According to a UNCTAD report, cross border M&A activity in India by the end of 2008 had increased by 100 percent as against the year-end figures in 2007. FDI inflows into India, for this period, were up by 59.9 percent. Although there may be a reduction in the percentage for this year, the numbers are remarkable considering that the figures worldwide have been decelerating. The significant growth of cross-border M&A’s in India is an indication of the liberal regulatory structure and India’s growing market.

In India, the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) was the nodal legislation regulating concentration of economic power, control of monopolies and prohibition of unfair and monopolistic trade practices.

However, the MRTP Act was felt to be obsolete as it did not promote competition and was too rigid and inflexible.

Therefore, the Competition Act was enacted in 2002 to promote competition that will result in industrial growth leading to greater efficiency and innovation. The Competition Act envisaged a new Competition Commission of India (CCI) whose mandate is to regulate:

a)Anti-Competitive Agreements
b)Abuse of Dominant Position
c) Combinations, in the form of Acquition, Mergers and Amalgamations

After prolonged deliberation certain sections of the Competition Act were notified in May 2009. As of this date, only the provisions related to (a) and (b) have been brought into force while (c) is yet to be notified.

On September 1, 2009, the MRTP Act was repealed and the CCI replaced the MRTP Commission. All pending investigations and proceedings under the MRTP Act will be transferred to the CCI. Further MRTP has a two-year mandate to dispose all pending cases and will be dissolved by September 1, 2011.

The main concern as regards the competition regime in India is the proposed procedure for approval of a merger from the CCI. Under the Competition Act, proposed combinations crossing the specified threshold limits must be notified to the CCI within 30 days of the execution of the merger agreement. Also, the CCI has a time-frame of 210 days to clear the combination. This is seen as an unusually long waiting period and may impact merger activities in India. The CCI has however made soothing noises and even said that they would seek to ‘fast-track’ merger approvals within a 30-day timeframe.

Downstream investments

As regards FDI in India, it is controlled and regulated by the Foreign Investment Promotion Board (FIPB), Ministry of Finance, Government of India and the Reserve Bank of India (RBI). Earlier, there were several ambiguities on laws / regulations governing downstream investments, i.e. further investment by a company that has non-resident shareholding in India. In February 2009, the Government of India clarified norms for downstream FDI through three consecutive press notes. Press Note 2 (2009 Series) put some restrictions on downstream investments by resident entities that are “owned and controlled” by non-resident entities, that is, entities where non-resident shareholding is more than 50 percent or where non-resident shareholders have power to appoint the majority of directors. The definition of “ownership” and “control” may also prove to be problematic for many foreign Venture Capital investors, since a majority of these entities are set up as trusts under the Indian Trusts Act 1882, wherein ownership and control are not defined. Press Note 3 (2009 Series) further elaborated the same and defined “foreign investment” to include all types of foreign investments (like Foreign Institutional Investments, American Depository Receipts etc). Furthermore, Press Note 4 (2009 Series) clarified some aspects of the two preceding press notes. It defined operating companies, operating-cum-investment companies and investing companies and laid down the guidelines regarding downstream investments by these companies.

It has been clarified by Press Note 3 (2009 Series) that FIPB approval will be required for downstream investment (indirect holding) if the holding company only acts as an “investment company” and is “controlled” by non-resident/overseas investors. This may become more time-consuming than before from a transaction closing perspective for companies coming within the definition of “investment companies” under the ambit of Press Note 4 (2009 Series). However, the positive side of these press notes has been to clarify the law regarding downstream investments.

Takeover Code

On listed companies, the Securities and Exchange Board of India (SEBI) is the nodal agency for monitoring publicly listed companies. Takeovers of listed companies in India are governed by the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (Takeover Code). As per the existing provisions no person is permitted to acquire shares or voting rights of more than 15 percent in a listed company without making an open offer to acquire a minimum of 20 percent of such listed company’s shares from the public shareholders (open offer requirements). However, under a concept of ‘creeping acquisitions’ under Regulation 11(1) of the Takeover Code, an acquirer who holds more than 15 percent but less than 55 percent of shares or voting rights in a listed company may acquire additional shares or voting rights not exceeding 5 percent in any financial year without making an open offer to the public shareholders of the listed company. The acquirer can continue acquiring five percent shares every financial year until reaching the limit of 55 percent when the acquirer has to make an open offer of at least 20 percent of voting rights to the public shareholders. Also, under Regulation 7(1A) of the Takeover Code, when the acquirer is holding between 15 percent to 55 percent of the target company, any acquisition or sale of shares aggregating to (+/-) two percent will have to be disclosed to the target company and the relevant stock exchanges. In this regard, some ambiguities that have been sought to be removed recently by SEBI as per its Board Meeting held on September 22, 2009 are set out below:

a) the acquisition limit of five percent under Regulation 11(1) of the Takeover Code would be permissible provided post-acquisition, the shareholding/voting rights of the acquirer together with persons acting in concert does not exceed 55 percent of the equity capital of the target company
b) the provisions of the Regulation 7(1A) of the Takeover Code have been extended to acquirers holding between 15 percent to 75 percent of the shares
c) holders of ADRs and GDRs were usually exempt from the open offer requirements mentioned above. However, under the proposed changes, ADRs/GDRs giving the holders voting rights have also been brought under the purview of the open offer requirements

Although a final analysis regarding the impact can only be made after the text of the amendments are formally issued, the changes may be an impediment to the foreign investors and especially the Foreign Institutional Investors and Private Equity players, many of who route their investments through instruments like ADRs/GDRs. These changes may adversely impact investments into India as investors will have to look out for the threshold limits while investing through the above-mentioned instruments.

Other developments

It is also worth mentioning a few significant upcoming regulatory changes which should impact the M&A landscape in the country, namely the provisions of the Companies Bill 2009 which has been reintroduced in the Parliament. This Bill will change the dimensions of company law in general and merger laws in particular in India, once it is enacted. Further, the Union Ministry for Company Affairs has enacted a draft Valuations Professionals Bill in 2007 and circulated the said bill to stakeholders for comments. Once the law is enacted and the procedures are in place, it would aid in facilitating valuation and formalising valuation principles vis-à-vis M&A activities in India. As regards taxation, presently the Income Tax Act, 1961 is the nodal legislation governing direct taxation in India. The government has recently introduced a draft Direct Tax Code, 2009 (DTC), which aims to simplify the tax provisions in India and bring them at par with the international standards of taxation.

The above discussion and analysis goes to show the stage of development and changing environment in the M&A space in India. Although these are at a nascent stage and still evolving, however a concerted effort is seen on the part of the legislators to fill the gaps and counter the shortcomings in the provisions thereby effectively addressing the demands of the corporate world, foreign investors and the interests of the various other stakeholders alike.

Hemant Sahai is the Managing Partner at Hemant Sahai Associates – Advocates (hemant@sahailaw.com). Aparajit Bhattacharya is a Partner (aparajit@sahailaw.com).

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