INDIA (DOMESTIC FIRMS): An Introduction to Corporate/M&A: The Elite
India: Corporate M&A
Background
In a remarkable move, India assumed the G20 presidency for 2023 and hosted the G20 summit in New Delhi in September 2023. In tandem with India’s G20 presidency, Q3 of 2023 witnessed a surge in both M&A and PE deals with a total of around 70 deals amounting to over USD4 billion. This was a mammoth 150%.+ increase in deal values in comparison to Q2 of 2023, which mirrored the global M&A slowdown and saw fewer deals. As such, while the year till then had been devoid of “mega deals”, the third quarter saw a revival with six mega deals valued at over USD1 billion. These included Walmart’s acquisition of an additional stake in Flipkart Online Services for USD1.4 billion and Temasek’s USD2 billion investment in Manipal Health to acquire a majority stake – both reflecting that investors and corporations are once again considering long-term opportunities in the Indian market despite global economic uncertainties. Whilst the M&A side of things started looking strong in the third quarter, PE deals were significantly fewer in comparison, in terms of volume with only around 50 deals which is the lowest in comparison to the last several quarters. However, the USD1 billion+ investment in Reliance Retail Ventures Limited, led by Qatar Investment Authority along with ADIA and KKR, at a valuation of approx. USD100 billion and Carlyle Group's USD500 million investment in engineering services BPO firm Quest Global at least contributed towards a decent deal value. PE/VC funding generally though remained down by 38%. as compared to the previous year.
Overall, 2023 remained a year of “reflection” and “course correction” amongst investors. A confluence of factors, including geopolitical tensions, rising inflation, and global interest rate hikes, prompted a measured recalibration emphasizing more on capacity building and market expansion through investments in complementary sectors. This approach was echoed across various industries, with the automotive sector, in particular, exemplifying the trend as Indian acquirers position themselves for vertical integration in the Electric Vehicle (EV) supply chain, poised to seize opportunities as the global macroeconomic landscape stabilizes. Indian startups also shifted their strategic approach from fundraising towards resolving internal issues. Ed-tech major Byju’s, which had a staggering valuation of USD22 billion last year owing to its fundraising efforts, spent a large part of the year in dealing with alleged financial irregularities in its operations. The only stand-out success story was of Zepto, a quick commerce startup, which became the first and only unicorn of 2023. This showcases the resilience and potential for growth in India's startup ecosystem, even in the face of regulatory hurdles and a so-called “funding winter”.
As we peer into the remainder of 2023, and if the third quarter of 2023 is anything to go by, it would be fair to say that the Indian M&A landscape holds the promise of an uptick. There may be a slight slowdown in early 2024 owing to the upcoming general elections, but with the current dispensation being anticipated to still come back into power, this is expected to be if at all only be a small bump in the road.
The (Ongoing) Issue of Investments from Bordering Countries
Press Note 3 of 2020 (PN3) which was issued by the Government of India in light of the COVID-19 pandemic and the geopolitical tensions with China and which subjected investments from countries sharing a land border with India, or where the beneficial owner of the investment is situated in such a country, to prior Government approval continued to cast a shadow on a large number of M&A and also PE/VC investments.
PN3 approvals have been hard to come by, with entities seeking licenses and approvals from regulators, especially in the financial services sector, increasingly realising that having Chinese investors on their cap tables could additionally also impact their possibility of successfully obtaining the licenses. As a workaround to this issue, creative structures were adopted spurting some activity in this space. For instance, Alibaba transferred a large chunk of its shareholding in PayTM to an overseas entity owned by the founder of PayTM in lieu of acquiring optionally convertible debt in the acquiring entity. Whilst the acquiring entity held the legal ownership and voting rights associated with the shares, the economic interest underlying these shares continued to vest with Alibaba by virtue of the optionally convertible debt arrangement. In another arrangement, Chinese fashion house Shein, which was banned from operating in India in 2021, entered into a licensing agreement with the retail arm of Reliance to develop an e-commerce platform that would sell Shein branded products. The ownership and control of the platform would always remain with Reliance, with just the economics being shared with Shein by way of the licensing arrangement.
Separately, recent developments suggest that the Government may be open to considering applications from entities with land bordering investors which provide essential components towards electronic supply chains and / or are engaged in the EV sector, both of which are sectors that India is keen to develop expertise indigenously, albeit subject to such entities tying up with local Indian partners. This, therefore, is a space where significant activity can be expected in the short to medium term.
Key Regulatory Developments
Data protection
The Indian data protection regime is at the cusp of an overhaul with the recent introduction of the Digital Personal Data Protection Act (theAct) in 2023 which is expected to gradually come into effect in the coming months. Set to regulate the processing of all personal data whether collected in digital form or, if collected in non-digital form, digitized subsequently, the Act bears resemblance to the EU’s GDPR.
It encompasses provisions related to consent for processing of personal data of data principals, notice requirements vis-a-vis the data principal, appropriate safety standards to prevent data breaches, reporting requirements in the event of a breach, obligations of data fiduciaries and significant data fiduciaries, and the rights of data principals, amongst others. Notably, the Act permits data transfer outside India except to "blacklisted" territories and also includes various exemptions from the applicability of its provisions. In particular, in situations where personal data processing is necessary for mergers, amalgamations, or other court-approved corporate restructurings, most of the obligations of data fiduciaries are inapplicable, and data subjects have limited rights. There would also be no requirement to adhere to the restrictions on transfer of personal data outside India. These exemptions are expected to potentially simplify transactions.
With penalties ranging up to INR250 crores (approx. USD30 million) in each instance of breach, the new regime is likely to create major compliance burden for all though it should be a smooth sailing ride for EU-GDPR compliant corporates.
Deal value threshold for merger control assessments
In a significant change to the Indian competition regime, a separate deal value threshold is proposed to be introduced. Transactions with a value exceeding INR20 billion (approx. USD242 million) and where the target has “substantial business operations in India” would be required to be notified to the Competition Commission of India. At under USD250 million, the deal value threshold – especially from a global deal perspective – is quite low which could potentially result in a few unwarranted deals being having to be notified.
Promoting PE participation in the insurance and mutual funds space
The past two years have witnessed a series of changes in the regulatory regimes for the Indian insurance companies and mutual funds spaces, several of which are aimed at relaxing investment restrictions and could potentially be key drivers for facilitating the entry of more players in these sectors. While a few niggling concerns remain, the changes are long overdue and much needed.
In December 2022, the insurance regulator, IRDAI overhauled the investment and registration regulations for insurance companies. The most significant one was the increase in the investment limit from 10% to 25% for individual financial investors, which provides a much-needed relaxation for pure financial investors to not be categorised as a “promoter”, a tag which has material repercussions. The amendments also enhanced structural flexibilities for PE funds to become “promoters” of an insurance company and have done away with the requirement of a PE fund setting up an SPV to be a promoter.
Following IRDAI’s lead, SEBI, in June 2023, amended the mutual fund regulations to permit PE funds to become “sponsors” of mutual funds. This move is aimed at increasing financial investments in the mutual fund space, which is currently underpenetrated and dominated by large Indian banks and corporates. The updated framework provides for alternative eligibility criteria for PE funds who do not fulfil the original criteria, subject to a lock in and also meeting certain requirements including minimum capitalization and liquid net worth. Previously, PE funds resorted to either having an indirect interest in the form of a stake in the sponsor or participating alongside an established Indian player.