Trends and climate What is the current state of the M&A market in your jurisdiction? Amid the turmoil in the global market, India is one of the strongest performers among developing economies. This is one of the main reasons that India has experienced an increase in M&A activity, especially in relation to inbound M&A deals, since 2014. While India saw a rise in the total number of disclosed deals in 2015, the overall disclosed deal value slightly declined compared to 2014 and stood at $26.3 billion, owing mainly to a lack of large transactions.
Remarkably, India has also moved up 12 spots in the World Bank's latest ranking for ease of doing business. The government’s efforts to streamline the process of starting businesses in India is considered to be one of the main factors for this progress.
Major deals during 2015 include American Tower Corporation's 51% majority stake in Viom Network for $1.2 billion and Mumbai-based Carnival Group's acquisition of Larsen & Toubro's commercial real estate projects in Chandigarh for $267 million.
Have any significant economic or political developments affected the M&A market in your jurisdiction over the past 12 months? India witnessed a steady decline in the value of inbound deals since 2011 due to a policy freeze, regulatory uncertainties and the inaction shown by the coalition government. However, since the election of the Bharatiya Janata Party (BJP), which was elected by a resounding majority in the lower house of Parliament in 2014, India has experienced an encouraging increase in inbound deal figures. The rise in M&A activity can be attributed to the economic reforms promised by the new government. However, the government’s goals were hindered in 2015 when the BJP was defeated in the Delhi and Bihar state elections. This defeat stalled the government's initiative to increase its numbers in the upper house of Parliament and thus its ability to get key legislations passed.
External factors (eg, the slowing of China’s economy) coupled with the major global economic slowdown has also influenced India’s recent M&A activity. However, the increase in financing by foreign institutional investors has bolstered India's foreign exchange reserves and created a stable environment in the face of weakening emerging markets.
The government has also introduced certain policies to encourage foreign investment in India, including:
- increasing sectoral limits in sectors such as broadcasting carriage services and non-schedules airport transport services;
- increasing the number of special investment regions or special economic zones in light of the government’s smart cities initiative; and
- permitting investment in limited liability partnerships under the automatic route in sectors where 100% foreign investment is permitted.
These reforms have been lauded by domestic and foreign companies alike.
Are any sectors experiencing significant M&A activity? Significant growth in M&A activity has been observed in the energy and natural resources, pharma, life sciences and healthcare, e-commerce and technology sectors.
Are there any proposals for legal reform in your jurisdiction? The new Companies Act 2013 came into force on April 1 2014. Since enforcement, the act has occasionally been amended to encourage the establishment and operation of business in India. In this context, the Ministry of Corporate Affairs has also constituted the Companies Law Committee to provide recommendations on issues arising from the implementation of the act. The recommendations given by the committee, along with public comments on the same, are now being considered by the ministry.
Various sections of the Companies Act 2013 are yet to be notified – for example, those relating to court-approved mergers and winding up of companies. The enforcement of the provisions pertaining to M&A will streamline the procedure for mergers between small companies or holding companies and their wholly owned subsidiaries and also provide a mechanism for Indian companies to amalgamate with foreign companies.
Other significant reforms introduced by the government include:
- introduction of goods and services tax, which will consolidate the indirect tax regime;
- amendments to the Arbitration and Conciliation Act 1996, which are expected to fast-track arbitration in India;
- initiation of the process for establishing the National Company Law Tribunal, which will act as a comprehensive and overarching quasi-judicial body in order to adjudicate disputes relating to companies; and
- introduction of the Real Estate Regulation Bill, which is expected to streamline the acquisition of real estate.
Legislation What legislation governs M&A in your jurisdiction? While the Companies Act 2013 primarily governs companies in India, the Companies Act 1956 continues to govern the procedure for court-approved restructuring and reorganisation. Where the M&A activity involves a public listed company, the rules and regulations prescribed under the Securities and Exchange Board of India Act 1992 (eg, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 and the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulation 2009) also come into play. If the acquirer or seller is not resident in India, the regulations under the Foreign Exchange Management Act 1999 must be considered when structuring a transaction. Mergers and acquisitions may also require compliance with the Competition Act 2002, if the thresholds prescribed therein are met. Apart from these, labour laws, IP laws, contract law and certain other sector-specific laws are also relevant.
Regulation How is the M&A market regulated? M&A activity is fairly regulated in India. The Securities and Exchange Board of India (SEBI), the Reserve Bank of India, the Foreign Investment Promotion Board and the Competition Commission of India (CCI) are some of the primary regulators of M&A activity.
Under the Companies Act 1956, a merger or amalgamation may either be structured as a regular share purchase or through a scheme that is approved by the high court within whose jurisdiction the registered office of the merging company is located, in addition to the shareholders and creditors of the merging companies.
M&A transactions involving listed companies must adhere to additional regulations prescribed by SEBI. The Takeover Code prescribes certain circumstances where an acquirer must make a mandatory offer to the target’s shareholders in order to acquire at least 26% of the voting rights of the target.
M&A activities involving non-residents must comply with the exchange control regulations – including Foreign Exchange Management Act 1999 – which classify sectors as prohibited, restricted and open.
M&A activities resulting in business combinations that may have an appreciable adverse effect on competition within a relevant market in India may require detailed disclosures to be made to the CCI if the parties to the transaction satisfy the prescribed monetary thresholds in relation to the:
- size of the acquired enterprise; and
- combined size of the resulting entity, with regard to value of assets and turnover of the enterprises in India.
Are there specific rules for particular sectors? Yes, M&A activities in certain sectors (eg, banking, non-banking financial companies, insurance and real estate) are restricted and may be permitted only on fulfilment of certain conditions or with the approval of the appropriate authority, such as the Reserve Bank of India or the Insurance Regulatory and Development Authority.
In addition, the exchange control regulations governing foreign direct investment in India classify sectors into three categories:
- Prohibited sectors – this includes lottery business, gambling, betting, real estate business and atomic energy where foreign investment is prohibited.
- Restricted sectors – this includes defence and financial services where foreign investment is permitted only with government approval. Investments beyond the sectoral limit prescribed by the exchange control regulations may also require government approval. In addition, certain sectors require compliance with additional conditions before receipt of foreign investment. For instance, foreign investment beyond 51% in multi-brand retail trading is not permitted without obtaining government approval. Further, such investment should satisfy conditions relating to the minimum amount to be brought in as foreign direct investment.
- Open sectors – this includes general services, manufacturing, technology and wholesale trading where foreign investment is permitted up to 100% without prior government approval. Certain sectors falling under this classification may also have to fulfil additional conditions specified by the exchange control regulations. For instance, 100% foreign investment is permitted in construction development projects, provided that a minimum floor area of 20,000 square metres is developed under each project.
Types of acquisition What are the different ways to acquire a company in your jurisdiction? Acquirers may consider using any of the following options:
- an acquisition of shares from the existing shareholders of the company;
- an acquisition of a business through:
- a slump sale where the undertaking is transferred for a lump-sum consideration without assigning separate values for individual assets and liabilities;
- a business transfer involving transfer of business along with employees, assets and liabilities;
- an itemised asset sale; or
- an acquihire transaction under which the acquirer is interested only in the talent pool of a company (ie, its employees and intellectual property); or
- mergers, amalgamations or demergers involving the purchase of shares or an undertaking, depending on the structure and the desired outcome of the transaction. This option may require the scheme of arrangement to be authorised by the high court within whose jurisdiction the registered office of the company proposing the scheme is located.
Due diligence requirements What due diligence is necessary for buyers? Pursuant to the principle of caveat emptor, Indian law necessitates reasonable diligence by the buyer before any proposed acquisition. Therefore, a buyer must at least undertake legal and financial due diligence on the target in order to make an informed assessment as to the viability of the proposed acquisition.
Information What information is available to buyers? The following information is available to prospective buyers in the public domain with respect to private and public companies:
- corporate information relating to the corporate records of a company, including the filings made by companies with the Registrar of Companies, which is available on the Ministry of Corporate Affairs’ website (www.mca.gov.in/MCA21/);
- IP information, whether registered or pending registration, which can be obtained from the Department of Industrial Policy and Promotions’ website (http://ipindia.nic.in) in relation to trademarks, patents, designs and geographical indications of goods and the Ministry of Human Resource Development’s website (www.copyright.gov.in) in relation to copyright;
- information relating to the creation of encumbrances over the real property of the target, which can be determined by examining the encumbrance certificates issued by the office of the relevant sub-registrar of assurances and the register of charges maintained by the Registrar of Companies; and
- records with respect to any pending litigation, which can be examined by checking the online databases maintained by the relevant courts or by conducting a manual search of their records.
For listed companies, filings made with the relevant stock exchanges, available on the website of that stock exchange and on the Securities and Exchange Board of India’s website (www.sebi.gov.in/sebiweb/) are also available in the public domain.
What information can and cannot be disclosed when dealing with a public company? Under the Companies Act 2013, a person – including a director or key managerial personnel – is prohibited from counselling about procurement or communicating directly or indirectly any non-public price sensitive information to any other person. In addition, directors and key managerial personnel cannot deal in the securities of another company while in possession of non-public price sensitive information.
With respect to a listed public company, due diligence is further limited by the restrictions set out in the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015. Under these regulations, insiders are prohibited from communicating unpublished price sensitive information to any person, except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. In addition, no company or person can deal in the securities of another company while in possession of unpublished price sensitive information.
Unpublished price sensitive information may be communicated in connection with a transaction that:
- entails an obligation to make an open offer under the Takeover Code, where the board of directors of the company is of the informed opinion that the proposed transaction is in the company’s best interests; or
- does not attract the obligation to make an open offer under the Takeover Code, but where the board of directors of the company is of the informed opinion that the proposed transaction is in the company’s best interests and the information that constitutes unpublished price sensitive information is made generally available at least two trading days before the proposed transaction is effected in a form determined by the board of directors.
However, the board of directors should obtain confidentiality and non-disclosure agreements from the recipients of the unpublished price sensitive information.
‘Unpublished price sensitive information’ is defined as any information directly or indirectly relating to a company or its securities that is not generally available and which, on becoming generally available, is likely to have a material effect the price of the securities and includes information relating to:
- financial results;
- change in capital structure;
- mergers, demergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
- changes in key managerial personnel; and
- material events in accordance with the listing agreement prescribed by the relevant stock exchange.
Given the above, diligence is limited to information that is not price sensitive or publicly known.
Stakebuilding How is stakebuilding regulated? In India, stakebuilding for private and unlisted public companies is unregulated, except in cases where foreign investors are involved and the sectoral caps specified under the exchange control regulations must be met.
Stakebuilding for public listed companies is regulated by the Takeover Code and the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations). Under the Takeover Code, a bidder, either individually or together with persons acting in concert, can acquire up to 24.99% of the shares or voting rights in the target without having to make an offer to the shareholders, provided that it does not otherwise acquire control over the target as set out in the Takeover Code.
If the bidder acquires more than 24.99% of the shares or voting rights in the target, it must make mandatory offers to the target’s shareholders in order to acquire at least 26% of the target’s voting rights, in accordance with the procedure set out in the Takeover Code. Mandatory offers must also be made when the acquirer already holds more than 25% of the shares or the voting rights of the target and intends to acquire, along with persons acting in concert, an additional 5% of the shares or voting rights of the target in any financial year, subject to a maximum of 75% (which is the maximum permissible non-public shareholding in a listed company).
Under the PIT Regulations, the promoters, directors and employees of a company must make disclosures to the company if the securities acquired or disposed by them, whether in one or multiple transactions, over any calendar quarter aggregates to a traded value in excess of Rs1 million.
Preliminary agreements What preliminary agreements are commonly drafted? In case of an acquisition, the parties generally execute a memorandum of understanding or term sheet to record the broad terms and conditions of a proposed transaction until the execution of definitive documentation. These documents are generally made as a statement of intent and accordingly may not be binding on the parties. However, the parties are free to make certain clauses (eg, confidentiality and exclusivity) binding and enforceable.
Principal documentation What documents are required? Depending on the type of acquisition being undertaken by the parties, the transaction documents may include a:
- share purchase, asset purchase or business transfer agreement;
- in case of a partial acquisition or a minority shareholding, a shareholders' agreement;
- IP assignment agreements;
- new employment agreements to be executed with key managerial personnel of the target; and
- if an escrow mechanism is contemplated, an escrow agreement.
In case of a merger between two companies resulting in the creation of a third company, transaction documentation includes a scheme of amalgamation (which must be approved by the jurisdictional high court) and may include a shareholders' agreement and employment agreements for the employees of the entity created.
Which side normally prepares the first drafts? This may differ based on the structure of the transaction; however, in most cases, the acquirer prepares the first drafts of the transaction documents. In situations where an Indian company proposes to obtain bids from potential acquirers for the transaction, the company usually prepares the first draft of the transaction documents and requires comments from the bidders in advance of the decision.
What are the substantive clauses that comprise an acquisition agreement? The substantial clauses in an acquisition agreement include:
- the obligations of each party with respect to the sale and acquisition;
- conditions precedent to completing the transaction;
- actions to be undertaken at and post-completion of the transaction;
- confidentiality and exclusivity obligations;
- representations, warranties and indemnities;
- termination and consequences of termination; and
- governing law and dispute resolution.
What provisions are made for deal protection? For the purpose of deal protection, the following provisions are included in the transaction documentation to be effective between execution and closing:
- positive covenants to preserve the company's business and performance;
- negative covenants capturing the action items, including soliciting competing bids, which cannot be undertaken without the purchaser’s prior consent;
- clawbacks or escrow of shares of the promoters; and
Closing documentation What documents are normally executed at signing and closing? Typically, definitive agreements (eg, the share purchase agreement, asset purchase agreement or business transfer agreement and, as the case may be, an IP assignment agreement) are all executed simultaneously.
At closing, the parties execute condition precedent completion certificates, share transfer forms (if applicable) and undertake the activities contemplated in the definitive agreements, such as passing necessary corporate resolutions and making requisite filings with government authorities to give effect to the transaction. In transactions involving the transfer of shares between a resident and a non-resident, the resident must file Form FC-TRS with its authorised dealer bank within 60 days of receipt of the purchase consideration. The transfer is not construed to be complete until the form is duly filed with the authorised dealer bank of the resident and the filed form is taken on record by the target’s board of directors. For public listed companies, filings must also be made with the relevant stock. For instance, if a promoter of a public listed company sells its securities to another person and the value of such securities in aggregate exceeds Rs1 million over any calendar quarter, the company must notify the particulars of the transaction to the stock exchange on which the shares of the company are listed.
Are there formalities for the execution of documents by foreign companies? There are no separate formalities for execution of definitive documents by foreign companies. However, if a non-resident is purchasing or selling shares of an Indian company, it must execute Form FC-TRS and associated consent letters in addition to the share transfer form to give effect to the transaction.
Are digital signatures binding and enforceable? Digital signatures are binding and enforceable in India, but are not yet popular.
Foreign law and ownership
Foreign law Can agreements provide for a foreign governing law? Yes, agreements can provide for a foreign governing law. Typically, agreements provide for a foreign governing law where one of the parties is situated in a foreign country or the subject matter of the contract is situated in a location outside India. However, if an action is brought under such contract before an Indian court, foreign law will have to be pleaded like an ordinary fact and proved by experts as per the Indian Evidence Act 1872.
Foreign ownership What provisions and/or restrictions are there for foreign ownership? The exchange control regulations primarily govern foreign ownership of assets in India. These regulations list certain sectors:
- where prior approval of the government is required before an investment can be made by a non-resident (eg, investments in the defence sector);
- with restrictions on the investment limits that a non-resident can make (eg, foreign direct investment in infrastructure companies is permitted only up to 26% without having to obtain the government’s prior approval);
- which have conditions that must be fulfilled before making foreign investment (eg, investment in a non-banking financial company is subject to certain minimal capitalisation norms); and
- in which foreign investment is completely prohibited.
Valuation and consideration
Valuation How are companies valued? In acquisitions involving a foreign acquirer, unlisted companies must be valued either by a Securities and Exchange Board of India (SEBI) registered merchant banker or a chartered accountant. The exchange control regulations allow adoption of any internationally accepted pricing methodology on an arm's-length basis for valuation of an unlisted Indian company.
In case of public listed companies, the valuation should be undertaken in accordance with guidelines set out under the SEBI (Issue of Capital and Disclosure Requirements) Regulation 2009 and the Takeover Code, which are linked to the average of the weekly high and low closing price of the stock of the company over a specific period preceding the relevant date.
Consideration What types of consideration can be offered? Unless expressly prohibited by any sector-specific regulation:
- domestic deals can be structured with either cash or non-cash consideration (including swap of shares); and
- deals involving a foreign party require the consideration to be paid in cash and the amount of consideration to be equal to or more than the fair market value of the shares determined by a SEBI-registered merchant banker or a chartered accountant. The regulations also permit swap of shares, without the approval of the Foreign Investment Promotion Board (FIPB) in sectors falling under the automatic route, if the swap arrangement also meets the valuation requirement. Swap of shares in sectors not under the automatic route will require FIPB approval.
The exchange control regulations prevent a non-resident from deferring the purchase consideration (eg, in case of earn-outs) for shares purchased by the non-resident without obtaining approval from the Reserve Bank of India (RBI). RBI approval is also required if the non-resident intends to adopt an escrow mechanism for payment of the purchase consideration, if the duration for the escrow mechanism exceeds six months.
General tips What issues must be considered when preparing a company for sale? The issues that must be considered while preparing a company for sale may differ on a case-to-case basis. However, some of the common issues to be considered in transactions involving a foreign acquirer include whether:
- foreign investment is permitted in sector in which the company operates;
- the residential status of any shareholder of the company is likely to affect the proposed acquisition;
- the company has complied with all applicable laws, including the exchange control regulations – for instance, pursuant to the issue of shares to the foreign investor, the company must ensure that it has received the registration number for the FC-GPR filing made by it. Pending this, the transfer of shares by the foreign investor will not be taken on record by the Reserve Bank of India;
- the acquirer requires the company’s debts to be cleared before the acquisition or whether the company’s creditors will permit the proposed acquisition;
- the company rightfully owns all assets, including intangible assets such as trademarks;
- existing customer contracts, licenses or registrations of the company permit change of control; and
- the employees of the company are likely to remain employed post-acquisition.
What tips would you give when negotiating a deal? The negotiation strategy to be adopted depends on the type of investor and its stake in the company to be acquired. Typically, Indian promoters will not accept certain structures, such as those that are not tax efficient for them or which require the promoters to provide personal indemnities for non-compliances of the company. Traditional businesses are run by promoter families, where generations have had a stronghold, and it may be particularly important in these contexts to be mindful of cultural differences and their manner of operating and running the business. Newer companies in the technology sector see significant participation by venture capitalists and private equity players and have a more westernised approach to transactions. Be that as it may, deals in India commonly take considerably longer to be completed.
Hostile takeovers Are hostile takeovers permitted and what are the possible strategies for the target? The Takeover Code recognises two kinds of takeover – voluntary and mandatory takeovers. A voluntary takeover may be considered as a hostile bid. Voluntary takeovers are uncommon in India because of procedural requirements under the Takeover Code. Further, acquirers face practical difficulty in acquiring a stake in the target without the cooperation of the target’s board of directors and promoters. Certain commercial risks may also be involved in voluntary takeovers, as the hostile acquirer is usually not in a position to discuss the business and financial background of the target with its management.
Warranties and indemnities
Scope of warranties What do warranties and indemnities typically cover and how should they be negotiated? In typical partial acquisitions, the warranties provided include title-based warranties from the sellers and business-related warranties from the company, its promoters or both. Promoters are generally reluctant to provide unqualified business-related warranties – especially those relating to compliance with applicable laws – given the plethora of laws that may apply to the company. Therefore, in most transactions, business-related warranties are heavily negotiated. It is recommended for an acquirer to demand a full set of business-related warranties. However, depending on the circumstances, the acquirer may need to settle for qualifications in the form of materiality thresholds and knowledge qualifiers.
In case of 100% acquisitions, non-promoter sellers may be reluctant to provide warranties apart from customary title warranties. However, it is recommended that an acquirer insist on a full set of warranties from non-promoter sellers as well, given that the company and its business was under the sellers’ control.
While foreign acquirers typically seek warranties indicating compliance with anti-bribery laws (eg, the US Foreign Corrupt Practices Act 1977 and the UK Bribery Act 2010), these warranties undergo considerable deliberation, as their scope and ambit are not easily understood or appreciated by Indian promoters.
Acquisitions involving a foreign acquirer and seller also extensively review the obligation to withhold tax in accordance with the Income Tax Act 1961. Typically, sellers located in countries with which India has executed a double taxation avoidance agreement prefer to provide warranties relating to their tax residency status, to avoid a withholding from the sale consideration. Acquirers that rely on such warranties may also require opinions from any of the big accounting firms to that effect.
Limitations and remedies Are there limitations on warranties? Under Indian law, a party cannot claim damages on a breach of warranty if it had the means to discover the truth with ordinary diligence. Thus, an acquirer will not be entitled to claim damages on breaches of warranty if it had the means to discover that the warranty was untruthful.
Other limitations to warranties are disclosures to the warranties made by the sellers. Disclosures can be specifically listed against the relevant warranties set out in the definitive agreements or extended to the entire data room disclosed to the acquirer during the course of the diligence.
Definitive agreements involving 100% acquisition generally contain caps on the indemnity that the indemnified party may claim for a breach of warranties, including as follows:
- Aggregate cap – a cap on the maximum liability under the definitive agreements, which is usually capped at between 50% and 100% of the consideration.
- De minimis – a minimum threshold of the individual claims of the indemnified party, which is usually capped at between 0.1% and 0.5% of the consideration.
- Indemnification basket – a threshold that must be met in order for the liability of the indemnifying party to arise, which is usually capped at between 1% and 2% of the consideration.
The time limits for warranties are as follows:
- Critical warranties (authorisation and title) are generally unlimited in time.
- Important business/operations-related warranties (licenses and authorisations) survive for a period of three to five years after completion.
- Other miscellaneous warranties are generally limited to 36 months.
- Tax warranties are generally limited to seven years.
What are the remedies for a breach of warranty? Under the law, the aggrieved party may either claim indemnity under the contract or approach the jurisdictional court to claim for damages. In either case, the aggrieved party must provide sufficient proof of the loss that it suffered. The parties may also contractually agree on other remedies – for instance, in case of partial acquisitions, the aggrieved party may propose put or call options as a remedy for breach of material warranties.
Are there time limits or restrictions for bringing claims under warranties? The statutory limit prescribed to bring a claim for damages on account of a breach of warranties is three years from the date on which the aggrieved party became aware of the breach. Agreements with clauses requiring a suit for damages on account of a breach of warranties to be brought within a timeframe that differs from that prescribed by law are considered void under Indian law.
Tax and fees
Considerations and rates What are the tax considerations (including any applicable rates)? Under Indian income tax laws, the seller of a capital asset must bear capital gains tax on the gains arising from the sale of the asset. The rates of taxation may differ depending on whether the gain is a long-term capital gain (where the capital asset is held by the seller for more than 36 months, 20% of the gain, plus cess) or a short-term capital gain (30% of the gain, plus cess). Capital gains tax applies to a shareholder for the sale of shares and to a company for the sale of its assets. In case of a slump sale, the entire income will be treated as capital gain arising from a single transaction if the transaction is structured such that the consideration is received in a lump-sum without separate values being assigned to each individual asset or liability.
Further, if the buyer intends to impose non-compete restrictions (which is permissible only in the event of sale of goodwill), the income received for it may be treated as business income and taxed separately, unless the transaction can be shown to be a composite arrangement with the sale of shares or business.
Further, in the event that a sale of shares is contemplated in which the transferor is receiving an amount less than the fair market value of the shares, the difference between the fair market value of the shares and the purchase consideration received by the transferor is deemed to be the transferor's income and the transferor will be liable to pay income tax. The rate of income tax payable will differ depending on whether the transferor is an individual or entity. In case the transferor is an individual, the tax rates may differ depending on the tax brackets that the individual falls under, subject to a maximum of 30%. If the transferor is a company, the total income of the company will be taxed at 30%.
In the event that a non-resident transfers the shares of an Indian company to another non-resident, it must withhold taxes from the purchase consideration, unless the non-resident seller is located in a jurisdiction with which India has a double taxation avoidance agreement and India has given up its right to tax the capital gains under that agreement.
It is also pertinent to note that indirect taxes such as sales tax or value added taxes may be levied in the case of an itemised sale, as this involves the sale of individual movable goods. Since the transfer of an entire business undertaking as contemplated in a slump sale cannot be construed as a sale of individual movable goods, indirect taxes in the form of sales tax or value added tax will not apply to a slump sale transaction.
Exemptions and mitigation Are any tax exemptions or reliefs available? In the case of a slump sale, the entire income is treated as capital gains arising from a single transaction and thus the seller is not required to pay tax on each asset acquired by the buyer. Further, transfer of a capital assets under a scheme of amalgamation (if the amalgamated company is Indian) is exempt from tax on capital gains, subject to the fulfilment of the conditions specified under the Income Tax Act 1961. Similar exemptions also apply in cases of a court-approved demerger, provided that the demerger fulfils the conditions prescribed under the Income Tax Act 1961.
What are the common methods used to mitigate tax liability? Foreign acquirers usually structure the acquisition to avoid the double taxation of income in both India and the acquirer’s home country. The common structures adopted by foreign acquirers is to route the transaction through an investment vehicle located in a jurisdiction which has a favourable tax treaty with India (eg, Mauritius, Singapore, Cyprus, the United Arab Emirates and the Netherlands). Singapore is the most commonly used jurisdiction for inbound investment into India. Under the double taxation avoidance agreement between India and Singapore, any capital gains earned by an entity that is a resident of Singapore on shares held in an Indian company are subject only to the Singapore's tax regime, which does not tax capital gains, and thus is not subject to taxes in India.
Fees What fees are likely to be involved? Apart from legal fees and other expenses in negotiating the transactions, the statutory fees involved in M&A activities include:
- registration fees – payable where documents must be registered under Indian laws (eg, instruments for the transfer of immovable property require compulsorily registration);
- stamp duty – payable on the transaction documents and the share transfer forms;
- court fees – payable in case of a court-approved corporate restructuring; and
- fees involved in registration of title.
Management and directors
Management buy-outs What are the rules on management buy-outs? Management buy-outs are permitted in India. In the event that a management buy-out involves a foreign person, the exchange control regulations must be followed – including compliance with sectoral limits and payment of a consideration which is equal to or more than the fair market value of the shares.
Directors’ duties What duties do directors have in relation to M&A? In general, directors must act in good faith in order to:
- promote the objectives of the company for the benefit of its members as a whole; and
- act in the best interest of the company.
Therefore, if the directors have proposed an acquisition, they must ensure that it is in the best interest of the company and its stakeholders, including its employees.
For listed companies, the Takeover Code also requires directors to constitute a committee of independent directors in order to provide reasoned recommendations to the shareholders on an open offer. Further, they are expected to:
- facilitate the acquirer in verification of shares tendered in acceptance of the open offer;
- make any relevant information available to all acquirers making competing offers; and
- cooperate with any acquirer that has made a competing offer.
Consultation and transfer How are employees involved in the process? In acquisitions through the purchase of shares, employees do not play a significant role, as they generally continue to be employed by the company in accordance with existing terms of employment. However, the employees may need to be involved if the acquirer requires them to execute new employment agreements with the company in a form acceptable to the acquirer.
Further, in a scenario where employees have options under a stock option scheme, there may be additional negotiations with employees to deal with accelerated vesting and new compensation structures.
What rules govern the transfer of employees to a buyer? A slump sale or business transfer results in the transfer of employees from one employer to another. In this case, under Indian law, the employer must obtain the employees’ consent to be transferred. Transfers can effectuated by:
- terminating the employee’s employment with the transferor and entering into a new employment agreement with the transferee; or
- transferring the employee by way of a tripartite agreement between the transferor, transferee and the employee.
However, in relation to a ‘workman' (ie, any person employed in an industry to do manual, unskilled, skilled, technical or operational work and not a person who is employed mainly in a managerial or administrative capacity), the employee’s consent need not be obtained if the following conditions are met:
- The transfer is of an entire and independent undertaking (where all assets and employees are transferred).
- The workmen are offered continuity of service (ie, their service with the transferor is recognised by the transferee while calculating all end of service benefits and payments).
- The workmen are offered as favourable terms of service.
Notably, since the employees are stakeholders in the company, there is always a risk of them approaching a court and claiming that the transfer is prejudicial to their interest, which may delay the transfer.
Pensions What are the rules in relation to company pension rights in the event of an acquisition? Generally, in the case of employee transfers during acquisitions, there will be no effect on the statutory pension benefits (eg, the requirement to make additional contributions), as the transferor will be responsible for any pension contributions until the date of the employee transfer; thereafter, the transferee will be responsible for the contributions.
Whether the transferor will need to pay out accumulated pension benefits at the time of the employee transfer depends on which method has been adopted for the transfer. Under certain social security legislation (eg, the Employees Provident Funds and Miscellaneous Provisions Act 1952), joint and several liability on the transferor and transferee may subsist after the transfer of employees. This liability will be triggered if claims arise in relation to pension contributions (eg, the contributions were not calculated properly or not paid in time). However, this liability relates only to the period up to the date of the transfer. Further, the transferee's liability in these cases is limited to the value of the assets obtained by the transfer.
With respect to the payment of gratuity, acquisitions will have no effect on the gratuity payable if the transferee agrees to pay gratuity to the employee on the basis that his or her service has been continuous and not interrupted by the transfer. However, if the parties adopt a structure whereby an employee joins the transferee company afresh, the transferor may have to pay the gratuity payable for the service rendered by the employee, if he or she had been employed for a continuous period of five years.
Other relevant considerations
Competition What legislation governs competition issues relating to M&A? Competition issues relating to M&A are governed by the Competition Act 2002.
Anti-bribery Are any anti-bribery provisions in force? In India, bribery and corruption issues are covered under the Prevention of Corruption Act 1989 and the Indian Penal Code 1860. The Prevention of Corruption Act applies to public servants and provides for punishments when:
- a public servant takes gratification other than his or her legal remuneration in respect of an official act or to influence public servants; or
- a public servant accepts a valuable item without paying for it or by paying an inadequate consideration from a person with whom he or she is involved in a business transaction in his or her official capacity. The government is considering certain amendments to the Prevention of Corruption Act, which are likely to introduce stringent measures to tackle corruption.
Receivership/bankruptcy What happens if the company being bought is in receivership or bankrupt? Under the Companies Act 1956, if a company is under liquidation, the liquidator can participate in a scheme of amalgamation, merger, compromise or arrangement. The liquidator can also sell any of the company’s assets separately or the entire business as a going concern.
The government has also proposed a new Bankruptcy Code to streamline bankruptcy resolution.