Amit Shekhar , Isha Agrawal , Himanshu Seth
June 3, 2023
Mergers and acquisitions (“M&A”) have become increasingly prevalent in today's dynamic business landscape, as companies seek to consolidate their operations, expand their market presence, and drive growth. In India, the M&A space has witnessed significant activity, fueled by a growing economy and favorable investment climate. The M&A activity in India touched a record of USD 91.4 billion, driven by seven multi-billion-dollar deals. These high value deals constituted 84% of M&A values.
On the sidelines, private equity (“PE”) and venture capital (“VC”) investments have emerged as powerful drivers of economic growth and innovation in India. PE and VC investments are both forms of investment in privately held companies, but they differ in their investment focus, stage of the company's lifecycle, risk profile, and investment strategies. PE investments typically target mature companies that are already established and have a proven track record. PE firms invest in companies that have a stable cash flow, strong market position, and potential for growth. The focus is often on buyouts, expansion, or restructuring of established businesses. Meanwhile, VC investments focus on early-stage or high-growth companies with significant growth potential but may lack an established market presence. VCs invest in startups and emerging businesses, often in technology, innovation, and high-growth sectors. The primary goal is to provide capital to fuel the company's growth and help it reach its full potential.
This article explores the key aspects of laws applicable on M&A transactions and PE/VC investments in India concerning mergers and acquisitions, shedding light on the legal framework, regulatory considerations, and recent developments.
Legal Framework for M&A and PE/VC transactions
M&A transactions and PE/VC investments in India are governed by a comprehensive legal framework, which includes various acts, regulations, and guidelines. Some of the key legislations and regulatory authorities relevant to such transaction in India are:
Companies Act, 2013: The Companies Act, 2013 provides the legal framework for corporate governance, M&A transactions, and PE/VC investments in India. It prescribes rules and regulations concerning shareholder rights, approval procedures, and disclosures. It also governs various aspects of corporate entities, including the transfer and issuance of shares. Share transfers and issuances are crucial transactions that enable companies to raise capital, facilitate ownership changes, and promote liquidity in the securities market.
Foreign Exchange Management Act, 1999 (“FEMA”): FEMA governs foreign direct investment (“FDI”) and foreign exchange transactions in India. It regulates cross-border M&A deals, investment structures, and repatriation of funds. The Reserve Bank of India (“RBI”) is responsible for administering and implementing FEMA regulations. The government has progressively liberalized the FDI regime, encouraging foreign investors to explore opportunities in diverse sectors. The FDI policy is regularly updated to reflect changing market dynamics and attract investments in priority areas such as infrastructure, manufacturing, and technology.
Competition Act, 2002: The Competition Act regulates competition and anti-competitive practices in India. It establishes the Competition Commission of India (“CCI”), which scrutinizes M&A transactions to prevent any abuse of market dominance or anti-competitive behavior. Parties to an M&A deal are required to notify the CCI if the transaction exceeds certain financial thresholds.
Applicable rules and regulations of Securities and Exchange Board of India (“SEBI”): The securities market in India is governed by SEBI, a statutory body that also acts as a market regulator. Sebi's primary functions are to promote and regulate the securities market and to safeguard investors' interests in securities.
When engaging in M&A or PE/VC transactions in India, several regulatory considerations need to be taken in account, as follows:
Due Diligence: Before initiating any transaction, thorough due diligence is essential to assess the legal, financial, and operational aspects of the target company. This includes but is not limited to reviewing the corporate status and compliances of the target company, contracts, intellectual property rights, employment agreements, statutory compliances, tax liabilities, and any potential legal disputes or regulatory issues.
Approval of board & shareholders: The approval of the board of directors and shareholders of a target is a crucial step in a transaction process. The Companies Act, 2013 mandates that any scheme of amalgamation, merger, or arrangement must be approved by the shareholders of the involved companies through a special resolution passed in a general meeting.
Regulatory approvals: Transactions may require approvals from various regulatory bodies depending on the nature of the transaction. For example, if the entities involved are listed companies, SEBI's approval may be necessary. Additionally, sector-specific regulations and government authorities such as the RBI may impose specific compliance requirements for certain industries.
Competition law compliance: The Competition Act, 2002, governs competition-related aspects of transactions. Parties to a proposed combination meeting certain financial thresholds are required to notify the CCI and obtain its approval before completing the transaction. The CCI assesses the potential anti-competitive effects of the combination on the market and grants approval if it deems the combination to be in the best interest of competition.
Employee consultation and approvals: In certain cases, particularly in joint ventures or 100% acquisition of a target, employee consultation and approval may be required. This is particularly important if the transaction involves changes to employee contracts, redundancies, or substantial alterations to the terms and conditions of employment.
Statutory filings and disclosures: The Companies Act, 2013 necessitates the filing of various documents and disclosures with the Registrar of Companies (“RoC”), including the scheme of amalgamation or arrangement, board resolutions, shareholder agreements, and other relevant documents. Non-compliance with these filing requirements can result in penalties and adversely affect the validity of the transaction.
Tax and Stamp Duty considerations: Transactions have tax implications, and compliance with applicable tax laws is vital. This includes considerations related to income tax, capital gains tax, and stamp duty on various transaction documents. Parties involved must assess and fulfill their tax obligations, including obtaining tax clearances, filing tax returns, and paying any applicable taxes and duties.
Recent developments and future outlook
India's transactional landscape has witnessed significant developments in recent years. The government has implemented various reforms to simplify regulations, promote ease of doing business, and attract foreign investment. Additionally, India's PE/VC market has been vibrant, with domestic and international investors actively participating. The government's emphasis on sectors such as technology, healthcare, renewable energy, and infrastructure has created ample opportunities for PE/VC firms to invest in high-growth companies.
As India continues to offer a conducive environment for investments, PE/VC firms and companies engaging in M&A transactions must stay informed about the evolving legal landscape to capitalize on emerging opportunities and drive sustainable growth.
The forthcoming articles as part of this Series will delve deeper in the nitty grittiness of the transactional procedure, capturing the commercial intents of both an investor and a target, and the applicability of law, required to enable the intent in the transaction process.
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