1.2 Are there different rules for different types of company?

Yes, regulations governing Indian companies differ, among other things, depending on whether such companies are: (a) private or public companies; (b) listed or unlisted companies; (c) non-resident (i.e., foreign-owned and/or controlled companies (“FOCCs”)) or resident companies (i.e., Indian-owned and controlled companies); and/or (d) operating in specified sectors.

For example, in comparison to private companies, the Companies Act prescribes rigorous compliance and reporting requirements for public listed companies, and such companies are also required to comply with the SEBI Regulations, such as those governing takeovers, insider trading, issue and listing of securities and general corporate governance-related compliance. Similarly, a company that is considered an FOCC (on the basis of the foreign shareholding in the company) must comply with the Foreign Exchange Regulations with regard to downstream investment in an Indian resident company as opposed to companies not classified as an FOCC (see also the response to question 1.3).

1.3 Are there special rules for foreign buyers?

The Foreign Exchange Regulations govern M&A transactions where one or more parties are non-residents (i.e., a person not resident in India). Amongst other things, the Foreign Exchange Regulations prescribe the following guidelines for pricing, sector-specific conditions and reporting requirements.

• Pricing guidelines. The Foreign Exchange Regulations prescribe pricing guidelines for determination of the price at which securities of an Indian company can be: (a) issued to a non-resident; and (b) transferred between a resident and a non-resident (the “Pricing Guidelines”). The Pricing Guidelines do not apply to a transfer of securities of an Indian company between non-residents.
• Sector-related restrictions. Under the Foreign Exchange Regulations, foreign direct investment (“FDI”) in certain sectors falls under the ‘automatic route’ whereby investments up to 100% or a certain prescribed cap do not require prior approval of the Government (e.g., FDI up to 100% is permitted in single brand retail trading under the automatic route). On the other hand, FDI in certain sectors is permitted only with prior approval from the relevant Government ministry or department and/or the RBI (e.g., FDI in multi-brand retail trading and in print media is permitted up to 51% and 26%, respectively, and falls under the ‘approval route’). Sectors such as atomic energy, gambling, lottery business and chit funds are prohibited from receiving any FDI.
• Reporting. In terms of the Foreign Exchange Regulations, acquisition of securities of an Indian company by a non-resident is required to be reported in the prescribed form to the RBI through authorised dealer banks to whom such authority has been delegated by the RBI. These prescribed formats may vary depending on the mode of acquisition undertaken by the parties (e.g., primary, secondary, deferred consideration, cash or share swap). In an effort to streamline the reporting requirements, the RBI has introduced a consolidated reporting framework in a ‘single master form’, which consolidates the multiple existing prescribed formats for reporting FDI.
• Declaration. Receipt of FDI from entities incorporated in a country that shares a land border with India (“Restricted Countries”); or where the beneficial owner of an investment into India is situated in or is a citizen of any Restricted Country is permitted only under the Government route. In addition, any transfer of ownership of any existing or future FDI in an entity in India (directly or indirectly), resulting in the beneficial ownership falling within the aforementioned restriction/purview, will require the prior approval of the Government. Accordingly, parties need to evaluate the applicability of such restriction and in cases where such restriction does not apply, the investors are typically required to provide a declaration to such effect to the investee entity. While the Government of India has not yet released a formal list of the Restricted Countries, a website maintained by the Ministry of External Affairs, Government of India, mentions in the context of FDI proposals received from neighbouring countries that India shares its land borders with Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan. In addition, FDI proposals from Hong Kong, Macau and Taiwan are treated on par with the proposals received by the Government from China for the purpose of the above restriction.

1.4 Are there any special sector-related rules?

Legislation, such as the Banking Regulation Act, 1949, Insurance Act, 1938, Mines and Minerals (Development and Regulation) Act, 1957, Drugs and Cosmetics Act, 1940 and Telecom Regulatory Authority of India Act, 1997, applies to transactions involving Indian companies operating in the relevant sector. In the case of highly regulated sectors such as insurance and banking, the relevant sector-specific regulators, such as the Insurance Regulatory and Development Authority of India and the RBI, respectively, lay down guidelines for companies operating in the concerned sector, and may require their prior approval to be sought for the acquisition of shares, business or assets of companies operating in such sectors. The Foreign Exchange Regulations also prescribe certain sector-specific conditions, and FDI in such sectors should be in compliance with such prescribed conditions (e.g., 100% FDI is permitted in telecom services, subject to the observance of licensing and security conditions prescribed by the telecom regulator).

1.5 What are the principal sources of liability?

Contravention of any statutory legislation is punishable in accordance with the framework of penalties for contravention, as set out in the relevant legislation. In most cases, the liability comprises fines and/or imprisonment. For instance, any contravention of the Foreign Exchange Regulations is punishable with a penalty of up to thrice the sum involved in such contravention (where such amount is quantifiable), or up to INR 0.2 million (where the amount is not quantifiable). Further, where a contravention is by a company, the individuals (i.e., executive directors or officers of the company) responsible for the conduct of the business of the company are also generally liable under the relevant statutory legislation. In addition, contractual claims pertaining to acquisition agreements including indemnity provisions are primarily governed by the Contract Act.

2. Mechanics of Acquisition

2.1 What alternative means of acquisition are there?

In addition to acquisition of shares, by way of a secondary purchase or primary investment, alternative modes of acquisition typically seen in the Indian market are as follows:

• Mergers and amalgamations. In India, schemes of mergers and amalgamations are court-driven processes and require the sanction of the National Company Law Tribunal (the “NCLT”) in order to be implemented, making it a time-consuming process. As an exception, fast-track mergers are possible in cases of mergers between certain categories of companies (e.g., mergers between small companies, start-ups, or between a holding company and its wholly owned subsidiary) where such mergers can be undertaken outside the NCLT process but with the approval of the Central Government. In addition, the Cross Border M&A Regulations lay down the regulatory framework to facilitate international merger transactions in India. Any M&A transaction that complies with the conditions set out under the Cross Border M&A Regulations will be deemed to have been approved by the RBI and a certificate (signed by the managing director, whole time director and company secretary of the concerned companies) declaring that such compliance will need to be submitted with the NCLT. In addition, depending on the residential status of the resultant entity (Indian or foreign entity), compliance with the Foreign Exchange Regulations will need to be ensured by the parties. On a separate note, the Cross Border M&A Regulations define a ‘cross-border merger’ as a ‘merger, amalgamation or arrangement’ between an Indian company and foreign company in accordance with the rules under the Companies Act. However, the relevant provisions under the Companies Act read with the rules only mention ‘mergers and amalgamations’ and do not expressly refer to an ‘arrangement’. Accordingly, it appears that though ‘arrangements’ are contemplated under the Cross Border M&A Regulations, they may not be permissible under the Companies Act in the context of an Indian company and a foreign company. However, no specific clarity has been provided by the regulators in this regard. In addition, with a view to encouraging dynamic resolution plans for corporate debtors on a going concern basis to maximise value, under the IBC, a resolution plan proposed in respect of a corporate debtor may include provisions for the corporate restructuring of such corporate debtor, including by way of merger, amalgamation and demerger. Accordingly, the IBC provides an opportunity to acquirers to participate in the resolution process and capitalise on relatively lesser valued assets/corporate debtors.
• Asset and business purchase. Both acquisitions of key assets of a business (i.e., asset transfers) or acquisition of the entire business undertakings as a going concern (i.e., business transfers or slump sale) are common in India. The business purchase of an undertaking on a going-concern basis is tax-efficient and more time-efficient than a merger, as it does not need to be approved/sanctioned by a court/tribunal.
• Joint ventures. A joint venture is another common structure in India, consisting of two parties contributing to the capital of an entity set up to engage in a common business venture, with economic and governance rights shared between the parties. This allows each party to the venture to benefit from the other’s synergies and expertise.
  In addition, shares of a public listed entity can also be acquired by triggering a voluntary offer or a mandatory tender offer (an “MTO”) pursuant to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (as amended) (the “Takeover Regulations”).

2.2 What advisers do the parties need?

In addition to external legal counsel, financial and tax advisers are typically required. Depending on the nature and complexity of the transaction, environmental and technical due diligence advisers with sector-specific expertise may be appointed. There is a growing (and recommended) trend of engaging advisers to conduct due diligence on the target in relation to anti-bribery, anti-money laundering and anti-corrupt practices. In addition, for acquisition of a public listed company, a SEBI-registered merchant banker is also required.

2.3 How long does it take?

The time taken for a transaction primarily depends on the nature of the target (listed or unlisted) and mode of acquisition. The acquisition of a private company (through an asset/business transfer or share purchase agreement) is a comparatively faster process compared with the acquisition of a public listed company, followed by acquisition through a scheme. Merger, amalgamation and demerger schemes generally take between six and eight months depending on the NCLT jurisdiction and the complexity involved. The timeline for a transaction would also depend on the timelines for completing the due diligence processes, drafting and negotiating transaction documents, fulfilment of conditions precedent set out in the transaction documents and receipt of relevant statutory and contractual approvals.

2.4 What are the main hurdles?

In order to complete an acquisition, the acquirer and the relevant target company must obtain all necessary approvals, including corporate approvals, regulatory approvals, consents of lenders and other third parties.

Where the acquisition contemplates the purchase of shares of a listed company, the Takeover Regulations require an acquirer to make an MTO to the public shareholders of such listed company if, amongst other things, the acquisition of the shares results in the acquirer’s shareholding or voting rights in the company being equal to or exceeding 25%.

Where the acquisition is pursuant to a merger process, the merger scheme is required to be approved by a majority representing three-fourths in value of shareholders, a class of shareholders and creditors, or a class of creditors. Further, the final order approving a merger scheme must be approved by the NCLT, after objections received from concerned regulatory authorities/stakeholders in relation to the scheme are resolved. Mergers involving listed companies also require the in-principle approval of SEBI.

2.5 How much flexibility is there over deal terms and price?

Where either the acquirer or the seller is a non-resident, the pricing of shares is governed by the Pricing Guidelines. To elaborate, in the case of issuance of shares to a non-resident or transfer of shares from a resident to a non-resident, the price of shares cannot be lower than the price determined in accordance with the Pricing Guidelines. Conversely, the transfer of shares from a non-resident to a resident cannot be higher than the price determined in accordance with the Pricing Guidelines. The deal terms would typically be guided by the nature of the transaction (i.e., certain terms are customary or market) and the intent and objective of the parties.

2.6 What differences are there between offering cash and other consideration?

Parties to a transaction involving a foreign buyer/seller may negotiate the consideration payable, provided that the price is in compliance with the Pricing Guidelines.

Non-cash consideration is permitted under Indian law (e.g., share/stock swap). However, the income tax authorities have the authority to determine the fair value of such non-cash consideration, which may be deemed to be higher than the agreed-upon consideration, thereby resulting in a higher tax liability for the seller. Further, certain transactions involving non-cash consideration are also subject to specific conditions such as requiring a valuation report by a registered valuer in accordance with the provisions of the Companies Act.

2.7 Do the same terms have to be offered to all shareholders?

Typically, in unlisted companies, the terms governing economic and governance rights may differ amongst shareholders, subject to the Pricing Guidelines (if applicable). However, for listed companies where an acquisition triggers an MTO, the price offered to the public shareholders cannot be lower than the price received by the seller. Further, an acquirer may get additional rights, subject to the approval of a three-fourths majority of the shareholders of the listed target; this may also require amendments to the constitutional documents of the target.

2.8 Are there obligations to purchase other classes of target securities?

If an MTO is triggered, the acquirer is mandatorily required to offer to purchase at least 26% of the shares of the target company, but there is no obligation to make an offer for non- equity securities. However, where an MTO is not triggered or it is an unlisted company, there are no statutory obligations on the acquirer to purchase other classes of target securities.

2.9 Are there any limits on agreeing terms with employees?

While there are no restrictions for an acquirer to negotiate terms of employment with employees, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (the “LODR Regulations”) require that the approval of the board of directors and shareholders be sought for any profit-sharing or compensation agreements between the employee and the acquirer in connection with the securities of a listed company. In addition, in certain cases involving the transfer of an undertaking, employees who fall within the ambit of ‘workmen’ and have been in continuous service for a year are entitled to notice and compensation equal to 15 days’ average pay for every completed year of service/any part thereof in excess of six months. Such compensation need not be paid in certain events, i.e., if the service of such workman is not interrupted by the transfer, terms and conditions of service pursuant to the transfer are not less favourable than the terms before the transfer, etc. Further, all contractual agreements entered into with employees should be in compliance with the applicable labour legislation in India.

2.10 What role do employees, pension trustees and other stakeholders play?

Unless employment of employees is impacted pursuant to a transaction, there are no statutory requirements to inform/consult employees about the transaction. However, where recognised trade unions exist, they may be consulted on (or they may get involved because of) the effect of the transaction on employees.

2.11 What documentation is needed?

For the transfer or issuance of shares, parties enter into share purchase or share subscription agreements governing the terms of the transfer or issuance, as the case may be. Parties may also enter into a shareholders’ agreement to govern inter se rights and obligations, including in relation to management and governance.

A business transfer agreement or an asset-purchase agreement is usually entered into for the sale of a business undertaking or sale of specific assets, as the case may be.

In order to give effect to a joint venture, parties enter into a joint venture agreement for setting out their capital contribution, common business objectives and distribution of responsibilities and management rights.

In the case of mergers, amalgamations and demergers, a scheme of arrangement setting out the terms and process of the merger is required to be sanctioned by the relevant NCLT(s) in whose jurisdiction the merging entities fall. In addition to the scheme of arrangement, it is not uncommon to execute a separate agreement detailing the parties’ underlying obligation vis-à-vis the merger/amalgamation/demerger.

2.12 Are there any special disclosure requirements?

Where an acquisition requires the approval of shareholders of the target (as may be required in, e.g., a scheme), it is mandatory to disclose material information relating to the transaction in the notice to the shareholders convening the shareholders’ meeting.

The LODR Regulations require listed companies to make various disclosures to SEBI/stock exchange(s) where the company is listed relating to shareholding and pricing in a strictly time-bound manner. In addition, where an open offer is made, potential acquirers are to make relevant disclosures, including newspaper advertisements, at different stages of the acquisition process, such as in the public announcement (“PA”), detailed public statements, letters of offers, etc. Further, M&A transactions may also require appropriate filings to be made to the relevant registrar of companies (“RoC”) or the RBI in the case of a transaction involving non-residents in the prescribed form and manner within the prescribed statutory time limit (e.g., filings for issuance of shares or changes to the board of directors of the target).

2.13 What are the key costs?

Under Indian law, applicable stamp duty is required to be paid on a document for it to be admissible as evidence in court. It should be noted that the amount of stamp duty payable depends on the subject matter of the document and the place of execution. The applicable stamp duty in India varies for every state. In addition, stamp duty is payable on the issue and transfer of securities of Indian companies in accordance with the uniform rates prescribed by the Central Government.

Transfer of immovable property pursuant to a slump sale (i.e., a business transfer) would require execution of a conveyance deed, which would need to be stamped in accordance with the stamp duty laws of the state where the conveyance is being executed and to which it relates. Further, documents that relate to immovable property are also required to be registered at an additional cost in order to be enforceable.

An order sanctioning a scheme of arrangement is also to be stamped, in accordance with state-specific stamp laws.

Lastly, taxes would be payable depending on the nature of the transaction.

2.14 What consents are needed?

In addition to the regulatory consents and corporate approvals for the transaction, third-party consents from, inter alia, financial lenders, existing investors, counterparties to contracts, local governmental authorities and tax authorities are typically required for transactions involving a change in shareholding, control or management of a company.

2.15 What levels of approval or acceptance are needed?

The approval of the board of directors of a company is required for any form of acquisition. Where securities are issued to an acquirer in preference to existing shareholders (or one existing shareholder in preference to another), approval of at least 75% shareholders is required. In the case of public companies, shareholders’ approval is also required for the sale of a material undertaking (i.e., an undertaking that generates 20% of the total income of the company during the previous financial year). Prior to the NCLT approving a scheme, the scheme must be approved by a majority representing three-fourths in value of each class of shareholders and creditors. Also, any merger involving a listed company requires the approval of SEBI and the relevant stock exchanges where the securities are listed.

An acquisition may require an approval from the RBI if it is not in compliance with the provisions of the Foreign Exchange Regulations (for instance, if the investment exceeds the sectoral caps for foreign investment or is not in compliance with the Pricing Guidelines). Similarly, certain types of combinations (such as M&A) of companies may need to be notified to the Competition Commission of India (the “CCI”) if the financial thresholds, as prescribed, are exceeded or if prescribed exemptions are not available.

2.16 When does cash consideration need to be committed and available?

In general, there are no statutory guidelines requiring availability of committed cash considerations in the case of an acquisition. The only exception is in the case of an MTO to public shareholders of a listed company in accordance with the Takeover Regulations. The Takeover Regulations require that prior to making the PA for an open offer, the acquirer ensures that financial arrangements have been made for fulfilling the payment obligations. Further, the acquirer is required to create an escrow account toward security for performance of its obligations, and deposit at least a portion of the consideration for the open offer in such escrow account in accordance with the Takeover Regulations.

3. Friendly or Hostile

3.1 Is there a choice?

Hostile takeovers are fairly uncommon in India. This is attributable to the fact that board and shareholder cooperation is required for various steps of an acquisition and such shareholding is typically controlled by promoters, and also because of regulatory hurdles, such as an MTO can be withdrawn only in certain, very limited, prescribed situations after being launched (see also the response to question 8.2). In particular, the requirement under the Takeover Regulations to disclose shareholdings upon crossing certain thresholds allows the controlling shareholders to keep an eye on ‘predators’. Nevertheless, the Takeover Regulations permit an acquirer to voluntarily make an open offer to acquire shareholding in a listed company (up to the entire share capital of the company or up to 75% of the share capital of the company, depending on the existing shareholding of the acquirer in the company).

3.2 Are there rules about an approach to the target?

Generally, there is no specific legal framework for approaching a target. However, listed companies are not permitted to share information with a potential acquirer unless the board approves the potential transaction as being in the best interests of the company. Further, confidentiality and non-disclosure agreements are required to be entered into with the acquirer and advisors.

3.3 How relevant is the target board?

Under the corporate law regime, the board owes a fiduciary duty to act in the best interests of all the stakeholders of the company and to discharge its duties with due and reasonable care. Specifically, under the M&A framework, the target board is required to approve all acquisition transactions. Such approval is required for the issuance and allotment of shares and to take on record the transfer of shares from the seller to the acquirer.

In the case of listed companies, while the Takeover Regulations mandate a neutral role for the target during the offer period, the board is required to provide relevant information to shareholders when an MTO is triggered and further, to constitute a committee of independent directors to provide reasoned recommendations on the open offer once the draft public statement is received by the target.

3.4 Does the choice affect process?

Yes. However, hostile takeovers are not common in India for the reasons set out in questions 3.1 and 8.2.

4. Information

4.1 What information is available to a buyer?

Certain information in relation to the target is available on publicly available databases, including the details of incorporation, shareholding, corporate filings, encumbrance on assets, intellectual property owned, land records and litigation.

Moreover, the information available to buyers will differ based on whether the target is a public listed company or a closely held private company. In the case of the latter, the information is limited to statutory corporate filings made with the RoC. Such information would include annual reports and financial statements, constitutional documents and filings concerning directors, encumbrances, changes to share capital, etc.

As opposed to the above, in the case of listed public companies, besides information available from the RoC, SEBI also prescribes various disclosure and filing requirements with the stock exchanges (where the shares of the target are listed). Examples of mandatory disclosures include change in shareholding pattern, material agreements entered into and the outcome of a board and shareholders’ meeting. In addition to the mandatory disclosures and filings, listed companies are required to disclose all events that are considered material by the board (such as acquisitions (including agreement to acquire), schemes of arrangement, the sale or disposal of any unit(s)/division(s) or any other form of restructuring, the issuance/forfeiture of shares, the buyback of securities and change in directors and key managerial personnel).

The SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “Insider Trading Regulations”) prohibit both the communication and receipt of unpublished, price-sensitive information in relation to listed companies. However, the Insider Trading Regulations specifically permit the communication and procurement of information in connection with acquisition transactions if, in the opinion of the board of the target, the transaction is in the best interests of the company and confidentiality agreements have been entered into with the acquirer and its advisors.

4.2 Is negotiation confidential and is access restricted?

Yes, generally, the negotiation process is confidential and only the advisors on the transaction have access to the negotiations. Further, parties to transactions generally execute non-disclosure agreements for exchanging confidential information.

4.3 When is an announcement required and what will become public?

For transactions involving unlisted companies, there is no requirement to make an announcement in relation to the acquisition. However, for a listed company, the LODR Regulations prescribe various disclosures to be made to the relevant stock exchange(s). Generally, on the execution of the transaction documents, listed companies disclose the transaction.

4.4 What if the information is wrong or changes?

Any incorrect information or any change in the information provided in the disclosures must be corrected by issuing corrigenda. The compliance-related forms may be re-submitted for rectification, if permitted. In addition, rectification of information submitted to the RoC can be made through Forms GNL-1 and GNL-2.

5. Stakebuilding

5.1 Can shares be bought outside the offer process?

Yes. However, there is a restriction on the purchase of shares outside of the offer process for a period of three working days prior to the commencement of the tendering period and until the expiry of the tendering period.

5.2 Can derivatives be bought outside the offer process?

There are no specific restrictions on the purchase of derivatives while an open offer process is ongoing.

5.3 What are the disclosure triggers for shares and derivatives stakebuilding before the offer and during the offer period?

A PA of an open offer is to be made by an acquirer:

• for acquiring 25% or more of the voting rights in, or control of, the target; or
• for any subsequent acquisition exceeding 5% in a financial year.

The PA is to be made on the date of agreeing to acquire the shares/voting rights in, or control over, the target. The acquirer is required to disclose (within two working days of receipt of intimation of allotment or acquisition of shares/voting rights, as the case may be):

• its aggregate shareholding in the case of an acquisition of 5% or more of the target; and
• change in shareholding or voting rights of 2% or more, from the time the last disclosure was made.

Further, acquisition of convertible securities is considered an acquisition of shares and the appropriate disclosures will be necessary.

5.4 What are the limitations and consequences?

The offer size will proportionately increase if there is an increase in the total number of shares after a PA, not contemplated on the date of the PA. Further, where the price of acquisition of shares is higher than the price offered pursuant to an MTO, the price of shares to be purchased pursuant to the MTO will also increase.

6. Deal Protection

6.1 Are break fees available?

The payment of break fees in the case of a failed transaction is more an outcome of contractual agreements rather than obligations under law. In India, payment of break fees or reverse-break fees does not find a position within the realm of the legal framework. The parties may contractually negotiate and finalise the terms governing the payment of break fees, including, inter alia, quantum, triggers, guarantees for securing payment, etc. In the absence of express legal provisions for payment of break fees, there are several regulatory hurdles that arise while effecting the payment obligation. For example, in the case of a cross-border transaction, payment of break fees by a resident to a non-resident may require prior approval from the RBI. Similarly, in the case of transactions involving a listed Indian company, although break fees are not common, if included, prior sanction from SEBI may also be required. From an antitrust perspective, the payment of break fees could likely give rise to ‘gun-jumping’ issues. While payment of break fees is often used in transactions as a deal-protection device, it is still in a nascent stage and has not been fully tested before the courts of law. Though not tested, in all likelihood, break fees that may be agreed by the regulatory authorities will be limited to compensation for losses that are reasonably foreseeable as the natural loss resulting from non-performance. If the quantum is high or disproportionate to the expected loss, Indian courts may well strike down the break fees as being in the nature of a penalty. In most cases, the party breaching the letter of intent or memorandum of understanding must reimburse the expenses incurred by the other party in connection with the transaction.

6.2 Can the target agree not to shop the company or its assets?

In negotiated M&A transactions, it is very common for the buyer to impose a restriction on the target and its shareholders from soliciting third-party offers or proposals until the consummation of the transaction. Usually, a ‘no-shop provision’ requires: (a) the target, promoters/shareholders to not actively seek any offers; (b) the target to cease providing any information about the buyer’s bid to other third-party buyers; and (c) the target to provide information pertaining to any unsolicited offers to the buyer. However, a listed company cannot block any competitive tender offer made by a new bidder. The listed company may be required to treat a competing tender offer on par with the original offer and may have to extend similar information and support to all acquirers.

6.3 Can the target agree to issue shares or sell assets?

A listed company, during the subsistence of a tender offer, cannot dispose of material assets or issue securities (except in certain circumstances) without the prior approval of the shareholders by a special resolution. However, parties may contractually agree to securities being issued by the target or where particular assets are to be disposed.

6.4 What commitments are available to tie up a deal?

To ensure effective completion, parties may contractually agree (subject to the Foreign Exchange Regulations, where applicable) to incorporate provisions pertaining to exclusivity, fulfilment of conditions precedent, advance payment of part consideration or deposit of consideration in escrow, standstill obligations and break fees.

7. Bidder Protection

7.1 What deal conditions are permitted and is their invocation restricted?

As a deal-protection device, the bidder can contractually require the target to adhere to covenants pertaining to exclusivity, standstill obligations, break fees, etc. Enforceability of such clauses must be ascertained on a case-by-case basis. For example, payment of break fees is subject to certain regulatory hurdles (see the response to question 6.1). Similarly, exclusivity can be enforced in limited circumstances (see the response to question 6.2).

7.2 What control does the bidder have over the target during the process?

In the case of an unlisted target, the nature and extent of control exercisable by a bidder during the acquisition process depends on the terms in the transaction documents. During the acquisition process, the target can contractually agree with the bidder to refrain from undertaking specific actions without the prior consent of the bidder. However, in cases where the prior approval of the CCI is required for consummation of the transaction, such provisions may be tantamount to an acquisition of control and, hence, are usually not included, or only included in a limited form, in the transaction documents.

Similarly, in the case of a listed target, control cannot be exercised by the bidder unless an MTO is made in accordance with the terms of the Takeover Regulations. It is pertinent to note that any indirect acquisition of control over a listed target will also trigger open offer obligations under the Takeover Regulations. Further, subject to regulatory approvals, where an acquirer deposits into the escrow account, in cash, 100% of the consideration payable under the open offer, such acquirer may appoint a director on the board of the target after a period of 15 working days from the date of the detailed public statement. However, any director representing the acquirer on the board is not entitled to vote on any matter pertaining to the open offer.

Apart from the limited instances described above, any demonstration of control by an acquirer or any act in furtherance of the transaction before receipt of an approval from the relevant antitrust authorities, where applicable, will be likely seen as ‘gun jumping’ and may attract penalties under the Competition Act.

7.3 When does control pass to the bidder?

Generally, control passes to the bidder at closing, i.e., on completion of the acquisition.

7.4 How can the bidder get 100% control?

In the case of an unlisted target, the bidder can acquire the entire equity share capital of the target pursuant to a share purchase agreement. In addition, in unlisted target companies, a majority shareholder of a company (holding at least 90% of equity shareholding) has a right, subject to certain conditions, to notify its intention to buy out minority shareholders at a price to be determined in accordance with the provisions of the Companies Act. However, the same mechanism of minority squeeze-out is not available for listed target companies as it is mandatory for listed target companies to maintain public shareholding of at least 25%. A bidder cannot acquire 100% ownership over a listed target unless the target is delisted in accordance with applicable laws (including the SEBI (Delisting of Equity Shares) Regulations, 2021 (the “Delisting Regulations”)).

It is to be noted that the delisting of equity shares is not permissible in certain circumstances. The Delisting Regulations do not allow any delisting of equity shares where it is, inter alia: (a) prior to expiry of three years from the listing of that class of equity shares on any stock exchange; (b) if any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding; or (c) if the acquirer (i.e., a person who decides to make an offer for delisting of equity shares, or any entity belonging to the promoter(s) or promoter group along with the persons acting in concert) has sold equity shares of the company during a period of six months prior to the date of the initial public announcement of the proposed delisting.

8. Target Defences

8.1 What can the target do to resist change of control?

Hostile takeovers in unlisted companies are unlikely as the terms are negotiated. In the case of a listed target, hostile bids, though fairly uncommon, are permitted under the Takeover Regulations. The Takeover Regulations set out extensive provisions on hostile/competitive bids in relation to (among other things): (a) the timing of the PA of the hostile bid; (b) the minimum acquisition thresholds for hostile bids; and (c) the right of the original bidder to revise the terms of its open offer to counter any hostile bids. There is no ‘straitjacket formula’ to prevent hostile bids.

Further, if the terms of the hostile bid are not in the interest of the target or the shareholders, the committee of independent directors of the listed target will provide written recommendations to the shareholders for their consideration. Such recommendations, however, are not binding on shareholders.

8.2 Is it a fair fight?

The listed target has limited avenues of defence in the case of a hostile takeover. However, it is difficult to implement a hostile takeover for various reasons, including, inter alia: (a) that most listed companies are family-owned and promoter-driven, resulting in the concentration of shareholding and rights in a specified group of people; (b) regulatory approvals and requirements; (c) commercial risks, since reliance can only be placed on publicly available information as hostile bidders cannot expect the target’s cooperation in relation to due diligence; and (d) risks associated with restrictions on withdrawal of the MTO.

9. Other Useful Facts

9.1 What are the major influences on the success of an acquisition?

Effective conduct and completion of due diligence exercise; completion of pre-closing covenants in a timely manner; the obtaining of regulatory, statutory and third-party approvals; and building good relations with key stakeholders (regulators, promoters, lenders, management, etc.) are some of the primary factors that influence the success of a transaction.

9.2 What happens if it fails?

In the case of a failed acquisition, the bidder will have to make a fresh attempt.

10. Updates

10.1 Please provide a summary of any relevant new law or practices in M&A in your jurisdiction.

Some of the notable legal updates in M&A in India are set out below:

• Amendments to the Indian merger control regime: The Competition (Amendment) Act, 2023 (the “Amendment Act”) has introduced certain notable changes to the Competition Act. A few key changes introduced in the Amendment Act and the Draft Regulations (as defined below) (which have not yet been brought into force) include:
  • Introduction of deal value threshold: A new ‘deal value’ threshold has been introduced; as a result, transactions where: (A) the deal value of any transaction involving the acquisition of control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds INR 20 billion (approximately USD 240,084,200); and (B) the target enterprise has ‘substantial business operations in India’, will be required to be notified to the CCI. It is important to note that transactions that are otherwise eligible for the de minimis exemption (i.e., small target exemption) but cross the deal value threshold will have to be notified to the CCI. The Amendment Act defines the ‘value of transaction’ to include every valuable consideration, whether direct, indirect or deferred. This threshold is aimed to capture transactions in the digital and infrastructure space, which are otherwise able to avail the benefit of the de minimis exemption. These business models are light on either assets or turnover but possess significant technology, valuable innovation or considerable investment in the real estate sector. Further, the CCI has published the draft Competition Commission of India (Combinations) Regulations, 2023 (the “Draft Regulations”) for public consultation to provide clarity on, inter alia, the parameters for determination of ‘value of transaction’ and ‘substantial business operations in India’. While the Draft Regulations are intended to replace the existing combination regulations, it does not contain any transitional provisions for transactions that have been signed but not closed before the final regulations are brought into force.
  • Amendment to the definition of ‘control’: The definition of ‘control’ under the Competition Act is relevant for assessing whether a transaction is notifiable for a substantive assessment by the CCI. The Amendment Act has replaced the existing definition of control and aligned it with the CCI’s decisional practice whereby the ability to exercise ‘material influence’ over the management, affairs or strategic commercial decisions is considered as exercising control over the entity. The Competition Act (or the Amendment Act) does not define ‘material influence’ and, as such, a determination in this respect will be on a case-by-case basis.
  • Execution of open offer and shares acquired through stock exchanges: The Amendment Act permits implementation of: (A) an open offer; (B) an acquisition of shares; or (C) an acquisition of securities convertible into other securities, through a series of transactions on a regulated stock exchange prior to approval by the CCI. However, this derogation is subject to the following conditions: (A) such transaction is notified to the CCI within 30 calendar days from the date of first acquisition of shares or securities; and (B) the acquirer should not exercise ownership or beneficial rights or interest in such shares or convertible securities, until the CCI approves the transaction. In the interim, however, the acquirer can: (1) avail economic benefits; (2) dispose the shares or securities acquired; or (3) exercise voting rights in relation to liquidation and/or insolvency proceedings, subject to the acquirer directly or indirectly not exercising any influence over the target.
  • Deemed approval and reduction in timeline for implementation of a combination: Where any enterprise proposes to enter into a combination that fulfils certain specified criteria or is otherwise not exempted under the Competition Act, it needs to submit a notice to the CCI. Pursuant to the Amendment Act, the CCI needs to formulate its prima facie opinion on whether a transaction is likely to cause an appreciable adverse effect on competition, within 30 calendar days from receipt of notice, failing which the combination will be deemed to be approved and no separate order is required to be passed by the CCI. In addition, the erstwhile timeline for review of a combination of 210 calendar days, has now been reduced to 150 calendar days, which cannot be extended by the CCI.
  • Scope of gun jumping provisions: The Amendment Act has expanded the scope of gun jumping provisions under the merger control framework. Currently, enterprises are penalised for gun-jumping in cases where the parties have either consummated a reportable transaction without notifying the CCI or consummated a notified transaction before the CCI’s approval. The Amendment Act has introduced an additional parameter, whereby, a penalty can be imposed by the CCI in cases where enterprises fail to provide requisite information requested by the CCI while examining whether a non-notified transaction was in fact reportable. In addition, in line with the proposed introduction of deal value threshold, the Amendment Act provides that the CCI can penalise parties for non-disclosure by up to 1% of the deal value.
• Development in the Indian data privacy regime: On 11 August 2023, the Digital Personal Data Protection Act, 2023 (the “DPDP Act”) was enacted by the Central Government to regulate the processing of digital personal data (i.e., data about an individual, being a data principal, who is identifiable by or in relation to such data) in a manner that recognises the individual’s right to protect their personal data as well as the need to process such personal data for lawful purposes. While the DPDP Act has been enacted, it is yet to be enforced. Upon enforcement, the DPDP Act will replace the existing data protection regime in India (i.e., Section 43A of the Information Technology Act, 2000 read with the rules issued thereunder). The DPDP Act focuses on governing personal data without creating tiered categories of such data (such as sensitive personal data or critical personal data). Specifically, the DPDP Act will govern certain processing activities that take place within India. It will also govern extra-territorial processing of digital personal data, if such processing is in connection with any activity of offering goods or services to data principals within India. As such, corporations will need to undertake an assessment of the type of personal data they process, the purpose for which such processing is done and how they source such data. Such a determination will be crucial for corporations to understand the compliances they will need to undertake. Once such determination has been made, corporations that qualify as ‘data fiduciaries’ (i.e., an entity that determines the means and purpose of processing personal data) will need to comply with a host of new requirements, such as providing notice and obtaining consent for processing personal data, ensuring purpose and retention limitation, effecting data principal rights (including right to erasure, nomination and correction), notifying data principals on the occurrence of a personal data breach and providing effective grievance redressal.
• Modification to the process for ‘fast-track mergers’: Section 233 of the Companies Act provides for a fast-track scheme of merger for the following categories of companies: (i) two small companies; (ii) two start-up companies; (iii) a start-up company with a small company; or (iv) a holding company with its wholly owned subsidiaries. The Ministry of Corporate Affairs (the “MCA”) has introduced the Companies (Compromises, Arrangement and Amalgamations) Amendment Rules, 2023 and modified this process by making the amendments set out below:
  • Time limit for objections: Prior to this amendment, there was no specific timeline for the RoC and the official liquidator to submit any objections or suggestions to the scheme before the Central Government. With this amendment, the RoC and the official liquidator need to submit their objections and suggestions (if any) within 30 days from the receipt of the scheme of merger.
  • Deemed approval: If no objections are received, the Central Government may issue a confirmation order within 15 days from expiry of the 30 days. However, if no confirmation order is passed within 60 days from the receipt of the scheme, the scheme will be deemed to be approved. Similarly, in the event objections are received and the Central Government does not pass a confirmation order or file an application before the NCLT within 60 days from the receipt of the scheme, the scheme will be deemed to be approved. Prior to the amendment, such provision on deemed approvals did not form a part of the regime and, as such, it is a welcome move from the perspective of deal certainty and shorter gestation periods.
• Listing of securities of public companies on foreign stock exchanges: With effect from 30 October 2023, the MCA has notified the provision under Section 23 of the Companies Act pursuant to which certain classes of public companies are, inter alia, permitted to issue securities for the purpose of listing on permitted stock exchanges in permissible foreign jurisdictions. While the provision was enacted in 2020, it has only now been enforced. As a result, such public companies will have the flexibility to list their securities on foreign stock exchanges going forward.
• Mandatory conversion of physical securities into dematerialised format: The MCA has introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023, which requires all private companies (that are not small companies or Government companies) to convert their physical securities into a dematerialised format within 18 months of the conclusion of the financial year ended 31 March 2023 (i.e., by 30 September 2024 latest). In addition, every private company making any offer for the issue or buyback of any securities needs to ensure that before making such an offer, the entire holding of securities of its promoters, directors, key managerial personnel has been dematerialised. Prior to the amendment, such requirement of mandatory dematerialisation was only limited to public companies.
• Additional disclosure obligations for listed entities in relation to certain agreements: Pursuant to the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (the “SEBI LODR Amendment 2023”), the SEBI has introduced a new Regulation 30A under the SEBI LODR, which requires disclosure by a listed entity of all agreements that directly/indirectly/potentially or whose purpose and effect is to impact the management or control of the listed entity or impose any restriction or create any liability upon the listed entity, entered into by, inter alia, the shareholders, promoter group entities, related parties, key managerial personnel or employees of the listed entity (or of its holding, subsidiary or associate company), among themselves or with the listed entity or with a third party, solely or jointly, irrespective of whether the listed entity is a party to such agreements. Any rescission or amendment of such agreements will also need to be disclosed. However, agreements entered into by a listed entity in the normal course of business will not be required to be disclosed, unless such agreements either impact the management or control of the listed entity directly/indirectly/potentially or through their purpose and effect. This disclosure requirement will apply even to agreements that subsist as on the date of notification, i.e., 13 July 2023.
• Additional shareholder approval requirements for listed entities: Pursuant to the SEBI LODR Amendment 2023, the items set out below have been newly inserted in the list of matters, which will require shareholders’ approval by way of a special resolution (i.e., a majority representing three-fourths in the number of shareholders voting).
  • Special rights to shareholders: With effect from 15 July 2023, a grant of any special rights to any shareholder(s) will require shareholders’ approval once every five years from the date of grant of such rights. In addition, any existing special rights will need to be approved by the shareholders within five years from 15 July 2023. However, the grant of special rights to a financial institution or a debenture trustee (who becomes a shareholder of the listed entity as a consequence of the underlying lending/debenture document) has been excluded from this requirement. While the term ‘special rights’ has not been defined under the SEBI LODR, it can be reasonably assumed that rights that are ordinarily not available to the other shareholders should fall within its purview.
  • Sale, lease or disposal of an undertaking of a listed entity outside any scheme of arrangement: Any sale, lease or disposal of the whole or substantially the whole of the undertaking of a listed entity, going forward, will now need to be with the prior approval of its shareholders by way of a special resolution. It has been clarified that such a special resolution will be acted upon only if the votes cast by the ‘public shareholders’ in favour of the resolution exceed the votes cast by such public shareholders against the resolution. Accordingly, the votes cast by the shareholders other than public shareholders (i.e., promoters or promoter group entities; or associates) of the listed entity will be excluded for determining the outcome of the resolution. In addition, any public shareholder who is a party (directly/indirectly) to such a transaction is restricted from voting on such matters. However, this condition will not apply if such disposal: (a) is in favour of a wholly owned subsidiary whose accounts are consolidated with such listed entity. That said, any subsequent dilution of the listed entity’s shareholding (below 100%) in such wholly owned subsidiary will trigger prior shareholders’ approval; and (b) is by virtue of a covenant under a contract with a financial institution or debenture trustee. Prior to this amendment, Section 180(1)(a) of the Companies Act only provided for a requirement of special resolution, where even the parties interested in the transaction were allowed to vote. Thus, the SEBI LODR Amendment 2023 has introduced a stricter framework for the sale, lease or disposal of an undertaking of a listed entity.
• Changes in the definition of ‘change in control’ in relation to intermediaries: On 17 January 2023, the SEBI (Change in Control in Intermediaries) (Amendment) Regulations, 2023 was notified to amend/insert, as applicable, the definition of ‘change in control’ across several regulations issued by the SEBI, which are applicable to various intermediaries (including merchant bankers, debenture trustees, investment advisors, depositories and participants and alternate investment funds) for the purpose of streamlining a determination of change in control of the intermediaries. Pursuant to the regulations, a change in control of an intermediary will be construed by reference to: (i) the definition of ‘control’ under the Takeover Regulations, in case of a listed entity; and (ii) the definition of ‘control’ under the Companies Act, in case of an unlisted entity. In cases other than a body corporate, ‘change in control’ will be construed as any change in legal formation, ownership or change in controlling interest (i.e., a direct or indirect interest of not less than 50% of voting rights or interest).
  • Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023 (the “LLP SBO Rules”): In 2018, the MCA introduced the regime for the identification and declaration of significant beneficial owners (“SBOs”) with respect to companies under Section 90 of the Companies Act. By way of a notification dated 11 February 2022, the MCA extended the scope of Section 90 of the Companies Act to cover limited liability partnerships (“LLP(s)”). While the MCA rolled out the Companies (Significant Beneficial Owners) Rules, 2018 (the “Companies SBO Rules”) for implementing the SBO framework with respect to companies, no such rules were formulated in relation to LLPs. To address such gap in the SBO framework with respect to LLPs, the MCA has notified the LLP SBO Rules on 9 November 2023. As with the Companies SBO Rules, the LLP SBO Rules set out, inter alia: (i) the criteria to ascertain an SBO in relation to an LLP; and (ii) the compliance requirements for LLPs with respect to their SBOs (such as the maintenance of registers and reporting requirements).

Under the LLP SBO Rules, an individual is considered as an SBO of an LLP if such individual possesses one or more of the following rights or entitlements in such LLP, acting alone or together with one or more persons or trust, namely: (i) holding indirectly or together with any direct holdings, not less than 10% of the contribution; (ii) holding indirectly or together with any direct holding, not less than 10% of voting rights in respect of the management or policy decisions in such LLP; (iii) having the right to receive or participate in not less than 10% of the total distributable profits, or any other distribution, in a financial year through indirect holdings alone or together with any direct holdings; and/or (iv) having the right to exercise or actually exercising, significant influence or control, in any manner other than through direct-holdings alone

This article was originally published in ICLG on 28 February 2024 Co-written by: Raghubir Menon, Regional Head – M&A and Private Equity, General Corporate; Sakshi Mehra, Partner; Rooha Khurshid, Senior Associate. Click here for original article

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