Mergers & Acquisitions in India - Nishith Desai Associates

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Mergers and Acquisitions

May 2020

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Mergers and Acquisitions

May 2020

? Nishith Desai Associates 2020

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Mergers and Acquisitions

About NDA

We are an India Centric Global law firm () with four offices in India and the only law firm with license to practice Indian law from our Munich, Singapore, Palo Alto and New York offices. We are a firm of specialists and the go-to firm for companies that want to conduct business in India, navigate its complex business regulations and grow. Over 70% of our clients are foreign multinationals and over 84.5% are repeat clients. Our reputation is well regarded for handling complex high value transactions and cross border litigation; that prestige extends to engaging and mentoring the start-up community that we passionately support and encourage. We also enjoy global recognition for our research with an ability to anticipate and address challenges from a strategic, legal and tax perspective in an integrated way. In fact, the framework and standards for the Asset Management industry within India was pioneered by us in the early 1990s, and we continue to remain respected industry experts. We are a research based law firm and have just set up a first-of-its kind IOT-driven Blue Sky Thinking & Research Campus named Imaginarium AliGunjan (near Mumbai, India), dedicated to exploring the future of law & society. We are consistently ranked at the top as Asia's most innovative law practice by Financial Times. NDA is renowned for its advanced predictive legal practice and constantly conducts original research into emerging areas of the law such as Blockchain, Artificial Intelligence, Designer Babies, Flying Cars, Autonomous vehicles, IOT, AI & Robotics, Medical Devices, Genetic Engineering amongst others and enjoy high credibility in respect of our independent research and assist number of ministries in their policy and regulatory work. The safety and security of our client's information and confidentiality is of paramount importance to us. To this end, we are hugely invested in the latest security systems and technology of military grade. We are a socially conscious law firm and do extensive pro-bono and public policy work. We have significant diversity with female employees in the range of about 49% and many in leadership positions.

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Accolades

A brief chronicle of our firm's global acclaim for its achievements and prowess through the years ? Legal500: Tier 1 for Tax, Investment Funds, Labour & Employment, TMT and Corporate M&A

2020, 2019, 2018, 2017, 2016, 2015, 2014, 2013, 2012 Chambers and Partners Asia Pacific: Band 1 for Employment, Lifesciences, Tax and TMT

2020, 2019, 2018, 2017, 2016, 2015 IFLR1000: Tier 1 for Private Equity and Project Development: Telecommunications Networks.

2020, 2019, 2018, 2017, 2014 AsiaLaw Asia-Pacific Guide 2020: Tier 1 (Outstanding) for TMT, Labour & Employment, Private

Equity, Regulatory and Tax FT Innovative Lawyers Asia Pacific 2019 Awards: NDA ranked 2nd in the Most Innovative Law

Firm category (Asia-Pacific Headquartered) RSG-Financial Times: India's Most Innovative Law Firm 2019, 2017, 2016, 2015, 2014 Benchmark Litigation Asia-Pacific: Tier 1 for Government & Regulatory and Tax 2019, 2018 Who's Who Legal 2019:

Nishith Desai, Corporate Tax and Private Funds ? Thought Leader Vikram Shroff, HR and Employment Law- Global Thought Leader Vaibhav Parikh, Data Practices - Thought Leader (India) Dr. Milind Antani, Pharma & Healthcare ? only Indian Lawyer to be recognized for `Life sciences-Regulatory,' for 5 years consecutively Merger Market 2018: Fastest growing M&A Law Firm in India Asia Mena Counsel's In-House Community Firms Survey 2018: The only Indian Firm recognized for Life Sciences IDEX Legal Awards 2015: Nishith Desai Associates won the "M&A Deal of the year", "Best Dispute Management lawyer", "Best Use of Innovation and Technology in a law firm" and "Best Dispute Management Firm"

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Mergers and Acquisitions

Please see the last page of this paper for the most recent research papers by our experts.

Disclaimer

This report is a copy right of Nishith Desai Associates. No reader should act on the basis of any statement contained herein without seeking professional advice. The authors and the firm expressly disclaim all and any liability to any person who has read this report, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this report.

Contact

For any help or assistance please email us on ndaconnect@ or visit us at

Acknowledgements

Aishwarya H aishwarya.h@ Poonam Sharma poonam.sharma@ Aditya Desai aditya.desai@ Afaan Arshad afaan.arshad@ Vinay Shukla vinay.shukla@ Harshita Srivastava harshita.srivastava@ Nishchal Joshipura nishchal.joshipura@

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Mergers and Acquisitions

Contents

1. INTRODUCTION

01

I. Overview of the M&A Market

01

II. Conceptual Overview

01

2. MERGERS AND AMALGAMATIONS: KEY CORPORATE AND

SECURITIES LAWS CONSIDERATIONS

04

I. Company Law

04

II. Securities Laws

05

3. ACQUISITIONS: KEY CORPORATE AND SECURITIES LAWS

CONSIDERATIONS

07

I. Company Law

07

II. Other Securities Laws

10

4. COMPETITION LAW

18

I. Anti-Competitive Agreements

18

II. Abuse of Dominant Position

18

III. Regulation of Combinations

18

4. EXCHANGE CONTROL

22

I. Foreign Direct Investment

22

II. Indirect Foreign Investment; Downstream investment

29

III. Transfer of equity instruments of an Indian company by or

to a person resident outside India

29

IV. Overseas Direct Investment

31

5. TAXES AND DUTIES

35

I. Income Tax Act, 1961

35

II. Goods and Services Tax

43

III. Stamp Duty

43

6. CONCLUSION

45

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Mergers and Acquisitions

1. Introduction

I. Overview of the M&A Market

With a few highs and lows, the merger and acquisition ("M&A") activity in India during the period from 2015-2019 has been largely resilient. During this period, India has witnessed more than 3,600 M&A deals with an aggregate value of more than USD 310 billion.1

Sectors such as industrial goods, energy, telecom & media represented more than 60% of deals by volume and value.2 A few of the largest deals include Walmart's USD 16 billion acquisition of Flipkart (2018), the USD 13 billion acquisition of Essar Oil by a Rosneft-led Russian consortium (2017), and Adani Transmission's USD 3 billion acquisition of Reliance Infrastructure's integrated Mumbai power distribution business (2018).3

The second term of the Modi government brought back tremendous faith in investor community in India. The government's reform agenda and the policies were largely formulated to encourage foreign investments. There was also a surge in M&A activity due to the new bankruptcy law, the faster pace of approvals initiated by the government as part of its ease of doing business in India campaign and the relaxation in Foreign Direct Investment ("FDI") norms.

However, India started seeing a slump in deal making in the third and fourth quarters of 2019. Inter alia the US-China trade war, Brexit, the situation in Hong Kong, the drone strike on Saudi Arabia's oil facilities had indicated a dawning recession.

In addition, the COVID-19 outbreak which disrupted the world in 2020 has not left the Indian economy untouched. Several M&A deals in the country have been stalled in the wake

1.

2. Ibid. 3. Ibid.

of this pandemic including the privatization of Air India and Bharat Petroleum Corporation Limited. Once the world is able to curtail the spread of the virus and lift the lockdown across the globe, countries will look up to their governments to propose measures to revive the economy and help revive M&A activity.

II. Conceptual Overview

In this section, we have briefly explained the different types of M&As that may be undertaken and an overview of certain laws that would be of significance to M&A in India.

A. Mergers and Amalgamations

The term `merger' is not defined under the Companies Act, 2013 ("CA 2013") or under Income Tax Act, 1961 ("ITA"). As a concept, `merger' is a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business. The possible objectives of mergers are manifold - economies of scale, acquisition of technologies, access to varied sectors / markets etc. Generally, in a merger, the merging entities would cease to exist and would merge into a single surviving entity.

The ITA does however define the analogous term `amalgamation' as the merger of one or more companies with another company, or the merger of two or more companies to form one company. The ITA goes on to specify certain other conditions that must be satisfied for an `amalgamation' to be eligible for benefits accruing from beneficial tax treatment (discussed in Part VI of this Paper).

Sections 230-234 of CA 2013 (the "Merger Provisions") deal with the schemes of arrangement or compromise between a company, its shareholders and/or its creditors. These provisions are discussed in greater detail in Part II of this Paper. Commercially, mergers

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and amalgamations may be of several types, depending on the requirements of the merging entities. Although corporate laws may be indifferent to the different commercial forms of merger/amalgamation, the Competition Act, 2002 does pay special attention to the forms.

i. Horizontal Mergers

Also referred to as a `horizontal integration', this kind of merger takes place between entities engaged in competing businesses which are at the same stage of the industrial process. A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope. These forms of merger are heavily scrutinized by the Competition Commission of India ("CCI").

ii. Vertical Mergers

Vertical mergers refer to the combination of two entities at different stages of the industrial or production process. For example, the merger of a company engaged in construction business with a company engaged in production of brick or steel would lead to vertical integration. Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence and self-sufficiency.

iii. Congeneric Mergers

A congeneric merger is a type of merger where two companies are in the same or related industries or markets but do not offer the same products. In a congeneric merger, the companies may share similar distribution channels, providing synergies for the merger. The acquiring company and the target company may have overlapping technology or production systems, making for easy integration of the two entities. This type of merger is often resorted to by entities who intend to increase their market shares or expand their product lines.

iv. Conglomerate Mergers

A conglomerate merger is a merger between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital.4 A merger with an unrrelated business also helps the company to foray into diverse businesses without having to incur large start-up costs normally associated with a new business.

v. Cash Merger

In a `cash merger', also known as a `cash-out merger', the shareholders of one entity receives cash instead of shares in the merged entity. This is effectively an exit for the cashed-out shareholders.

vi. Triangular Merger

A triangular merger is often resorted to, for regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives).

B. Acquisitions

An `acquisition' or `takeover' is the purchase by one person, of controlling interest in the share capital or of all or substantially all of the assets and/or liabilities, of the target. A takeover may be friendly or hostile and may be structured either by way of agreement between the offer or and the majority shareholders or purchase of shares from the open market or by making an offer for acquisition of the target's shares to the entire body of shareholders.

4. Ibid, note 4, at p. 59

2

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