This country-specific Q&A provides an overview to M&A laws and regulations that may occur in India.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The key laws and rules depend on various factors such as the nature of the entity—whether it is private or public or public listed, whether it is a company, a partnership or a limited liability partnership; whether it is an Indian or a foreign entity etc. However, generally speaking the following key laws apply especially in the cross-border context:
(i) The Companies Act, 2013 (the “Companies Act”),
(ii) The Limited Liability Partnership Act, 2008,
(iii) The Competition Act, 2002,
(iv) The Securities and Exchange Board of India Act, 1992,
(v) The Securities Contract Regulation Act, 1956,
(vi) The Income-tax Act, 1961,
(vii) The Foreign Exchange Management Act, 1999, and
(viii) The Insolvency and Bankruptcy Code, 2016
Similarly, generally speaking, the key rules are as follows:
(i) The Companies (Restrictions on Number of Layers Rules), 2017,
(ii) The (Prospectus and Allotment of Securities Rules), 2019,
(iii) The (Share Capital and Debentures) Rules, 2014,
(iv) The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016,
(v) The Companies (Registered Valuers and Valuation) Rules, 2017,
(vi) The Foreign Exchange Management (Transfer or Issue of Security By a Person Resident Outside India) Regulations, 2000,
(vii) Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations 2004,
(viii) The Foreign Exchange Management (Cross Border Merger) Regulations, 2018,
(ix) The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover Code”),
(x) Securities and Exchange Board of India (Buy-back of Securities) Regulations, 2018,
(xi) SEBI (Prohibition of Insider Trading) Regulations, 2015,
(xii) The Competition Commission of India (Procedure In Regard to the Transaction of Business Relating to Combinations) Regulations, 2011.
The key regulators are:
(i) The Securities and Exchange Board of India (“SEBI”),
(ii) The Competition Commission of India,
(iii) The Reserved Bank of India, and
(iv) The National Company Law Tribunal (“NCLT”).
In addition, there are be sector specific M&A regulations and regulators applicable to sectors such as the insurance sector, telecom sector, etc. Also, other general laws that may have relevance to M&A in India, are laws relating to intellectual property, contract law, arbitration law, etc.
What is the current state of the market?
The market is robust. India is the fastest growing large economy in the world, and is also ahead of China. Infact several Chinese companies are now heavily invested and active in the Indian market. India’s GDP growth is expected to be 7.2% for the financial year 2018-19. India’s ranking was once again, upgraded by several notches, in the World Bank’s ‘Ease of Doing Business Report.’
As per newspaper reports, the value of announced M&A deals for the year 2018 was US$ 129.4 Billion. The earlier highest record was US$ 67.4 Billion in 2007. Thus, after a gap of 11 years the M&A deal volume significantly picked-up. Out of the total deals, there were five deals exceeding US$ 5 Billion. Domestic deal value was US$ 53.7 Billion. Cross-border M&A activity stood at US$ 69.2 Billion out of which inbound M&A was US$ 55.8 Billion. One of the largest deals in the e-commerce space in the world was the acquisition Walmart Inc, USA of Flipkart India for US$ 16 Billion.
Which market sectors have been particularly active recently?
E-commerce, food-tech, cab-aggregation, non-banking finance, education, and health care have been particularly active. Additionally, there has been activity in the warehousing, telecom, manufacturing, energy and natural resources sectors.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
The three most significant factors influencing M&A activity over the next 2 years are likely to be the large market India offers for sales of products and services, acquirers wanting to acquire competing companies and growing inorganically, and various opportunities offered by companies undergoing insolvency proceedings.
What are the key means of effecting the acquisition of a publicly traded company?
The key means of effecting the acquisition of a public traded company are to (i) to enter into a negotiated transaction with the key equity shareholders of the company for purchase of their shares, (ii) investing into the target company by way of a preferential allotment of equity shares, (iii) court approved merger or amalgamations, and/or (iv) acquiring shares from the open market, and (v) making a voluntary or a mandatory open offer for acquisition of additional shares as per the provisions of the Take Over Code.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
If the target is a listed company then there will be significant information publicly available, since all listed companies are required to make various disclosures pursuant to the SEBI (Listing Obligations and Disclosure Requirements), Regulations including information regarding all material information and events such as acquisition, sale or disposal of any a unit, division(s) or subsidiary of the listed entity or any other restructuring issuance or forfeiture of securities, split or consolidation of shares, buyback of securities, any restriction on transferability of securities or alteration in terms or structure of existing securities including forfeiture, reissue of forfeited securities, alteration of calls, redemption of securities, revision in ratings, outcome of meetings of the board of directors related to dividends and/or cash bonuses recommended or declared or the decision to pass any dividend and the date on which dividend shall be paid/dispatched; the decision on buyback of securities; the decision with respect to fund raising proposed to be undertaken, financial results; and all information having a bearing on the performance, operations and/or price sensitive information.
As far as a potential acquirer is concerned, the extent of diligence related information would depend on the contractual obligations between the acquirer and the target. However, no unpublished price sensitive information can be disclosed by the target unless the acquirer is bound by a non-disclosure agreement, and the board of directors of the target is of the informed opinion that the disclosure of such information is in the best interest of the target. Further, such information may be disclosed only if it is in connection with a substantial transaction, which would entail an open offer, or if such information is disseminated and made generally available, at least two trading days prior to the proposed transaction being effected.
To what level of detail is due diligence customarily undertaken?
Generally, in case of unlisted targets including companies, a very detailed diligence is customarily undertaken. This would cover matters right from incorporation of a target, to issuance of initial shares or other instruments to the founders, and matters such as compliance with various applicable laws including company laws, income-tax laws, foreign exchange management laws, environmental laws, intellectual property laws, etc. Internal agreements among founders and key vendors and customers are also analyzed threadbare.
As far as listed targets are concerned, subject to the limitations explained in answer 6 above, depending on the size of the deal, detailed diligence may be conducted
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The key decision-making organs of a target company are its board of directors. The board of directors may delegate their powers to their managing director, the manager or any other principal officer of the company. However, certain key decisions compulsorily need the approval of the target company’s shareholders.
For example, matters such as selling, leasing or otherwise disposing of the whole or substantially the whole of the undertaking of the company; borrowing monies, where the monies to be borrowed, together with the money already borrowed by the company would exceed the aggregate of its paid-up share capital, free reserves and securities premium; investing the amount of compensation received as a result of any merger or amalgamation; to remit, or give time for the repayment of, any debt due from a director.
What are the duties of the directors and controlling shareholders of a target company?
Duties of directors are prescribed under the Companies Act, and are as follows:
(i) To act in accordance with the articles of the company.
(ii) To act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
(iii) To exercise their duties with due and reasonable care, skill and diligence and exercise independent judgment.
(iv) To not be involved in situations in which they may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(v) To restrain themselves from achieving or attempting to achieve any undue gain or advantage either to themselves or to their relatives, partners, or associates.
As far as controlling shareholders are concerned, there are no duties imposed on them by statue. However, under the Companies Act, an eligible shareholder including an eligible minority shareholder may petition the NCLT that the affairs of a company are being conducted in a manner prejudicial or oppressive to him or in a manner prejudicial to the interests of the company. Thus, to this extent it may be implied that it would be the duty of a majority shareholder not to oppress a minority shareholder.
Do employees/other stakeholders have any specific approval, consultation or other rights?
Since directors are to act in good faith in order to promote the objects of the company for the benefit also of its employees, it could be said that to that extent, the employees have a right to protect themselves against their interests being neglected. Further, where an employee is considered to be a ‘workman’ under India’s labor laws, then such an employee may have additional rights and may need to grant his approval for being transferred to a new employee in certain situations.
As far as other stakeholders are concerned, in the case of amalgamations when an application is made to the NCLT for approving the scheme of amalgamation, a notice of the scheme is to be sent to various statutory authorities such as the Central Government, the Registrar of Companies, the Income-tax authorities, in all cases; the Reserve Bank of India, the Securities and Exchange Board of India, the Competition Commission of India, and the stock exchanges, as may be applicable; and other sectoral regulators or authorities, as required by the NCLT. Thereafter, the statutory authorities may make a representation within 30 days from the date of the receipt of the said notice.
To what degree is conditionality an accepted market feature on acquisitions?
Conditionality is a very commonly accepted market feature on acquisitions. Most of the transactions are subject to there being no material adverse change, subject to the target procuring all internal approvals such as shareholders approvals, as well as any statutory approvals. Further, if any of the material contracts contain a change of control consent provision, then such consents need to be procured. In certain cases, the acquisition may be subject to achievement of specific milestones by the target. Matters that may have come-up in the due diligence would need to be addressed or certain representations, warranties and indemnities procured.
What steps can an acquirer of a target company take to secure deal exclusivity?
The acquirer can enter into an exclusivity agreement including a no-shop covenant with the target and/or its majority shareholders in order to secure exclusivity for the deal. The acquirer may impose break-up fees on the target and/or its majority shareholders.
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
As stated above, the acquirer may impose break-up fees on the target and/or its majority shareholders.
Which forms of consideration are most commonly used?
Cash is the most common form of consideration. In certain cases, shares or a combination of cash and shares are also used.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Subject to certain exceptions, any person who acquires 25% or more of the shares or voting rights of a target must make a public announcement. Further, irrespective of the percentage of shares or voting rights acquired, if an acquirer acquires ‘control’ over a target, then too, a public announcement is to be made. Any person who already holds 25% or more of the shares or voting rights of a target, and who in any financial year acquires shares or voting rights which entitle such acquirer to voting rights exceeding 5%, is also required to make a public announcement, subject to certain exceptions.
Further, any acquirer who acquires shares or voting rights in a target company which taken together with shares or voting rights, if any, held by him and by persons acting in concert with him in such target company, aggregating to 5% or more of the shares of such target company, need to disclose their aggregate shareholding and voting rights in such target company. And any holder of 5% or more of shares or voting rights needs to also disclose any change in their holding even if the change results in the shareholding falling below 5% provided such change exceeds 2% of the total shareholding or voting rights.
At what stage of negotiation is public disclosure required or customary?
It is obligatory to make a public announcement on the date of agreeing to acquire the shares or voting rights or control over the target. If an acquirer proposes to acquiring shares or voting rights in, or control over the target company through the mode of a preferential allotment, then the public announcement is to be made on the date on which the board of directors of the target company authorizes such preferential allotment.
Is there any maximum time period for negotiations or due diligence?
No, there is no maximum period for negotiations or due diligence. However, most transactions provide for an outer limit for negotiations and for due diligence.
Are there any circumstances where a minimum price may be set for the shares in a target company?
In the case of acquisition of a listed target, the Takeover Code mandates the minimum price to be offered to the public shareholders. This price must be the negotiated price under the acquisition agreement or a market linked price based on different scenarios—for example the volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any person acting in concert with him, during the fifty-two weeks immediately preceding the date of the public announcement.
Further, in all cross-border transactions, the shares of an Indian company cannot be sold below a minimum price to a non-resident. Such price is to be determined in accordance with any internationally acceptable pricing methodology for valuation at an arms length basis which must be certified by certain prescribed valuers such as a SEBI registered merchant banker.
Is it possible for target companies to provide financial assistance?
A private target company may provide financial assistance. However, for public companies, even if unlisted, providing financial assistance is prohibited subject to certain exceptions such as in connection with an employee stock option scheme or the giving of loans to employees for an amount not exceeding their salaries for a period of six months.
Which governing law is customarily used on acquisitions?
This depends on the bargaining position of the parties. If the parties are of equal bargaining position then it may be a neutral governing law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
The buyer would need to:
(i) produce a public announcement document to be sent to the SEBI and to all stocks exchanges on which shares of the target are listed
(ii) produce a detailed public statement to be published within 5 days of the public announcement
(iii) produce a letter of offer to be filed with the SEBI within 5 working days from the date of the detailed public statement made. The letter of offer needs to also be sent to the target company
(iv) produce and issue an advertisement, one working day before the commencement of the tendering period, announcing the schedule of activities for the open offer,
(v) produce and issue a post offer advertisement within five working days after the offer period, giving details including aggregate number of shares tendered, accepted, date of payment of consideration, etc.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
Generally, share transfers are effected pursuant to a share purchase agreement between the parties, unless the shares have been purchased through the open market on a stock exchange. An instrument of transfer of securities held in physical form is required to be in Form No.SH.4 and every instrument of transfer is to be delivered to the company within sixty days from the date of its execution. This is in addition to any formalities that may be prescribed under the Articles of Association of the company. Each transfer of shares is then approved by the board of the company, and thereafter recorded in the register of members of the company.
Stamp duty payable on shares held in physical form is 0.25% of the consideration for the transfer of shares.
Are hostile acquisitions a common feature?
No, hostile acquisitions are not a common feature. Due to the various disclosure and open offer obligations under the Takeover Code, it is very difficult to undertake a hostile acquisition.
What protections do directors of a target company have against a hostile approach?
At the outset, the directors must comply with their fiduciary duties even if faced with a hostile acquirer. They must act in good faith and in the best interests of the company, its shareholders and others as stated above.
However, if the directors of the target company are of the informed opinion that any takeover offer is not in the best interest of the company and its shareholders, it may attempt to gain the vote of the majority of the shareholders (by way of a special resolution i.e. votes cast in favour must be not less than three times the number of the votes cast against, if any, of the resolution) to alienate any material assets whether by way of sale, lease, encumbrance or otherwise or enter into any agreement therefor outside the ordinary course of business; or effect any material borrowings outside the ordinary course of business; or issue or allot any authorized but unissued securities entitling the holder to voting rights: implement any buy-back of shares or effect any other change to the capital structure of the target company; enter into, amend or terminate any material contracts to which the target company or any of its subsidiaries is a party, outside the ordinary course of business, accelerate any contingent vesting of a right of any person to whom the target company or any of its subsidiaries may have an obligation, whether such obligation is to acquire shares of the target company by way of employee stock options or otherwise.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Yes, in the case of listed companies when the acquirer acquires 25% or more of the shares or voting rights of a target or otherwise acquires ‘control’ over a target. The term ‘control’ is defined under the Takeover Code to include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders’ agreements or voting agreements or in any other manner.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
At the outset, it must be noted that in case of a listed entity, at least 25% of the shares must be held by the public. Thus, if an acquirer desires to acquire the target and keep the target’s status as listed, then at least 25% of the shares would need to continue to be with the public shareholders.
As far as rights of minority shareholders are concerned, they do not have any special rights. Most decisions can be taken by a simple majority while others require a special majority of 75% of the total votes cast.
However, if a minority shareholder holds at least 10% of the voting capital or in certain other specified situations, the minority shareholder may file an application to the NCLT against oppression and/or mismanagement of the company, seek certain reliefs.
Is a mechanism available to compulsorily acquire minority stakes?
Yes, such a mechanism is available under section 235 of the Companies Act, where a scheme or contract involving the transfer of shares in a company (the transferor company) to another company (the transferee company) has, within a prescribed time frame been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, the transferee company may, within the prescribed time frame give notice to any dissenting shareholder that it desires to acquire his shares. Thereafter, unless if the NCLT on an application made by the dissenting shareholder to the Tribunal, orders otherwise, the transferee company shall be entitled to and bound to acquire those shares on the same terms as those offered to the approving shareholders.