Gaurav Dayal Hemant Krishna Shruthi Srinivasan January 4 2023 M&A round-up for 2022 Lakshmikumaran & Sridharan | Corporate Finance/M&A - India Gaurav Dayal, Hemant Krishna, Shruthi Srinivasan Corporate Finance/M&A IntroductionDeals that made headlinesStrategic drivers of M&A activityTrends in deal structuresLegal and regulatory factorsOutlook for 2023IntroductionSince the onset of the covid-19 pandemic, demand-driven technological developments have created waves of disruption in the banking and finance, education, consumer, and health sectors. The Russia-Ukraine conflict further aggravated inflation and caused upheaval in the global supply chain. Amid all this, India has remained a bright spot through much of 2022. Over the first nine months of 2022, M&A activity in India rose to an all-time high of $148 billion, which represents a 58.2% increase over 2021, according to a report in BusinessLine that quotes from a study done by Refinitiv.Deals that made headlinesOf the deals signed in the second quarter of 2022, the mega banking sector merger between HDFC Bank, India's largest private bank, and the Housing Finance Development Corporation Limited, India's largest mortgage lender, alone was valued at $40 billion. The deal has received no-objection letters and in-principle approvals from regulatory bodies such as the Reserve Bank of India, the Competition Commission of India (CCI), the Securities and Exchange Board of India and the stock exchanges on which its securities are listed and a few other approvals are expected in the months to come.Although the financial services sector appears all set to account for the highest per-sector deal value in 2022, there have been several big-ticket deals in the technology, media and telecoms (TMT) sector, consistent with the trend observed over the past few years. A notable telecoms sector deal involved Bharti Airtel, a leading telecoms service provider in India. Singapore Telecommunications (Singtel) completed the sale of 3.3% of the total number of equity shares of Bharti Airtel Singtel for around $1.76 billion. Of these shares, Bharti Telecom Ltd, a key promoter company of Bharti Airtel, acquired shares representing 3.2% of the total share capital of Bharti Airtel. Another TMT sector deal worth mentioning is the merger by the engineering conglomerate Larsen & Toubro (L&T) of its two listed software subsidiaries, Mindtree Limited and Larsen and Toubro Infotech Limited. This merger will result in a $3.5 billion IT service provider that will also be the sixth-largest information technology services company in the country in terms of revenue. L&T acquired an approximately 60% stake in Mindtree Limited in 2019, in what was one of the few successful hostile takeovers in India.India's ports-to-cement conglomerate Adani Group is set to become the single largest shareholder of one of India's biggest media houses, NDTV, through a combination of indirect acquisition and an open offer. Content and media have become more relevant than ever before, due to their ability to influence public opinion. The increase of shareholding by the Adani Group in NDTV underscores the significance of a mainstream media play for large business conglomerates, much like what has been seen in the West.In what might have been a mega fintech deal, PayU had proposed to acquire 100% of Billdesk for $4.7 billion. On completion, this transaction would have resulted in one of the largest mergers in the payments gateway space. Naturally, the deal required the approval of the CCI. However, the CCI approval took over a year to come through, since the CCI required a lot of information from the parties. For reasons that were not entirely clear, the deal was terminated. PayU's parent company was brief in its explanation and merely suggested that the deal fell through due to non-fulfilment of conditions precedent prior to the long stop date.The healthcare and pharma sector saw a boom in M&A in the first half of 2022. Fortune (India) quoted from a VCCEdge report to say that in the first half of 2022 alone, India's healthcare firms picked up a total M&A tab of $4.32 billion, compared to $2.02 billion in the same period last year. Biocon Biologics' acquisition of Viatris Inc's global biosimilar business, vertically integrating the two businesses, was a notable deal in this sector. The deal, valued at $3.335 billion, received CCI approval in June 2022. This deal supposedly gives Biocon Biologics entry into 100 countries and highlights the appetite of large Indian players to engage in outbound M&A. In the technology-and-healthcare sector, Bain Capital's investment into CitiusTech, the holding company of CitiusTech Healthcare Technology Private Limited, a healthcare technology and consultancy firm received significant media attention given that this deal attracted the interest of several private equity heavyweights. The quantum of investment is estimated to be valued at $960 million. The transaction received CCI approval in July 2022.With a renewed interest in slowing the ongoing climate crisis and the soaring prices of fossil fuels, the renewable energy sector saw a sharp surge in the number of deals this year. One such noteworthy inbound acquisition is of the Pune-based renewable energy platform, Sprng Energy by Shell Overseas Investment BVI, for an estimated $1.55 billion. Another interesting inbound acquisition in the sector is the acquisition of a 25% stake in Adani New Industries Limited by France's Total Energy. The target company is intended to serve as the exclusive platform of Adani Enterprises Limited and TotalEnergies for the production and commercialization of green hydrogen in India. With the launch of the Green Energy Open Access Portal by the government's Ministry of Power, as well as a domestic carbon credit trading scheme, which is expected to be launched in 2023, more movement in the renewable energy sector can be expected.Education technology was the need of the hour during the height of the pandemic. As a result, the industry boomed and saw sizeable venture capital investments, with companies such as Byju's and Vedantu emerging as frontrunners. Byju's quickly grew to become India's most valuable start-up. In 2021, Byju's made nine acquisitions, including the acquisition of Aakash Educational Services Private Limited, a brick-and-mortar coaching institute for entrance exams, to vertically expand its offerings, for a whopping $950 million – one of the largest acquisitions in the sector, by value. While Byju's made these acquisitions on a war footing in 2021, mounting losses did not allow it to continue that approach in 2022.Strategic drivers of M&A activityIn India, the M&A landscape has changed in relation to China in the aftermath of the pandemic. This resulted in regulatory changes such as the Press Note 3 (2020 series), issued by the government of India to curb opportunistic takeovers by countries that share a land border with India. The Indian government's championing of ideals such as "Atma Nirbhar Bharat" (self-reliant India) has contributed to progressive changes and streamlining of India's foreign direct investment policy and limits in sectors such as defence, with a view to encourage defence manufacturing in the country, rather than importing weaponry.While the overarching trend among Indian conglomerates has been to expand through domestic strategic acquisitions, outbound deal activity this year amounted to $7.6 billion. A discouraging factor for outbound M&As in 2022 has been a lack of clarity on regulations in respect of overseas listing. While the government amended the Companies Act 2013 in 2020 to allow public companies to list on permitted stock exchanges in foreign jurisdictions, the amendment is yet to be brought into force. Further, an increase in outbound mergers with special purpose acquisition vehicles (SPACs) for the purpose of listing on American bourses was expected. However, there have not been any publicly reported SPAC mergers by Indian companies since ReNew Power's overseas listing on Nasdaq using a SPAC in 2021.SPAC mergers aside, there has been a rise in public M&A involving Indian companies, with strategic investors displaying a keen interest in having more control over public entities. Further, private equity deals have also witnessed more interest in acquisition of control, rather than mere acquisition of a financial stake.A significant 2021 trend that continued in 2022 has been that of consolidation and supply chain integration, and a growth in omnichannel retail platforms. A few of the deals addressed in the section above have been made with a view to achieve integration and establish omnichannel presence. Large retail conglomerates like Reliance, Adani and Tata have either developed or are in the process of developing "super apps", which integrate the many services provided by the various divisions of these large retail houses. These apps are a "one stop shop" for all retail needs, from medicines to flight tickets. The conglomerates have made a series of acquisitions/roll-ups in order to expand the scope of services provided via their respective super apps.In the distressed M&A space, in a first-of-its-kind deal, Sterling Biotech, one of the world's largest producers of gelatin, beleaguered by allegations of fraud, has been acquired by Perfect Day, a US dairy start-up, as a going concern through the liquidation process after the failure of the corporate insolvency resolution process. As part of the deal, Perfect Day will acquire Sterling Biotech's manufacturing plants located in Gujarat and Tamil Nadu. This acquisition provides the US start-up a platform to enter the Asian market and could act as a precursor to future acquisitions through the liquidation process.Trends in deal structuresDeals in 2022 have been approached with greater caution compared with the deals in 2021. Consequently, due diligence has expanded in terms of depth as well as surface area. There has been a greater focus on environmental, social and governance (ESG) aspects while conducting due diligence. These include assessments such as impact on climate, waste management and carbon emissions, among other things. These factors are especially considered by companies based out of the United States, European Union, Hong Kong and Singapore in their deal-making. Another area of interest in due diligence that has particularly come into focus in 2022 is cybersecurity. With data becoming the new currency, safeguarding consumer data has become a key business imperative for companies that have large amounts of consumer data. Currently, India only legislates for the protection of sensitive personal data by way of the Information Technology (reasonable security practices and procedures and sensitive personal data or information) Rules, 2011. However, the government has floated the Digital Data Protection Bill 2022, which is broader in scope and is expected to come into effect in 2023. Additionally, the Indian Computer Emergency Response Team, the nodal agency for cyber incidents, has issued a set of directions for reporting of cyber incidents, which have been criticised for being onerous on stakeholders. There has been a mass exodus by virtual private network (VPN) companies, following the mandate of the computer emergency response team directions of customer data storage for extended periods of time, which are in conflict with the privacy policies of these VPN service providers.The cautious behaviour of investors is also reflected in the way the investors have chosen to structure consideration for shares. Due to certain key factors observed in 2022, such as valuation uncertainty and economic downturn, a large volume of deals in 2022 contain a deferred consideration structure, whereby a portion of the consideration is payable upon the investee company achieving certain performance milestones. Investors are increasingly opting for a deferred consideration mechanism, to hedge short-term underperformance risks. Similar considerations have dictated the need for earn-out mechanisms in deal documents. Yet another mechanism for hedging performance risks is the use of put and call options, which have been increasingly used to bridge valuation gaps, wherein the price at which these options are exercisable have been linked to performance metrics such as earnings before interest, taxes, depreciation and amortisation.In recent years, venture debt has gained significant momentum in India. In the past couple of years, whenever equity capital became hard to come by or valuations came under pressure, venture debt provided a backstop to the industry. While bridge rounds to prevent dilutive down-rounds remains the most prominent use-case for venture debt among tech start-ups, new use cases are emerging. Another noteworthy trend is a healthy cross-pollination between venture capital and venture debt. Start-ups have attracted significant venture debt this year, with fintech start-ups taking the lead, consistent with the trend in 2021.There has been a sharp increase in the use of warranty and indemnity (W&I) insurance, which typically covers unknown and unforeseeable risks emerging from breaches of representations and warranties that cannot be identified or quantified easily in the due diligence process. In 2022, W&I was seen frequently in dealmaking since it often offers protection against warranty-related risks accelerated by unpredictable market conditions. Cybersecurity insurance has also emerged as a more regular fixture in M&A transactions in 2022, partly owing to the spate of recent cyber-attacks and data security breaches.Legal and regulatory factorsIn August 2022, India's overseas investment framework underwent a complete overhaul. The new overseas investment regulations are a welcome move, as they provide clarity to a few key terms, and allow for certain types of round-tripping structures, which were not permissible under the previous overseas investment regulations. However, these regulations have made it harder for certain other structures, like the externalisation structure by way of gift of shares of an overseas entity by a non-resident. There is still ambiguity on several aspects of the framework, and greater clarity should emerge on these aspects.In November 2022, the government introduced a draft bill governing digital personal data as the successor to the Personal Data Protection Bill of 2019, which was withdrawn by the government earlier in 2022. The new bill proposes simplified mechanisms in comparison to the older bill and has been viewed as a welcome move. Contrary to the expectation from some quarters, this bill remains a personal data bill and does not deal with the protection of non-personal data, which is increasingly becoming a subject matter of cyber-attacks and needs statutory protection, as recognised by the Report of the Committee of Experts on Non-Personal Data Governance Framework. This bill, once passed by Parliament, is expected to give rise to new considerations in privacy diligence in M&A.Further, in August 2022, a bill to amend the Competition Act 2002, India's antitrust legislation, was introduced in the lower house of the Parliament. As per this bill, transactions with a value that exceeds 20 billion rupees (approximately $250 million) must be notified to the CCI. Further, the bill also seeks to reduce the time that the CCI may take to approve deals. These are some of the key changes which would have an impact on M&A in India in the year to come, if and when this bill is passed by Parliament.While there was a lot of activity in the blockchain and crypto space in 2021, factors such as the collapse of FTX, TerraLuna and Celsius in 2022 have led to a major slowdown in M&A in the blockchain and crypto sector in 2022. Regulations in India on cryptocurrencies and non-fungible tokens have not been notified, which has led to uncertainty and has encouraged Indian players in this space to consider offshore jurisdictions to set up their primary presence, while continuing to target the Indian retail market.The "futuristic" Energy Conservation Bill 2022 was passed by the upper house of Parliament in December 2022. This bill contemplates a carbon credits trading scheme, which will be issued separately. The Bureau of Energy Efficiency, Ministry of Power, Government of India has released a blueprint of the National Carbon Market. The blueprint contemplates a statutory carbon limit to be maintained by companies, as well as a market for voluntary trading of carbon credits. The launch of this carbon trading scheme will boost green businesses, and bolster M&A in the direction of renewable energy and other such industries which help minimise carbon emissions.Outlook for 2023In 2023, trends such as setting up of super apps, the omnichannel approach to sales and integration of supply chains and consolidation through strategic acquisitions are likely to persist. While markets remain volatile, valuations will continue to be uncertain. Therefore, deferred consideration and earn-out mechanisms will continue to be key components of the M&A toolkit and will often be deployed in combination with put and call options.With the possible adoption of the new law governing digital personal data, privacy concerns may be mitigated to an extent, and due diligence in respect of data privacy may be conducted with greater granularity and against clearly legislated benchmarks. Further, ESG due diligence is expected to grow at an exponential rate, especially in respect of deals involving foreign entities. The awaited launch of the National Carbon Market and the carbon credits trading scheme by the government will promote green businesses in a big way, and growth in the sector can be expected.For further information on this topic please contact Gaurav Dayal, Hemant Krishna or Shruthi Srinivasan at Lakshmikumaran & Sridharan by telephone (+91 11 4129 98000) or email ([email protected], [email protected] or [email protected]). The Lakshmikumaran & Sridharan website can be accessed at www.lakshmisri.com.