INDIA: An Introduction to Corporate/M&A: Mumbai-based

The following In-Depth Overview featured in Chambers Asia-Pacific 2024 and is awaiting update from the firm.

Introduction – 2023, an Annus Horribilis? 

M&A deal activity in 2022 in India reached record volume and value numbers, whilst global deal activity slowed down. Even if one were to discount the approximately USD61 billion acquisition of Housing Development Finance Corporation by HDFC Bank through a merger, 2022 was still one of the highest-value years for Indian M&A, on record.

In comparison, 2023 has seen a marked reduction in both deal value and deal activity, across all major sectors. As of Q3 CY 2023, there has been, approximately, a 32% decrease in deal volume and a 75% decrease in deal value, as compared to the same period for CY 2022.

Despite a global slowdown in deal activity and economic performance (including on account of the continued impact of the Russia-Ukraine conflict and the recent turmoil in the Middle East), India is still expected to be one of the best-performing major economies by the close of 2023, with the IMF’s GDP growth forecasts placing India ahead of China as well as many western developed economies.

Strong and ever-increasing domestic demand in India (fuelled by a population that recently overtook China) has been able to counterbalance reduced access to global export markets. This places India in a position of strength vis-a-vis other developing markets, which are coping with tightening credit conditions, rising interest rates and elevated inflation levels.

During a period of caution in M&A activity globally, India has also been able to generate inorganic growth, through deal activity either domestically or through outbound investments, signifying the continued assent of “India Inc”. Further, continued liberalisation of the Indian investment regulatory regime in recent years (including the loosening of foreign direct investment caps in certain key sectors, such as telecoms and insurance), a more certain and stable investment environment (with the days of Vodafone uncertainty well behind us), a growing middle class, greater financial inclusion and consumerism fuelled by technology, political stability and strong leadership, should help increase foreign investment flows.

India’s recent inclusion in JP Morgan’s Emerging Market Global Bond Index is indicative of projected substantial inflows into the country and may also, in the short term, lower funding costs and aid the development of domestic capital.

In summary, 2023, contrary to much of the world where it is perceived as an annus horribilis, has seen India continue to carve out a unique place in the global economic landscape, by growing despite global headwinds.

Looking Through the Quarters 

India posted its lowest Q1 figures for M&A in four years.

However, outbound M&A did witness an upward trend from 2022. Overall deal value in outbound M&A grew by 36.3% over Q1 CY 2022 and reached approximately USD1.5 billion as compared to approximately USD1.1 billion for the same period last year. In Q3, outbound M&A continued to outperform 2022 figures, both in terms of deal volume (a 6.7% increase) and deal value (a 112.1% increase).

Domestic transactions picked up and dominated the overall M&A deal-scape in Q2 and Q3 CY 2023, representing 85.1% and 71.4% (in Q2) and 65.5% and 42% (in Q3) of the total deal value and volume, respectively for these quarters. Notable domestic transactions include Nirma’s acquisition of Glenmark Life Sciences (for approximately USD689 million) and Titan Company’s acquisition of CaratLane (for approximately USD556 million).

Whilst inbound M&A deal values have generally displayed a steep decline (as compared to 2022), Q3 CY 2023 saw an increase in deal volume. Walmart’s further acquisition of Flipkart (for approximately USD1.4 billion) emerged as the standout transaction, reinforcing the faith of big foreign players in the Indian consumer market. The Proximus Group’s acquisition of Route Mobile (for approximately USD1 billion) was another notable inbound M&A deal in the previous quarter.

Navigating the Regulatory Landscape 

M&A transactions in India often see long gestation periods on account of significant regulatory timelines. Despite consistent efforts by the government to increase the ease of doing business in India, the time taken for regulatory approvals and the increasing cost of compliance for doing businesses in India continue to be challenges.

In a positive move, the Central Government recently introduced a timebound deemed approval process for fast-track mergers. In effect, this means that regulatory process timelines for eligible mergers could potentially be reduced to half.

Similarly, the IBBI is looking to (i) streamline the voluntary liquidation process; (ii) create a comprehensive scheme for resolution in the real estate sector; and (iii) break the corporate resolution plan into two parts, viz. inflow of funds and distribution to various stakeholders, which will enable the National Company Law Tribunal (NCLT) to approve resolution plans in stages, allowing for faster inflow into and functioning of the borrower.

These proposals may prove essential in progressing M&A deal activity under the Insolvency and Bankruptcy Code (IBC) framework, which, despite a decline in deal volume since the era of the “dirty dozen”, has remained an important route for acquisitions (especially with the benefit of a statutory whitewash of liabilities). GAIL India’s approximately USD971.36 million acquisition of JBF Petrochemicals and Vedanta’s approximately USD177.2 million acquisition of Meenakshi Energy, in 2023 were both under the IBC route.

Perhaps the most notable regulatory change of 2023, was the coming into effect of the long-proposed amendment to the Companies Law framework, which creates a pathway for eligible Indian public companies to list their securities directly on identified foreign stock exchanges (though the categories of companies that may avail of this benefit are yet to notified).

Overseas listing presents a platform for Indian companies with global aspirations to access larger and more diversified pools of capital, at comparatively lower costs. These companies may attract higher valuations, which should help fund M&A activity in India. The Securities and Exchange Board of India (SEBI), which has proactively sought to deepen India’s capital markets, had previously recommended a framework for overseas listing, which is expected to form the basis of regulation in this area.

However, some government/regulatory actions have negatively impacted investment and M&A in India. Press Note 3 (2020), which was initially introduced as a protective measure to restrict opportunistic takeovers during the pandemic, is one such example. Nearly four years on, inbound M&A has suffered on account of continued ambiguity in relation to the threshold of ownership from India’s territorial neighbours in entities investing into India, that would trigger the need for prior Government approval of such investments. This is because, most global pools of capital and MNCs, including those investing/who may invest in India, have some Chinese exposure.

Similarly, SEBI’s recent amendments to the related-party framework for Indian listed companies consider any shareholder holding 10% or more in a listed company as a related party, who is barred from voting to approve related party transactions (whether or not involved in such transactions). Further, the scope of what constitutes a related-party transaction has also been expanded, to bring within its fold inter se transactions between subsidiaries of listed companies as well as third party transactions intended to benefit related parties of listed companies/their subsidiaries.

Such prescriptions, while well intentioned, unfortunately fall into the trap of legislating for the exception and may have the (unintended) consequence of alienating institutional investors and complicating restructuring ahead of, or as a part of M&A transactions.

In a measure that will further add to the challenges to M&A and investment in India, our competition regulator (CCI) has made significant amendments to the merger-control regime in 2023 (which are yet to become effective). Primarily, these changes, would subject transactions involving targets with substantial business in India (ie, number of users and subscribers, or the turnover or gross merchandise value in India exceeding 10% of the global figure), which surpass a fairly low deal value threshold of INR 2000 crores (approximately USD242 million) to prior merger control clearance. This would negate the benefit of the target exemption, which was meant to exempt smaller transactions that are not likely to adversely impact competition, from prior merger control approval. Other exemptions that are currently available, particularly for financial investors acquiring a minority stake, may also be impacted by some of the proposed changes.

These amendments were targeted towards regulating “killer acquisitions” in the tech-space. However, they impact M&A and investment in general and are not limited to regulating specific acquisitions. Multiple global deals with an India nexus could also be impacted. Though it must be said that the CCI is also taking steps to shorten the merger review process, increase its own administrative bandwidth and potentially create alternative gateways for public M&A transactions.

The Road Ahead 

At this key juncture, with much of the positive India story still to play out and with M&A deal activity slowly picking up, one hopes for continued entrepreneurship, innovation, realistic valuations, collaborative discourse between regulators and stakeholders, greater efficiency and timeliness in regulatory processes, further simplification of rules, more trust, less interference, regulators resisting the urge to legislate for the exception and market participants adhering to not just the letter but also the spirit of the law. All of these and more will help realise the dream that is India!