Legal and regulatory framework

Legislation

What primary laws govern financial services M&A transactions in your jurisdiction?

The financial services M&A transactions are governed by certain regulators (ie, Reserve Bank of India (RBI), SEBI and IRDAI) and the primary laws include the following:

  • Banking Regulation Act 1949, and the rules and regulations framed thereunder;
  • Reserve Bank of India Act 1934, and the rules and regulations framed thereunder, including:
    • Master Direction – Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions 2021;
    • Master Direction – Non-Banking Financial Company –Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions 2016; and
    • Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions 2016;
  • Securities and Exchange Board of India Act 1992, and the rules and regulations formed thereunder, including:
    • Securities and Exchange Board of India (Substantial Acquisition of Shares And Takeovers) Regulations 2011;
    • SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015; and
    • Other sector specific regulations such as Securities and Exchange Board of India (Mutual Funds) Regulations 1996;
  • Insurance Act 1938, and the rules and regulations framed thereunder, including:
    • Indian Insurance Companies (Foreign Investment) Rules 2015; and
    • Insurance Regulatory and Development Authority (Transfer of Equity Shares of Insurance Companies) Regulations 2015;
  • Foreign Exchange Management Act 1999, and rules and regulations framed thereunder, including:
    • Foreign Exchange Management (Non-debt Instruments) Rules 2019; and
    • Foreign Exchange Management (Debt Instruments) Regulations 2019;
  • the Companies Act 2013; and
  • the Competition Act 2002.
Regulatory consents and filings

What regulatory consents, notifications and filings are required for a financial services M&A transaction? Should the parties anticipate any typical financial, social or other concessions?

Financial services sector in India is highly regulated with multiple regulatory authorities supervising different types of financial services businesses. For example, banking and non-banking credit institutions are regulated by the Reserve Bank of India, asset management companies are regulated by SEBI, and insurance businesses are regulated by the IRDAI. Specific regulatory approval is typically required for all M&A transactions that exceed the thresholds prescribed by the applicable regulatory authority. In the banking sector, the acquisition of more than 5 per cent of paid-up share capital or voting rights requires prior approval from the RBI. Acquisition of shares carrying more than 10 per cent voting rights in an asset management company requires prior approval from SEBI. Additional thresholds pertaining to specific changes in the control of the respective entity may also require approval even if the share capital or voting rights thresholds are not met. Transfer of insurance business to another insurer or amalgamation of two insurance businesses requires that the scheme of such transfer or amalgamation be approved by the IRDAI. Further, the transfer of shares of more than 5 per cent of the paid-up capital of a listed insurance company or 1 per cent in unlisted insurance companies requires prior approval from the IRDAI. These are only few types of approvals required and there are several other instances that require prior regulatory approvals depending upon the deal dynamics including structure.

There are no specific concessions available for a financial services M&A transaction.

Ownership restrictions

Are there any restrictions on the types of entities and individuals that can wholly or partly own financial institutions in your jurisdiction?

Entities and individuals holding shares in financial institutions are generally required by the relevant regulator to satisfy ‘fit and proper criteria’ ensuring that they have suitable qualifications, experience, and a good track record in the relevant business and excluding persons subject to previous criminal convictions. Any proposed acquirer of shares in a non-banking credit institution is required to provide information regarding satisfaction of such criteria as part of prior approval for such acquisition. Further, specific regulators impose additional requirements, for example, SEBI requires a person desirous of owning more than 40 per cent of an asset management company to demonstrate a 5-year track record of profitability to be eligible to own such a stake. Financial services regulators also typically seek information about the ultimate beneficial owners of the acquiring entity in order to draw comfort on the background of the acquirer.

Directors and officers – restrictions

Are there any restrictions on who can be a director or officer of a financial institution in your jurisdiction?

Under the Companies Act 2013, the following persons are not eligible for appointment as a director of a company:

  • any person declared by a competent court to be of an unsound mind;
  • an undischarged insolvent;
  • any person who has applied to be adjudicated as an insolvent and his or her application is pending;
  • any person who has been convicted of an offence and sentenced to imprisonment for:
    • a period of more than seven years; or
    • a period of more than five years in the previous five-year period;
  • an order disqualifying him or her for appointment as a director has been passed by a court or Tribunal and the order is in force;
  • any person who has due and unpaid amounts against calls in respect of any shares held by him for more than six months; or
  • any person who has been convicted of an offence dealing with related party transactions during the last preceding five years.

 

Further, individuals acting as directors in financial institutions are required by the relevant regulator to satisfy ‘fit and proper criteria’ to ensure that they have suitable qualifications, experience, and good track record in the relevant business and excluding persons subject to previous criminal convictions.

Directors and officers – liabilities and legal duties

What are the primary liabilities, legal duties and responsibilities of directors and officers in the context of financial services M&A transactions?

Under the Companies Act 2013, a director has a fiduciary duty towards the company and its members. The director’s duties and responsibilities include the following:

  • to act in accordance with the articles of association of the company;
  • promote the objects of the company for the benefits of its members and in the best interests of the company and its employees;
  • exercise due and reasonable care, skill, diligence, and independent judgement in the exercise of his or her duties; and
  • avoid any conflict of interest.

 

The directors can also be held liable for certain defaults under the Companies Act 2013.

There are also specific requirements under few specific legislations dealing with few financial services activities.

Foreign investment

What foreign investment restrictions and other domestic regulatory issues arise for acquirers based outside your jurisdiction?

Foreign investment restrictions are different for banks and for other financial service sectors. Foreign investment in private banks is capped at 74 per cent with investment above 49 per cent requiring government approval. All foreign investment in public banks requires government approval and is capped at 20 per cent. Foreign investment in insurance companies is capped at 74 per cent.

There is no additional restriction on foreign investment in other financial services that are under the purview of any specific financial services regulator in India (such as the RBI, SEBI, IRDAI etc), and the regulations applicable to domestic investment (regulatory approval, fit and proper criteria etc) continue to apply.

Competition law and merger control

What competition law and merger control issues arise in financial services M&A transactions in your jurisdiction?

The merger control laws under the Competition Act, 2002 will be applicable to an M&A transaction in the financial services sector only if the assets or turnover, or both, of the transacting parties exceed the jurisdiction thresholds and the transaction is not eligible for any exemption under the Competition Act 2002 read with regulations and notifications thereunder.

The Competition Act 2002 contains certain exemption provisions specifically designed to exclude share subscriptions, financing facilities and acquisitions by a public financial institution, foreign institutional investor, bank or venture capital fund, further to a covenant or loan agreement or investment agreement, from the ambit of the suspensory pre-closing provisions of the Competition Act 2002. Such transactions are still required to be notified on a post-closing basis to the Competition Commission of India (CCI).

At the same time, in exercise of its powers under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, the Central Government of India, through the Ministry of Corporate Affairs, has passed a notification exempting all M&A transactions involving nationalised banks from the scope of the merger control provisions of the Competition Act for a period of 10 years from 2017 to 2027.

Considering the stringently regulated nature of the financial services markets in India and the presence of numerous players and stakeholders across the value chain, no significant competition issues have been witnessed in this sector. In fact, the CCI has not passed any conditional orders in case of any financial services M&A transaction till date and has not blocked a single transaction in this space.