Global M&A activity has climbed sharply since last year, creating opportunities in emerging markets like India and the Philippines, which have relaxed and liberalised their investment policies
India witnessed its highest level of deal-making in 2021 by both value and volume as the stock market boomed along with phenomenal IPO exits and long-awaited resolutions to some of the largest distressed assets, including by foreign investors.
While foreign investment in India continues to be regulated, foreign investment conditions are being progressively liberalised and the government seems keen to promote the ease of doing business; though still governed by a multitude of legislations, rules, regulations, notifications and policies.
The central parliament has the legislative power to enact most of the statutes relevant to M&A, and such statutes do not vary from state to state. Key statutes are set out here:
The central government – particularly the Ministry of Finance, and Department for Promotion of Industry and Internal Trade at the Ministry of Commerce and Industry (DPIIT) – issues the rules and policy framework for foreign investments. The Reserve Bank of India (RBI) regulates and implements the reporting mechanism for foreign investment. Other regulators are the Securities and Exchange Board of India (SEBI), when listed companies are involved, and the Competition Commission of India for antitrust approvals, where necessary.
A foreign investor typically needs to find answers to the following two questions if proposing to invest in India:
Typically, foreign investment regulations cannot be circumvented by incorporating a company in India because a company such as this, controlled or majority-owned by non-residents and making downstream investment, would be subject to similar regulations applicable to non-residents.
M&A structuring typically involves:
For listed companies, additional requirements apply, including:
Investments by non-resident entities in Indian companies are governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FEMA NDI Rules) and press notes issued from time to time by the DPIIT.
While the use of warranty and indemnity insurance is still at a nascent stage in India, there is a growing demand for such products, given the surge in foreign investments. Similarly, trends such as including break fee and reverse break fee provisions in investment documents are starting to gain prominence, although these largely remain untested from a regulatory perspective. The authors also see payment structures such as locked-box mechanisms, deferred payments and escrow arrangements gaining popularity; as well as increasing use of hell or high water clauses as a remedy to get mega-mergers through.
Furthermore, the authors expect the record M&A momentum of 2021 to continue gaining traction in 2022 – with a focus on fintech, electric vehicles, tech and data analytics, pharma and healthcare, and e-commerce and quick-commerce. Private equity investors are likely to participate in more control transactions; and the startup space is expected to remain vibrant. With abundant financial reserves and liquidity, valuations are expected to remain high, and more investments are expected to take the contested auction route than a negotiated one, and with capital markets playing hot and cold, private equity exits are more likely to be structured as dual-track exits, with simultaneous IPO and auction process in play.
With the growing relevance of environmental, social and governance (ESG) rights are going to play an even more important and central role in negotiations and overall management. More capital is also likely to be deployed for impact investments, especially those related to transitioning into cleaner and sustainable energy sources. All of this is likely to generate increased M&A opportunities.
This article was originally published in Asia Business Law Journal on 11 May 2022 Co-written by: Shardul S. Shroff, Executive Chairman; Iqbal Khan, Partner; Ambarish, Partner. Click here for original article
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