Hostile Takeovers in India, an overwatch
You (foreign bidder) are a global company and India is not on your map, and then you have missed the cross-border mergers and acquisitions, are suitable and more rampant feature of the Indian corporate landscape-
-Dr. Manmohan Singh, Former Prime minister of India
Introduction
Mergers and Acquisitions have been a corporate phenomena for years and involves amalgamation of two or more distinct entities into one, integrating the assets and financial resources of both in order to achieve higher economic viability and business [1]propulsion. Mergers and Acquisitions are often characterized with several high – volume transactions, diligent deliberations of the participating entities’ financial health, future prospects of the venture etc. Often it has been seen that M&A deals usually fall under two broad categories – Public and Private. While Public M&A refers to the transactions taking place among companies whose shares are listed on a Public Stock Exchange, Private M&A involves companies who are not publicly listed. Public deals are relatively of bigger and more voluminous in terms of valuation and shares traded since public entities generally consist of large promoter holdings, running into thousands and millions of shareholders, hence the public merger deals are usually associated with public disclosures that are available in the public domain, since Public companies have their statistics mandatorily made visible to the general public. Information such as quarterly audited financial statements, past performance of the company, information about the company’s key management personnel. Public M&A deals are more prevalent in the Indian scenario due to the fact that Public enterprises consist of large promoter pools and diversified shareholding patterns, making such deals more credible and maintaining investor confidence.
Statutes controlling M&A activities in India
There are several statutes which seek to regulate the functioning and working of the corporate combinations in the country in India, The term “merger” is Defined under the Income Tax Act, 1961 as Amalgamation of two or more entities into one, thereby integrating their assets and liabilities to from a single business unit. The Companies Act, 2013 acts as the de-facto legislation for M&A in India, hence spelling out the procedure for acquisition for shares (s.186), purchase of shares by shareholders who own 75% or more the company’s Share Capital, Merger and Amalgamation of Companies (s.232), Merger with “certain companies” (s.233) as well as Merger with a foreign Company (s.234).[2]
SEBI (Substantial Acquisition of Shares and Takeover) (SAST) Regulations, 2011[3] prevent the incidence of Hostile Takeovers by rouge bidders and keep a check on the process of acquisition of public companies.Regulation 3(2) states that In any acquisition, when the threshold of 25% of shares or voting rights of the target in reached, at acquirer must make an open offer. In such instances, every time the acquire acquires more than 5%, an open offer is required to be made. The regulations make it mandatory to open an escrow account two days prior to the Public Announcement as security towards the performance of his duty under the regulations. The escrow account shall be credited with amount more than or equal to either 25% of the open offer consideration upto first Rs. 5oo crore. Thus it makes almost impossible for an outsider to make voluntary open offers, since the said acquirer must have at least 25% of the shareholding in the company. Thus, an outside bidder is constraint from protracting his shareholding immediately after acquiring substantial stake in the company [4].The SEBI (Prevention of Insider Trading) Regulations, 2015[5] prohibit Insider Trading and imposes heavy fine on anyone who has access to Unpublished Price Sensitive Information (UPSI) and uses the same or leaks it to the detriment of the company. UPSI may include confidential information which is not generally available to the general public, such as information about a company’s financial statements, dividend policy, merger and demerger and expansion plans, capital structure etc. [6]
The Competition Act, 2002 is the renewed antitrust legislation in the country, which seeks to regulate the anti-competitive aspect of large combinations. As per section 5 of the Act, All combinations which exceed the threshold as specified under the act, must obtain an approval from the Competition Commission of India, by giving full disclosures about the deal. The Commission also has powers to initiate investigations, under section 20, [7] with respect to a new combination, on the apprehension that it can or shall create an Appreciable Adverse Impact on Competition (AAEC) in the market.
Recent Trends in the Indian M&A Regime
Liberalization in 1991 has been a watershed moment for the Indian trans-border cooperative economy.With several Foreign Companies investing in India, as well as Indian enterprises merging or acquiring foreign entities. With the number of cross-border mergers rising from 156 to 236 from 1974 to 1994[8], the number of acquisitions rose exponentially from just 11 to 646 during the same time period. This prompted the Government to take some serious steps in order to prevent the incessant inflow of foreign ventures as well as rampant takeover of Indian entities by MNCs. The introduction of statutes such as Foreign Exchange Management Act, 1999 (FEMA) along with Cross –border merger Regulations of 2018. The constitution of the Securities Exchange Board of India (SEBI) for the regulation of listed entities introduced concepts which were prevented in the western M&A domains, such as hostile takeovers, price rigging, Listing Obligations of the participating entities etc. Furthermore, with the enactment of the Competition Act in 2002, the fair competition regime was given a boost when the erstwhile MRTP Act of 1969 was scrapped to introduce a modern, reinforced antitrust law to ensure that M&A Transactions did not produce any adverse impact on the level of healthy competition in the market. Public M&A in India saw a halt after the 2009 -10 Global Financial Crisis, it bounced back just a few years, statistically, inbound mergers i.e. mergers in which a foreign company mergers with an Indian company, with the resultant entity being based in India majority of the times, accounted for 40% of the total Mergers in the year 2013.
One of the striking features about Public M&A deals in India is that they are driven by broad-based promoter/shareholder groups or associations, as compared to the deals in Western Jurisdictions where the Promoter groups are usually closely –knit shareholder boards and groups. Acquiring control in a public company in India has consist of methods – the most common one being Acquisition of shares and of substantial voting rights in a company. In order to gain substantive control over the target entity, the bidder must make an offer for at least 26% of the total shares. Another common method of acquisition is through statutory provisions. A scheme of acquisition is devised by the parties, which is further approved by the NCLT. The scheme of acquisition requires approval from 75% of the members in class of shareholder and creditors in both the target as well as the acquiring companies. A major benefit of this scheme is that it is applicable even on the drag-along shareholders, apart from the 75% of the assenting pool. The scheme should be approved from SEBI and RBI as well in case of listed companies. Also, statutory scheme provides more flexibility to the bidders and target company in terms of framing the terms of the transaction, which suit to the best interest of both the parties. However, one major draw of this method is the jurisdictional constraints, since the statutory bodies of India protractedly come in the picture, the participating entities, especially in cross-border mergers and acquisitions where the companies are headquartered in different jurisdictions, tend to become more complex.
Hostile Bids/Takeover
Takeovers or Hostile Takeovers refers to unsolicited or unwarranted acquisition of a target entity by the bidder without the consensus of the target entities shareholders/promoters, at least in the majority. In absence of a consensus, the acquisition is termed as a takeover since it aims at gaining control of the target entity against the promoter sentiment. Hostile Takeovers, not not illegal, are not common in the Indian Market due to the fact that promoter holdings of company are large yet concentrated within a few individuals, hence the outside bidder finds it difficult acquire majority stake in the company on it’s own[9]. There have only been a handful of attempts at hostile takeover in the Country, with only two being successful so far- One being the acquisition of Raasi Cements by Indian Cements in 1998, wherein the bidder acquired 32% stake in the cement –manufacturing company through private placement, and acquired another 20% through private negotiations with the company’s founding management. The second one took place more recently in the shape of the infamous Mindtree-L&T deal whererin the multi-national Construction giant L&T absorbed more than 60% of Mindtree’s shares in 2019.In absence of a solid promoter base, Mindtree Ltd. was besieged by the acquirers through various routes, including open-market selling and eyed at a cumulative 55% state in the company.
Post-Covid Scenario and conclusion
The post COVID scenario looks quite promising in developing nations such as India. With the economics shut and production halted for well over 1.5 years, the derailed economy seems to gain footing again once the situation normalizes. The M&A landscape after the pandemic however changed drastically due to the innovations in lifestyle introduced during the funnel of the Lockdown era. With more and more e-commerce startups focusing on tech-driven consumer needs, such as fintech, e-commerce, B2C delivery services etc, the need for larger enterprises to acquire smaller, more niche companies for their expansion was seen more prominently. Traditional Edu-giant Akash acquiring Byjus – an Edu-tech startup is clear indication of the sign that industries are moving towards more technology –driven ecosystems.Daily-services delivery providing startup Big Basket acquiring milk delivery platform DailyNinja, and in-turn TATA Group’s acquisition of Big Basket in 2021 presents a scenario of layered combinations which aim to integrate diverse sectors of consumer –driven enterprises into one single unit. With India set to become the third largest economy in the world by 2050 in terms of nominal GDP and with rising M&A deals which have more tech-driven end-product, Indian Public M&A Scene is considering a serious revamping in the upcoming years.
[2] Companies Act, 2013 s. 186, 232, 233, 234
[3] SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011, reg.3(4)
[4]Raghubir Menon, Tanya Choudhary and Sidharth Chauhan, “Public Mergers and Acquisitions in India: overview” (Thomson Reuters, Jul 1, 2010) <https://uk.practicallaw.thomsonreuters.com/3-503-1108?transitionType=Default&contextData=(sc.Default)&firstPage=true>
[5] SEBI(Prevention of Insider Trading regulations), 2015
[6] Khusi Sharma, “All you need to know about the laws governing mergers and acquisitions” (Ipleaders, October 31, 2021) <https://blog.ipleaders.in/all-you-need-to-know-about-the-laws-governing-mergers-and-acquisitions/>
[7] Competition Act, 2002.s.6, 20
[8] Nikhil Gupta, ” Opportunities and challenges of M&A in India (MIT libraries, June2014) <https://dspace.mit.edu/bitstream/handle/1721.1/90246/890379077-MIT.pdf?sequence=2&isAllowed=y>
[9] Ayush Rastogi, ”Hostile Takeovers in India: A study covering statutory and regulatory background, cases and defenses” (Linkdin Articles, February 8, 2022)< https://www.linkedin.com/pulse/hostile-takeover-india-study-covering-statutory-cases-ayush-rastogi/ >
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