M&A transactions in India are likely to increase in the coming years, given the importance of India as a market for global companies. Also, at a time when companies are seeking to diversify and de-risk their supply chains, India is an attractive option for companies to establish their manufacturing operations and expand inorganically.
In the past few years, there have been several legislative, regulatory and procedural reforms with a view to easing doing business in the country. This process may accelerate, as India positions itself to attract more foreign investment and stimulate domestic growth.
As in other jurisdictions, successfully closing an M&A transaction requires the knowledge and understanding of the regulatory requirements, and the ability to navigate the processes efficiently. The regulatory requirements may vary depending upon the type, structure and process of the deal, and the size and market share of the companies involved.
This chapter summarises and provides insights on the important regulatory considerations (apart from tax and other cost aspects) that may help companies plan their Indian M&A transactions.
Key regulations affecting M&A deals in India Regulations under company law
The Indian Companies Act 2013 (Companies Act) is the primary Indian legislation that provides the general framework for the formation and governance of a company in India. It also contains provisions (sections 230 to 240) and rules that govern M&A transactions. Interestingly, while the Companies Act does not specifically set out the definition of ‘merger’, it does, in a generic sense, give a broad understanding of a merger to be the transfer of the whole or any part of an undertaking, properties and/or liabilities of one or more companies to another existing or new company, or division of the whole or any part of the undertaking, property or liabilities of one or more companies to two or more existing or new companies.
Applicable provisions of the Companies Act differ depending on whether:
- a company is private or public;
- it is listed on a stock exchange;
- it has foreign investment; and
- it is also in the purview of any specific regulator.
These factors will affect the process and manner in which an M&A transaction will proceed.
In addition to any other sectoral regulator or government authorities that may be involved in an M&A transaction depending on the type of entity and the business sector they are in, under the Companies Act, several authorities, such as the Registrar of Companies (ROC), the Regional Director (RD), the Official Liquidator (OL) and the National Company Law Tribunal (NCLT) may have a role to play. The final approval for any merger would be granted by the NCLT.
Companies that propose to merge are required to file a petition (along with a detailed scheme of merger) before the NCLT for sanction of the proposed merger scheme. Before any merger is approved by the NCLT, approval of the shareholders and creditors of the companies representing 75 per cent in value of the creditors or members would be required by conducting their meetings in the manner prescribed by the NCLT. The requirement of holding creditors meetings may be dispensed with by the NCLT at its discretion upon the companies furnishing affidavits of creditors having at least 90 per cent in value confirming their acceptance of the scheme of merger. Although there is no specific provision for dispensation of the meeting of the members, if 90 per cent or more members give their consent for the proposed merger by way of an affidavit, the NCLT may, at its discretion, dispense with the requirement of holding the meeting. Any objection pertaining to the merger can only be made by members who hold not less than 10 per cent of the shareholding, or creditors having outstanding debt amounting to not less than 5 per cent of the total outstanding debt as per the latest audited financial statement.
Notices of the meetings are also sent to the RD and various government authorities or sectoral regulators such as the ROC, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the OL, the respective stock exchanges, the Competition Commission of India (CCI), etc, as applicable, so as to receive objections or representations, if any, in relation to the proposed merger within 30 days from the date of receipt of the notice. If no representation is made by any regulator, it is presumed that the said regulator has no representation to make on the proposals. If any of the parties to a proposed merger is a listed company, applicable SEBI regulations must be complied with. Once the order approving the scheme of merger is issued by NCLT, the same needs to be filed with the ROC for registration within 30 days from the date of receipt of the certified copy of the NCLT’s order. The completion of the process of merger may take a few months to a few years, depending on the complexity of the merger, objections received from stakeholders, the sector in which the companies operate, etc.
To simplify the process of mergers between small companies, or between a holding company and its wholly owned subsidiary, without the intervention of the NCLT, the Companies Act sets out a fast-track merger procedure. In such cases, if no objections are received from the RD, ROC and OL for the scheme of merger, and the same is approved by a majority of members and creditors of the companies representing 90 per cent of their total numbers of shares and 90 per cent in value of their creditors, the scheme is considered to be approved.
The Companies Act also provides for cross-border mergers (ie, a merger between a foreign company and an Indian company or vice versa).
In addition to the merger of companies, another leg of M&A transactions is ‘acquisition’. As per market practice, an acquisition is generally effected either by transfer of existing shares or by subscribing to new shares of a company.
Regulations pertaining to M&A involving listed companies in India
An additional layer of regulatory compliances is required to be fulfilled in the case of merger or acquisition of shares of a listed company under the Securities and Exchange Board of India Act 1992 (SEBI Act) and the rules and regulations framed thereunder. The key regulations are: SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations); SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations); and SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations).
The Takeover Regulations apply to all direct and indirect acquisitions of shares or voting rights or control in a listed company in India, except to companies listed on the institutional trading platform of a stock exchange without making any public issue.
As per the Takeover Regulations, the acquirer is under an obligation to make a public announcement of an open offer for acquiring shares of the target listed company in certain scenarios, such as if an acquirer acquires shares or voting rights in a target listed company that, along with the shares or voting rights, if any, already held by the acquirer and the persons acting in concert (PAC) with the acquirer, entitles them to exercise 25 per cent or more of the voting rights in the target company, or the acquirer acquires, directly or indirectly, control over the target company, or if the acquirer (along with PAC) already holds more than 25 per cent or more voting rights in the target company and desires to acquire more shares or voting rights in a financial year entitling them to exercise more than 5 per cent of voting rights, provided that the aggregate shareholding pursuant to the acquisition does not exceed the maximum permissible non-public shareholding (ie, 75 per cent) except in case of acquisition made pursuant to a resolution plan approved under section 31 of the Insolvency and Bankruptcy Code 2016 (IBC).
An open offer for acquiring shares must be for at least 26 per cent of total shares of the target company.
In certain types of acquisitions, such as inter se transfer of shares among immediate relatives, promoters, etc, the Takeover Regulations provide an exemption from the requirement of making an open offer to the shareholders.
An acquirer who already holds (along with PAC) shares or voting rights in a target company entitling them to exercise 25 per cent or more of voting rights, can acquire additional shares in the target company by making a voluntary public announcement of an open offer to the shareholders, provided that the aggregate shareholding post open offer does not exceed the maximum permissible non-public shareholding (ie, 75 per cent). The offer size in case of a voluntary open offer should be for acquisition of at least such number of shares that would entitle the acquirer to exercise 10 per cent voting rights of the target company, provided that the shareholding of the acquirer (along with PAC) post-acquisition does not exceed the maximum permissible non-public shareholding.
As per the Takeover Regulations, the price paid for the shares should include any price paid, or agreed to be paid, to the promoters for their shares or voting rights or control premium, or as non-compete fees, or otherwise.
If an acquirer who makes a public announcement of an open offer to acquire shares of the target company intends to delist the securities of the target company, the acquirer should declare its intention to delist the shares upfront at the time of making the detailed public statement, which must be published not later than five working days from the date of public announcement of the open offer.
In the case of acquisition of shares by way of subscription of shares, the subscription must be carried out in accordance with the ICDR Regulations. The specified securities allotted on a preferential basis and the equity shares allotted pursuant to exercise of options attached to warrants issued on a preferential basis are subject to lock-in for periods ranging between one to three years, as prescribed under the ICDR Regulations.
The ICDR Regulations also provide some exceptions to the transfer restrictions.
In the case of M&A transactions pursued by listed companies in India, the companies are required to comply with the LODR Regulations. As and when a listed company plans to undertake a scheme of arrangement, the listed company is obliged to file the draft scheme of arrangement with the stock exchange or exchanges for the purpose of obtaining an observation letter or no-objection letter. Only after receipt of the observation letter or no-objection letter can the company file a scheme of arrangement before the NCLT seeking its approval. Upon sanction of the scheme, the company is required to inform stock exchanges and file the requisite documents as mentioned in the LODR Regulations. The LODR Regulations provide some exceptions to the above-mentioned obligation in the cases of merger of a wholly owned subsidiary with its holding company and a reconstruction proposal approved as part of resolution plan under section 31 of the IBC, in which case the only requirement is to file the draft scheme of arrangement within the statutory timelines with the stock exchange or exchanges for the purpose of disclosure.
Regulations under competition law
The Competition Act 2002 (Competition Act), read with the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (Combination Regulations), requires mandatory pre-notification of all acquisitions (of shares, voting rights, assets or control) and mergers and amalgamations that cross jurisdictional thresholds (Combination(s)) relating to a specified value of assets or turnover, to the CCI for its approval prior to completion of the transaction, unless specific exemptions apply:
In general, the Competition Act prohibits Combinations that cause, or are likely to cause, an appreciable adverse effect on competition (AAEC) within the relevant market in India. Any such Combination is void.
A Combination subject to a notification requirement cannot be consummated until a clearance from the CCI has been obtained, or a review period of 210 calendar days from the date of notification to the CCI has passed, whichever is earlier.
The thresholds for mandatory pre-notification are set out in terms of assets or turnover in India and abroad. These thresholds are as follows:
- at the enterprise level, the parties to the Combination jointly have:
- in India, assets valued at more than 20 billion Indian rupees or turnover of more than 60 billion Indian rupees; or
- in India or outside India, in aggregate, assets valued at more than US$1 billion with at least 10 billion Indian rupees in India, or turnover of more than US$3 billion with at least 30 billion Indian rupees in India;
- at the group level, the group acquirer to the Combination jointly has:
- in India, assets valued at more than 80 billion Indian rupees or turnover of more than 240 billion Indian rupees; or
- in India or outside India, in aggregate, assets valued at more than US$4 billion with at least 10 billion Indian rupees in India or turnover of more than US$12 billion with at least 30 billion Indian rupees in India.
De minimis exemption, or small target exemption, for a transaction is available and such transaction does not qualify as a Combination under the Competition Act. Accordingly, any enterprises being party to a Combination where the value of assets being acquired, taken control of, merged or amalgamated is not more than more than 3.5 billion Indian rupees in India or where the turnover is not more than 10 billion Indian rupees in India, are exempted from the pre-notification requirement under the Competition Act. The de minimis exemption is currently available until 26 March 2022.
The value of assets and turnover provided above are determined by taking the book value of the assets, as shown in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of the proposed transaction falls.
A ‘group’ has been defined as two or more enterprises that, directly or indirectly, are in a position to exercise 26 per cent or more of the voting rights in the other enterprise, appoint more than 50 per cent of the members of the board of directors in the other enterprise, or control the management or affairs of the other enterprise. However, the government of India has exempted groups exercising less than 50 per cent per cent of the voting rights in other enterprises from the provisions applicable on Combinations till 3 March 2021.
Generally, it is the responsibility of the acquirer to notify the CCI, but in cases involving mergers or amalgamations, it is a joint responsibility of all the concerned parties to file the notification.
The notice to the CCI disclosing the details of the proposed Combination is required to be given within 30 days of either the execution of any agreement or other document for acquisition or acquiring of control, or the approval of the proposal relating to merger or amalgamation by the board of directors of the parties concerned. However, to alleviate stringent reporting requirements, the government of India has provided an exemption of giving notice within 30 days as mentioned above, subject to the condition that no Combination shall come into effect until 210 days have passed from the day on which the notice has been given to the CCI or the CCI has approved the Combination, whichever is earlier. Such exemption is currently valid until 28 June 2022.
On receipt of a notice, the CCI conducts its investigation in two phases. In the first phase, the CCI determines, prima facie, whether the proposed Combination is likely to cause an AAEC, within 30 working days from the date of notification. If the CCI is of the opinion that the proposed Combination does not cause an AAEC, it approves the Combination.
If the CCI forms a prima facie opinion that the Combination is likely to have an AAEC, the CCI conducts a second phase of in-depth investigation during a statutory period of 210 calendar days. After investigation, the Combination may be approved or disapproved or approved with modification by the CCI.
The Competition Act has extraterritorial application thereby extending the jurisdiction of the CCI to transactions outside India. The implication is that Combinations where the assets or turnover of the entities involved are in India and where such assets or turnover exceed the prescribed thresholds provided in the Competition Act shall be subject to scrutiny by the CCI, even if the purchasers, sellers or target entities are outside India.
Pursuant to an amendment to the Combination Regulations in 2019, a green channel has been established with the CCI. Under the green channel, for certain categories of Combinations listed below, the parties to such Combinations have the option to opt for green channel approval. Upon filing under the green channel and an acknowledgment being received from the CCI thereof, the proposed Combination is deemed to be approved by the CCI.
Green channel approval may be sought if the parties to the Combination, their respective group entities, and/or any entity in which they, directly or indirectly, hold shares, control or both:
- do not produce or provide similar or identical or substitutable products or services;
- are not engaged in any activity relating to the production, supply, distribution, storage, sale and service or trade in products or provision of services that are at different stages or levels of the production chain; and
- are not engaged in any activity relating to the production, supply, distribution, storage, sale and service or trade in products or provision of services that are complementary to each other.
M&A deals in India involving foreign exchange, including cross-border M&As, are subject to a strict framework of regulations and guidelines prescribed under the Foreign Exchange Management Act 1999 (FEMA) administered by India’s central bank (the RBI).
The main regulations are the Foreign Exchange Management (Non-debt Instruments) Rules 2019 (NDI Rules), the Foreign Exchange Management (Debt Instruments) Regulations 2019 (DI Regulations) and Foreign Exchange Management (Cross-Border Merger) Regulations 2018 (Cross-Border Merger Regulations).
In addition, the government of India, through the Ministry of Commerce & Industry, Department for Promotion of Industry and Internal Trade, issues policy guidelines from time to time relating to foreign direct investment in India (FDI Guidelines). The FDI Guidelines and the above-mentioned regulations broadly govern the mode through which foreign investment can flow into and out of India, the prescribed instruments that can be used, the sectoral caps for foreign investments and the entry conditions attached thereto. Such conditions may include norms for minimum capitalisation, lock-in period, local sourcing, etc.
Acquisition of an Indian company can be done either through the ‘automatic route’ or the ‘approval route’ as mandated by the FDI Guidelines. Under the automatic route, neither the acquirer or non-resident investor nor the Indian company requires any approval from the government of India for the acquisition or investment. Under the ‘approval route’, prior approval of the government of India is required. The requirement of following the approval route and the extent of acquisition of shares and control of the Indian target or investee company largely depend upon the business activities of the Indian company. In a few cases, it also depends on the source country of the investment flowing into India.
The FDI policy prescribes the sectoral caps for acquisition or investment in the capital of an Indian company. An illustrative list of such caps is as follows:
- manufacturing, including contract manufacturing: 100 per cent through the automatic route;
- single-brand retail trading: 100 per cent through the automatic route, subject to a condition that FDI beyond 51 per cent requires local sourcing of at least 30 per cent of the value of goods procured;
- e-commerce: 100 per cent through the automatic route in marketplace model;
- defence industry: 49 per cent through the automatic route, beyond 49 per cent through government approval; and
- railway infrastructure: 100 per cent through the automatic route.
There are a few business sectors in which foreign investment is prohibited, such as the lottery business, chit funds, real estate business, manufacturing of cigars, cigarettes, atomic energy, etc.
Recently, the government of India has broadened the country-specific approval requirement to curb opportunistic takeovers of Indian companies that are in financial distress because of the covid-19 pandemic. Accordingly, an entity of a country that shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country can invest only through the approval route. As this requirement is the result of a specific situation, it may be changed or withdrawn later.
Regulations pertaining to cross-border mergers
In order to operationalise the enabling provisions under the Companies Act regarding cross-border mergers, the RBI has issued the Cross-Border Merger Regulations, which provide its operational framework. A cross-border merger is a merger, amalgamation or arrangement between an Indian company and a foreign company. Cross-border mergers could either be inbound or outbound. An inbound merger is a cross-border merger where the resultant company is an Indian company. An outbound merger is a cross-border merger where the resultant company is a foreign company. Resultant company means an Indian company or a foreign company that takes over the assets and liabilities of the companies involved in the cross-border merger.
In the case of an inbound merger:
- The resultant Indian company is allowed to issue or transfer any security to a non-resident outside India in accordance with the pricing guidelines, entry routes and sectoral caps as per the NDI Rules.
- An office of the foreign company situated outside India is deemed to be a branch of the resultant Indian entity post-merger, and the resultant Indian entity is permitted to undertake any transaction through such foreign branch as permitted under FEMA.
- Any borrowings of the foreign company from overseas sources that become borrowings of the resultant Indian entity, or are entered into the books of the resultant Indian company pursuant to the merger, are required to comply with the guidelines for external commercial borrowing of the RBI within a period of two years, provided that no remittance for repayment of such liability is made from India within such period of two years.
- Any asset or security that is acquired abroad by the resultant Indian company owing to the cross-border merger, which is not permitted to be held by it under FEMA, is required to be sold within a period of two years from the date of sanction of the scheme of merger by the NCLT, and the sale proceeds are required to be remitted to India. Similarly, any liability outside India that cannot be held by the resultant Indian company must be extinguished from the sale proceeds of the aforementioned overseas assets within a period of two years from the date of the NCLT’s sanction of the scheme of merger.
In the case of an outbound merger:
- A person resident in India is allowed to acquire securities of a foreign company as per the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations 2004, or within the limit prescribed under the Liberalised Remittance Scheme, namely up to US$250,000 per financial year.
- An office of the Indian company in India is deemed to be a branch office of the resultant foreign company and is governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations 2016.
- Any outstanding borrowings or guarantees of the Indian company that become the liabilities of the resultant foreign company pursuant to the cross-border merger are required to be repaid by the resultant foreign company as per the scheme of merger sanctioned by the NCLT.
- Any asset or security that is acquired in India by the resultant foreign company pursuant to the merger that cannot be held by it as per FEMA is required to be sold within a period of two years from the date of sanction of the scheme of merger and proceeds must be repatriated outside India. Any Indian liabilities may be repaid from such sale proceeds within the said period of two years.
- An Indian company is permitted to merge with a company incorporated in any of the notified foreign jurisdictions. The notified foreign jurisdiction include countries:
- whose securities market regulator is a signatory to the Multilateral Memorandum of Understanding of the International Organization of Securities Commissions or a signatory to the bilateral memorandum of understanding with SEBI; or
- whose central bank is a member of Bank for International Settlements; and
- that are not identified in the public statement of the Financial Action Task Force (FATF) as a jurisdiction having strategic anti-money laundering or combating the financing of terrorism deficiencies to which counter measures apply, or a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies.
If any transaction on account of a cross border merger is undertaken in accordance with the above-mentioned regulations, it is deemed to be approved by the RBI.
Court or tribunal involvement
The process of mergers in India, including cross-border mergers, is court-driven and required to be sanctioned by the NCLT. The process may be initiated by an agreement between the parties, but that would not be sufficient to provide legal validity to the transaction.
The NCLT inter alia takes the following aspects into consideration while supervising the process of mergers:
- determining the class of creditors or of members whose meetings have to be held for considering the proposed merger;
- determining the values of the creditors or the class of members whose meetings have to be held;
- fixing the quorum, procedure and voting mechanism to be followed at the meetings of shareholders and creditors; and
- issuing notices to the central government, the ROC, Income-tax authorities, the RBI, SEBI, the CCI and stock exchanges, as may be applicable;
The NCLT also has the power to direct provisions relating to dissenting persons to the transaction and the treatment of employees.
On sanction of the scheme of merger by the NCLT, it becomes binding on all the creditors, shareholders and companies involved in the merger.
Acquisition of distressed assets through corporate insolvency resolution process
The prime objective of the IBC is to provide a consolidated legal framework for reorganisation and insolvency resolution of companies. While the IBC does not directly deal with M&A, the insolvency process creates an opportunity for potential acquirers to acquire assets of stressed companies, whereby the acquirer may be able to acquire assets at a lower valuation than in ordinary circumstances.
The process of acquisition of a company (corporate debtor) under the IBC begins with the submission of a resolution plan by the potential acquirer (resolution applicant) to the resolution professional proposing the acquisition, followed by an approval of such resolution plan by the committee of creditors of the corporate debtor and, finally, sanction of the resolution plan by the NCLT.
Any person can be a resolution applicant, except a person who is disqualified to be a resolution applicant as per the IBC, such as a person who is an undischarged insolvent, is a wilful defaulter in accordance with the guidelines of the RBI, is prohibited by SEBI from trading in securities or accessing the securities markets, has been a promoter or in the management or control of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place, who at the time of submission of the resolution plan, has an account which is classified as a non-performing asset in accordance with the guidelines of the RBI, etc.
An acquisition by way of implementation of a resolution plan has been granted various regulatory exemptions, including under the Takeover Code, the ICDR Regulations, and the Companies Act (seeking of shareholders’ approval). However, if the combined values of the assets or turnovers of the resolution applicant (potential acquirer) and the target (corporate debtor) cross the thresholds prescribed under the Competition Act (as explained above), it will be mandatory for the resolution applicant (potential acquirer) to obtain prior approval for the proposed acquisition from the CCI, and till then, the committee of creditors cannot approve the resolution plan.
Other regulatory considerations
There are some sector-specific regulations, and regulators to regulate acquisitions in such sectors. Accordingly, additional approvals from such regulators may be required for completing an M&A transaction. For example, in the context of acquisition of an insurance company, approval from the Insurance Regulatory and Development Authority of India is required. RBI approval is required for acquisition of banking companies and non-banking financial companies (NBFCs).
The sector-specific regulations for insurance companies are triggered on the basis of the percentage of shareholding being acquired by the acquirer, and prescribe certain lock-in requirements, infusion of capital at periodic intervals, etc.
Similarly, the RBI’s Master Direction – Amalgamation of Private Sector Banks, Directions 2016 provide guidelines for the amalgamation of two banking companies, the amalgamation of an NBFC with a banking company, and the amalgamation of a banking company with an NBFC.
In the context of M&A transactions, section 25FF of the Industrial Disputes Act 1947 provides that when the ownership or management of an undertaking is transferred to a new employer, an eligible employee is entitled to notice and retrenchment compensation from the employer of such undertaking. However, such compensation is not applicable if the service of the employee:
- has not been interrupted by such transfer;
- the new terms and conditions of service applicable to the employee after such transfer are not less favourable to the employee; and
- the new employer is, under the terms of such transfer, legally liable to pay compensation to the employee in the event of his or her retrenchment.
However, the Supreme Court has observed that without their consent, employees cannot be forced to work under a different management, and if they do not give their consent to such transfer, those employees are entitled to retrenchment compensation.
The NCLT is also empowered to issue necessary directions on treatment of the workforce while sanctioning a scheme of amalgamation.