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Policy reforms - Spurring M&A deals in India

By Rabindra Jhunjhunwala & Stuti Galiya, Khaitan & Co.
Posted: 28th September 2017 09:08
2016 was a year of big-sized merger and acquisition (M&A) deals for India with data showing a record high US$72 billion worth of deals during the year, which is more than double the value of transactions last year. Out of this, around 15 M&A deals were for US$1 billion or above. There were only four deals of this size in 2015.
The biggest deal of the year came in the energy sector which saw Russia’s state-owned oil giant Rosneft and a consortium led by physical commodities trading group Trafigura entering into a US$12.9 billion-deal to acquire Essar Oil’s refining and retail assets. Other major deals concluded during the year include:
  • Acquisition of Max Financial Services' life insurance business by HDFC for US$3.19 billion.
  • Aircel's acquisition of Reliance Communications wireless business for US$4.86 billion.
  • Sale of nearly two-thirds of cement business by Jaiprakash Associates Ltd to UltraTech Cement Ltd for US$2.4 billion.
Initiatives taken by the Government
The Modi Government, in its brief tenure so far, has introduced several measures and is looking to remove hurdles and simplify laws to further attract foreign investment. Some of the key reforms introduced by the Government recently are summarised below:
Part A – Reforms under the Foreign Direct Investment (FDI) policy of the Government of India
Increased investment limits in various sectors
The Government has in the past two years eased foreign investment norms by increasing foreign investment limits and removing/easing conditionalities, across various sectors, including defence, banking, pharmaceuticals, construction, single brand retail, broadcasting, civil aviation. This is aimed at boosting the investment environment and bringing more foreign investments in the country.
Swap of shares, warrants and partly paid shares permissible
The FDI policy has been liberalised and it has been clarified that investments by way of swap of shares, in sectors which otherwise fall under the automatic route for foreign investments which hitherto required approval, will now longer require specific government approval.
Also, Indian companies can now issue partly paid shares and warrants to a person resident outside India under the automatic route in those sectors where FDI is allowed under the automatic route, subject to terms and conditions as stipulated by the Reserve Bank of India (RBI).
Bringing these instruments under automatic route has brought greater flexibility for Indian companies whilst raising capital.
No government approval for foreign investment in Limited Liability Partnerships (LLP)
FDI has now been permitted through the automatic approval route in Limited Liability Partnerships (LLPs) operating in sectors where 100% FDI is allowed under the automatic route without conditionalities. Previously, FDI in LLPs was allowed only with prior government approval, with a blanket restriction on downstream investments. LLPs receiving FDI are now permitted to make downstream investments in another LLP or company in sectors in which 100% FDI is allowed under the automatic route and without FDI-linked performance conditions.
The Government has brought LLPs on a par with companies with a view to promoting FDI, considering that LLP as an entity is easier to operate.
Deferred consideration
The RBI has now allowed deferred payment of up to 25% of the total consideration, in case of transfer of shares between a resident buyer and a non-resident seller or vice versa. Further, for this purpose, parties are free to mutually agree to an escrow arrangement for a period of not more than 18 months from the date of the transfer agreement. Under the previous regime, deferred consideration where foreign investors were involved was possible only after obtaining prior approval from the government.
Proposed abolition of Foreign Investment Promotion Board (FIPB)
In the recent union budget (2017), the government has also announced abolition of FIPB (the regulatory body for approval of FDIs under the automatic route), with a view to foster foreign investments in India.
Part B – Amendments to the Indian merger control regulations
On 4 March 2016, the Ministry of Corporate Affairs (MCA), Government of India increased the thresholds for small target exemptions. Accordingly, transactions involving target enterprises with value of assets not more than INR 350 crore (US$52.53m approx.) in India or turnover of not more than INR 1,000 crore (US$150.07m approx.) are exempt from the requirement of seeking the prior approval of the CCI.
On 27 March 2017, the MCA has extended small target exemption to mergers and amalgamations (which was not covered under the earlier regime). Further, it has also clarified that parties will no longer be obliged to look to the seller’s assets / turnover. This liberalization is expected to substantially reduce the number of notifications received by the Competition Commission of India (CCI) since this is a narrower approach with a focus on the “true” target, as opposed to the selling enterprise.
Part C – Bankruptcy Code
On 30 March 2017, Section 59 of the Insolvency and Bankruptcy Code, 2016 (Code) along with the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 (Regulations) were notified, with effect from 1 April 2017.
The Code and the Regulations provide a comprehensive regime for the companies and other corporate persons such as limited liability partnerships alike, and the National Company Law Tribunals (NCLTs) are now armed to deal with all voluntary liquidation proceedings initiated from 1 April 2017, whilst taking the power away from the High Courts. The NCLT and the National Company Law Appellate Tribunal (NCLAT) have been constituted in June 2016 under the company law. The NCLT has been constituted to perform the functions of the erstwhile Company Law Board and will also perform the functions of the High Court in relation to M&A deals.
Commercial courts have also been constituted under the company law for providing speedy trials of offences punishable under the law with imprisonment of two years or more. This is expected to facilitate the business environment in India for foreign investors.
Part D – Cross border mergers
The MCA has notified Section 234 of the Companies Act 2013 (2013 Act) which permits cross border mergers with effect from 13 April 2017. Marking a significant change from the old regime under Companies Act 1956, in terms of which only inbound mergers were permitted. For the first time, outbound mergers have also been permitted. This will facilitate Indian companies in expanding their horizons for achieving growth, be it for consolidation, acquisitions or internal restructuring.
Further, the MCA has also in December 2016 notified provisions relating to compromise, arrangements and reconstructions under the 2013 Act. This now allows fast track mergers with lesser compliances between small companies and between holding and its wholly owned subsidiary company.
Part E – Arbitration law reforms
The Parliament passed the Arbitration and Conciliation (Amendment) Act in December 2015, with a view to: making arbitration in India quicker, reduce interference by courts, and to make India a more attractive destination for foreign investors. The new arbitration law provides flexibility to parties to approach Indian courts for interim reliefs in case of foreign seated arbitrations.
Part F – Tax treaties
Investments into India were, in the past, often routed through intermediate holding jurisdictions such as Mauritius, Singapore and Cyprus because equity investments structured in this manner historically benefited from the favourable tax treaty provisions with regard to capital gains. However, tax treaties with Mauritius, Singapore and Cyprus have been revised recently, in terms of which, capital gains arising to tax residents of such jurisdictions from sale of shares of Indian companies acquired on or after 1 April 2017 shall be taxable in India.
As far as debt is concerned, the revised tax treaty with Mauritius caps the withholding tax rate on interest at 7.5% which may make Mauritius an attractive jurisdiction for routing debt investment into India provided that “substance” can be established in Mauritius.
Part G – Other initiatives
The Government of India has taken up a series of other measures to improve Ease of Doing Business, such as, integrating 20 services with the e-biz portal, launching several other initiatives, such as “Make in India”, “Smart Cities”, ‘Start up India”, ‘Digital India”. All this is with a view to facilitate investments, foster innovation and build best-in-class facilities. These initiatives are expected to provide further impetus to industries.
Given the positive business sentiment and persistent focus on reforms for attracting foreign capital, rest of 2017 seems to be definitely a promising year for M&A activities in the country.

Rabindra Jhunjhunwala, Partner
T: +91 22 6636 5000
Rabindra Jhunjhunwala is a Partner at Khaitan & Co, Mumbai. He co-founded the Firm’s Mumbai office and heads the Firm’s France desk and Germany desk initiative. He specialises in domestic and cross border mergers and acquisitions, joint ventures and private equity investments and advises on all aspects of foreign investments (both inbound and outbound) and regulatory approvals. He has advised several multinationals and Indian companies on complex and big-ticket M&A transactions. Rabindra has been acknowledged for his experience and expertise and been recommended by several leading publications including IFLR, Asialaw, Chambers and Partners, Legal 500 for Corporate/M&A work.
Stuti Galiya, Counsel
T: +91 22 6636 5000

Stuti Galiya is a Counsel at Khaitan & Co, Mumbai. Her primary areas of practice include mergers & acquisitions, joint ventures, India entry strategies, private equity investments, foreign investments, technology collaborations, financial services and related regulations, commercial contracts, real estate, employment and general corporate laws.
Views of the authors are personal, and should not be considered as views of Khaitan & Co.
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