joint Ventures Committee Newsletter (issue 1/ 2016) as the India update

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