INBOUND M&A IN INDIA –
OPPORTUNITIES AND CHALLENGES
Investing in Emerging Markets 2011
The Harvard Club, New York City
Mohit Saraf
Senior Partner
Luthra & Luthra
Law Offices
TODAY’S SCENARIO
 For years, US has been the biggest investor in India
 Economic Downturn in the US
 Liquidity Crunch
 High Degree of Uncertainty
 Increasing Inter linkages in Global Economy
 Corporate Governance Issues in the India and the US
 Retreating Private Equity
29 November 2011
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FUNDAMENTALS HAVE NOT CHANGED
 Synergies : Often 2+2 > 4
 Access to new markets, established customer bases and
supply chains
 Access to technology
 Brand equity and diversification
 Economies of scale
 Consolidation
29 November 2011
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ISN’T THIS THE RIGHT TIME……..
 Easing Valuation Multiples
 Lower Competition from Private Equity
 Today Sellers Often Lack Bargaining Power; Forced Exits
 Undeployed Cash in a Falling Interest Regime: Helpful in
Stimulation of Growth and Expansion of Margins
 Long Term Value Driver: Capturing Synergy Benefits
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MARKET CHALLENGES
 Volatile Market : mark to market losses
 Mismatch of Expectations : seller expecting valuation to go
north and buyer expecting valuation to go south
 Raising of third party capital much more challenging
 Leveraged Companies becoming soft targets
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DEAL MAKING TODAY
 Target Identification: Lots on the block
 Comprehensive Due Diligence : Like never before
 Representations and Warranties: A challenge
 Deal Cancellation Ability: Strong reluctance

Conditions Precedent

Material Adverse Effect Clauses
 Purchase Price Adjustments in Listed Entities
29 November 2011
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REGULATORY CHANGES IMPACTING M&A
 Forward looking reforms:

New Takeover Code (2011).

Competition Commission of India (“CCI”) approval required for
M&A (2011).

Removal of prior approval under Press Note 1 of 2005 (2011).

Liberalization in the escrow regime for non-residents (2011).

Certain share transfers no longer require RBI approval (2011).

In–principle approval for FDI in multi brand retail and for
increase in FDI cap in single brand retail (2011).
13 April, 2015
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REGULATORY CHANGES IMPACTING M&A
 Negative changes:

FDI in the pharmaceutical sector requires approval (2011).

FDI in instruments with built-in options to be considered as debt.
(This has now been deleted) (2011).

13 April, 2015
Tax liability issues eg. Vodafone case.
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FORWARD LOOKING REFORMS
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INTRODUCTION OF THE NEW TAKEOVER CODE
 Salient features:

Threshold limit for open offer trigger increased from 15% to 25%.
This enables acquisition of a higher stake without having to
comply with the open offer process.

Minimum open offer size increased to 26% from 20%.
This provides an exit to higher number of shareholders.

Non-compete fee to now be part of offer price.
This may increase cost of acquisitions.
13 April, 2015
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CCI TO APPROVE OF ‘COMBINATIONS’
 Any M&A deal where the aggregate value of assets or turnover
of the individual entity or the group exceeds certain thresholds
specified in the Competition Act would trigger a filing
requirement with the CCI.
 The CCI must then determine whether the combination causes
or is likely to cause an appreciable adverse effect on
competition within the relevant market in India.
 The transaction can be consummated after the expiry of 210
days of the filing being made with the CCI or the grant of
approval by the CCI, whichever is earlier.
13 April, 2015
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FDI IN MULTI BRAND RETAIL
 In–principle approval has been granted for FDI in multi-brand
retail upto 51% under the approval route. This is subject to,
inter alia, the following conditions:

Minimum amount to be brought in by the foreign investor to be
USD 100 million.

At least 50% of the total FDI must be invested in back-end
infrastructure (includes capital expenditure on all activities,
excluding front-end units.
Excludes expenditure on land cost
and rentals).

30% procurement of manufactured/ processed products must be
from SMEs.

Government to have first right on procurement of agricultural
products.
13 April, 2015
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FDI IN SINGLE BRAND RETAIL
 In-principle approval granted for increase in FDI in single brand
retail from 51% to 100% under the approval route. This is
subject to, inter alia, the following conditions:

Products to be sold under the same brand internationally.

Foreign investor must be the owner of the brand.

Single brand retail would cover only products branded during
manufacture.

13 April, 2015
For FDI above 51%, 30% sourcing must be from SMEs.
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OTHER POSITIVE REFORMS
 Removal of Press Note 1 of 2005:

Earlier, prior FIPB approval was required where the foreign investor had an
existing joint venture, technology transfer or trade mark agreement in the
same. Typically an NoC from the existing Indian partner was required. This
has now been removed.
Liberalization in escrow regime:


To facilitate FDI transactions, it is now permissible to open non-interest
bearing escrow accounts without RBI approval, subject to certain specified
conditions.
The escrow account can remain operational for a maximum of 6 months.
Transfer of shares without RBI approval:

Certain share transfers from a resident to a non-resident can now occur
without RBI approval, subject to certain specified conditions eg. where FIPB
approval has been obtained, or where the pricing norms under FEMA have not
been followed provided FDI policy and FEMA (in terms of sectoral caps and
conditionalities) are complied with.
13 April, 2015
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NEGATIVE REFORMS
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FDI IN THE PHARMACEUTICAL SECTOR
 Earlier, 100% FDI was permitted in the pharmaceutical sector
without any Government approval being required.
 This has been changed as follows:

FDI upto 100% is permitted for greenfield investments in the
pharmaceuticals sector, without approval.

FDI upto 100% is permitted for brownfield investments (i.e.
investments in existing companies), under the Government
approval route.

This is proposed to be reviewed in another six months as it is
contemplated that, by then, the CCI would be able to effectively
monitor ‘combinations’ in the pharma sector.
13 April, 2015
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FDI IN INSTRUMENTS WITH BUILT-IN OPTIONS
 The FDI Policy issued in 2011 carried the following change:

Only equity shares, fully, mandatorily and compulsorily
convertible debentures and preference shares with no built-in
options of any kind would be eligible instruments for FDI.

Equity instruments issued/transferred to non-residents having inbuilt options to be treated as debt and have to comply with the
extant guidelines on external commercial borrowings.
 This has now been deleted. However, the RBI has had concerns
regarding such exit mechanisms where non-residents have a
guaranteed rate of return. Thus, it is quite likely that RBI may
notify that FDI in such instruments would not be permissible.
13 April, 2015
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CAPITAL GAINS TAX ISSUES: VODAFONE CASE
 Bona fide business purpose v. sham, fraudulent and colourable
transaction.
 No tax treaty benefit available (Cayman companies).
 Non-compete fee was being paid to Essar.
 Undertaking to discontinue operations in India.
 FIPB disclosure.
13 April, 2015
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THANK YOU
Mohit Saraf
Senior Partner,
Luthra & Luthra
Law Offices
Mumbai | New Delhi | Bangalore
Email : msaraf@luthra.com
29 November 2011
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