M&A deal structures

Businesses utilise M&A to achieve strategic objectives such as market expansion, economies of scale or diversification, with the deal structure encompassing terms, considerations, legalities and risk-reward allocations between parties.

The most common types of M&A deals include:

(1) Acquisition. Acquisition by way of: (a) primary investment, where investors are acquiring shares directly from the issuer; and (b) secondary purchase, where investors are purchasing shares from sources other than the issuer such as promoters, employees and existing investors. Documentation for such deals include shareholders and share purchase agreements between the buyer and seller.

(2) Mergers under the Companies Act, 2013. The process of mergers and amalgamations in India is implemented by the National Company Law Tribunal (NCLT), which typically entails a time-consuming procedure, with fast-track mergers an exception that can bypass the NCLT with central government approval. In addition, the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018, provide a regulatory framework for international merger transactions, ensuring compliance with conditions set out by the Reserve Bank of India, a number of which have been implemented in India. The Insolvency and Bankruptcy Code offers opportunities for acquirers to engage in corporate restructuring, including mergers and amalgamations, as part of resolution plans aimed at maximising the value of distressed corporate debtors.

(3) Asset and business purchase. In India, it is common practice to acquire significant business assets, and a business, as a going concern. Business transfer agreements or asset purchase agreements, along with deeds of conveyance, are the agreements facilitating such transactions.

Regulatory framework

India’s regulatory framework provides investment paths with varied categorisations, depending on the type of investment vehicle utilised. The primary statutes governing M&A activity include: the Companies Act, 2013; the Indian Contract Act, 1872; the Securities and Exchange Board of India Act, 1992; the Foreign Exchange Management Act, 1999; the Income Tax Act, 1961; the Competition Act, 2002; and the Insolvency and Bankruptcy Code, 2016.

These statutes are typically accompanied by rules, regulations and notifications and, in some cases, press notes or other policy documents. Numerous sector-specific laws alongside various state and local regulations collectively shape the legal landscape.

Developments in M&A law

The regulatory M&A landscape in India is constantly evolving to account for progress in technology and the demands of the economy, and to ensure a smooth acquisition process for investors. Some major developments witnessed in 2023 are set out below:

(1) Mandatory dematerialisation of securities. The Ministry of Corporate Affairs (MCA) mandated all private companies (excluding small companies as of 31 March 2023) to issue securities in dematerialised form, and facilitate dematerialisation of all existing securities from 30 September 2024 onwards, to harmonise private company regulations with those of public companies, enhancing business efficiency, transparency in share transfers, and reducing legal disputes related to share title.

(2) Fast-track mergers. To expediate the merger process in India, the MCA has reduced the timeline for the central government to confirm the merger scheme, and also introduced the concept of deemed approval in the event objections are raised and no action has been taken by the central government within 60 days.

(3) Key amendments to competition laws in India. Deal value threshold has been added to the conventional asset-turnover matrix. In addition, the overall timeline for the Competition Commission of India (CCI) to approve a combination has been reduced from 210 days to 150 days. The amendments incorporate the CCI’s established practice of using the standard of “material influence” to assess the degree of control into the main legislation.

(4) Listing of securities of public companies on foreign stock exchanges. Certain classes of public companies are permitted to issue securities for the purpose of listing on permitted stock exchanges in permissible foreign jurisdictions.

(5) Market rumour clarifications. The Securities and Exchange Board of India has mandated listed entities to confirm, deny or clarify any media reported information that leads to a “material price” movement of shares, effective 1 June 2024, for the top 100 listed entities by market value, followed by the next 150 entities from 1 December 2024.

(6) Developments in Indian data privacy regime. The Digital Personal Data Protection Act, 2023, effective from 11 August 2023, will replace India’s current data protection regulations under section 43A of the Information Technology Act, 2000, and its associated rules. It shall also have a bearing on M&A activity where fresh consent would be required from individuals whose data is being shared pursuant to a transaction.

Growth lift of M&A

The M&A landscape is being transformed by data analytics and artificial intelligence (AI) by enabling more informed and faster decision making throughout the M&A process. Corporates have adopted generative AI to take advantage of its capabilities – spurring innovation, deep data analysis and automating routine tasks.

This trend is evident in high-profile acquisitions like MosaicML’s purchase by Databricks at USD1.3 billion, and Casetext’s acquisition by Thomson Reuters for USD650 million. There is also renewed attention on the compliance practices of targets with a particular eye on their sustainability approaches highlighted through environmental, social and governance (ESG) compliance among foreign exchange and corporate compliances.

The focus of the newly formed government on the infrastructure, defence, tourism, agriculture, housing and manufacturing sectors, as outlined in its manifesto, may lead to increased investment in these sectors.

Some of the significant deals witnessed by India because of a surge in M&A include:

(1) With the planned strategic acquisition of Jaypee Infratech, Suraksha Realty has bolstered its position in the competitive real estate sector with a deal value of about USD2.45 billion, making it the largest deal in India by value.

(2) Acquisition by Proximus Opal of a majority shareholding (about 82.7%) in Route Mobile, a player in the Indian SaaS sector, through a mandatory tender offer and an additional private purchase of shares from the market.

(3) The joint venture between Star India Private, Walt Disney Co and Viacom18 Media Private is valued at about USD4.53 billion, making it one of the biggest deals in the telecoms and entertainment industry.

(4) Reliance Industries Ltd acquired a 33.33% stake in Brookfield Infra-Digital Realty to establish a joint venture for developing data centres
in India.

Challenges

Geopolitical tensions and inward-looking economies are two of the biggest challenges to the market, while the valuation of deals in India is impacted by anticipated growth rates and the premium attached to Indian markets relative to global peers.

In addition, investor appetite for capital intensive business has started to fall, with a notable focus on providing feasible paths to profitability at the investment stage as can be witnessed by the closure of ZestMoney and Frontrow. Corporates are being encouraged to adopt leaner operational models while focusing on cashflow instead of the unchecked growth-oriented hyper expansionism that dominated funding circles in the past.

Conclusion

India continues to be one of the key players in the global economic landscape and is expected to become a USD5 trillion economy by 2025, which makes it an attractive market for the global investment industry. Financial services, technology, pharmaceuticals, healthcare and industrials are expected to stay active on the domestic front in terms of value creation and market share.

Technology is expected to see the highest growth in inbound cross-border M&A in 2024. While structuring transactions for M&A with Indian entities, global and domestic players must align with legal and regulatory changes while tying in with past precedents in India, to ensure that their transactions can sail through and do not face any hindrance from authorities.

This article was originally published in Asia Business Law Journal on 18 July 2024 Co-written by: Raghubir Menon, Regional Practice Head – Mumbai – M&A and Private Equity; Jeel Panchal, Senior Associate; Ketayun Mistry, Associate. Click here for original article

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