Mergers and acquisitions in India during a pandemic – Key legislative changes aiding M&A deals
- By Vineet Aneja, Managing Partner, Clasis Law
The year 2020 will go down in history as the year that changed many lives and brought the world to a complete standstill due to the COVID-19 pandemic, effects of which countries like India are still reeling under. While the year 2020-21 has been devastating for many sectors like aviation, hospitality, travel and tourism, which are largely dependent on the physical movement of people, certain sectors such as telecom, consumer goods, oil and refinery, ports, finance, industrials, real estate and technology have done well. On the private equity (PE) front, the COVID-19 pandemic has been a boon for tech firms. Increased digital consumption has led to ballooning tech valuations and soaring interest in tech-based investments with the year witnessing over 75% investment in the start-ups, e-commerce and IT & ITeS sectors.
Despite concerns around macroeconomics, corporate governance, changing regulatory norms, geopolitics and global tensions, deal values in 2020 nearly retained momentum with the previous year. At an aggregate level, deal values amounted to little over USD 80 billion across around 1,268 transactions, which is a 7% increase in terms of value as compared to 2019. However, 25% of this deal value could be attributed to sizeable inbound investments in Jio Platforms. Further, Facebook’s USD 5.7 billion investment for around 10% stake in Jio was both the largest investment for a minority stake by a tech firm globally and the largest foreign direct investment (FDI) in Indian telecom (tech platform) ever. Strategic deals (mergers and acquisitions) accounted for over 50% of the total deal value this year, while private equity (PE) activity kept pace with last year, recording investments worth USD 38.2 billion. 
While mergers and acquisitions aid companies in entering new markets and in their growth, there are various legislative changes that give an impetus to such deals. This blog post will briefly touch upon some of those recent legislative changes:
(a) The Government of India has issued Press Note 3 of 2020 dated 17 April 2020 pursuant to which the foreign direct investment policy has been amended to provide that:
(i) investment in an Indian company by an entity which is resident in a country sharing a land border with India (such as China, Pakistan, Nepal, Bhutan, Burma and Bangladesh) would now require Government approval,
(ii) investment in an Indian company where the beneficial owner of the investment is a resident or citizen of a country sharing a land border with Indian will fall under the Government approval route, and
(iii) any transfer of shares of an Indian company which, directly or indirectly, results in a resident or citizen of a country sharing a land border with India becoming the beneficial ownership of the shares will also require Government approval.
This press note was issued in order to curb opportunistic acquisitions of Indian companies during the COVID-19 pandemic. Effectively, investments from seven countries, including China, are impacted as there may be a delay in obtaining regulatory approval (or the investment may be rejected). These changes to the FDI Regulations require an assessment of, among other issues, the term "beneficial owner". Although the Government issued an updated version of the FDI Policy (effective from October 15, 2020), but it does not clarify the manner of determination of a "beneficial owner". This term has been defined under other Indian laws (such as the Companies Act, 2013), although a uniform definition is not available.
(b) FDI limit increased in the defence sector – The Department for Promotion of Industry and Internal Trade(DPIIT) issued press note 4 of 2020 thereby permitting 100% FDI in the defence sector with up to 74% (which was 49% previously) FDI permitted under the automatic route and beyond 74% FDI through Government approval route wherever it is likely to result in access to modern technology or for other reasons to be recorded. FDI up to 74% under automatic route shall be permitted for companies seeking new industrial licenses.
It is yet to be determined what is meant by ‘modern technology’ and what ‘other reasons’ can convince the Government to allow investment exceeding 49% remained undefined. And though investment under the enhanced 74% cap will now not depend on these factors, the fact remains that it will still require prior government clearance, subject to security clearance.
(c) Insolvency related measures - The threshold for filing an insolvency petition against an Indian company has been increased from INR 100,000 to INR 10 Million. This has come as a relief to businesses, especially the micro, small and medium enterprises. The Central Government after considering the circumstances has decided to discontinue the suspension on the filing of the fresh insolvency proceedings after completion of one (1) year time period as on March 24, 2021. Additionally, the Central Government vide Gazette Notification dated April 4, 2021 has introduced pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises. The minimum amount of default of higher value by such corporate person shall not be more than INR 10 Million, only for the matters that are related to the pre-packaged insolvency resolution process of such corporate debtor classified as micro, small and medium enterprises.
(d) Direct overseas listing by Indian companies - In a move to succor the economic hardships faced by Indian companies and Indian startups due to the COVID-19 pandemic, more precisely because of the nation-wide lockdown, the Government of India gave its nod to Indian companies to directly get listed on an overseas Stock Exchange by tabling the Companies Amendment Bill, 2020. This is a welcome step as it allows Indian companies to sell their shares in the overseas market and in this way get access to a larger pool of capital.
(e) Reclassification of promoters by the Securities and Exchange Board of India (SEBI) – SEBI has proposed to change the minimum threshold required for reclassification of promoters as a public shareholder. Promoters seeking re- classification should not hold 15% or more of the total voting rights in a company. This is proposed so as to enable those promoters who have shareholding of less than 15% but are no longer involved in the day-to-day control of the listed entity to opt-out from being classified as promoters, without having to reduce their share-holding.Such revision is reflective of ground realities of public market deals where outgoing promoters are often left, by choice or on account of deal structure, with a stake exceeding 10%. In turn, such promoters face various difficulties such as forced sell down of shares (often at a sub-optimal price), in order to achieve re-classification. This also aids incoming investors structure the deals better by facilitating a more efficient re-classification, and not remain hostage to outgoing promoters first completing a sell-down to become eligible for re-classification. Currently, the promoter/promoter group before making a re-classification request is to ensure that their cumulative shareholding in the listed entity does not exceed 10%.
(f) Introduction of labour codes – The Government has introduced 3 new labour codes - the Code on Wages, 2020; Code on Social Security, 2020 and Code on Occupational Safety, Health and Working Conditions, 2020 thereby consolidating many labour laws and seeking to facilitate ease of doing business. These Codes have not yet come into effect. Once the provisions of these Codes come into force, they shall repeal the existing Central legislations relating to wages, payments, social security benefits, health and safety conditions, etc. However, until the proposed law reforms are in effect, an entity doing business in India is required to comply with the existing labour laws, both at the Central and State level.
While significant steps have been taken to accelerate the merger and acquisition market, there are still some areas of concern that need to be addressed in order to facilitate such transactions.
DSICLAIMER: The contents of this publication have been updated as of 17 May 2021. It is neither a legal opinion nor does it set out a comprehensive review of all developments in law and practice or to cover all aspects of the matters referred to. Clasis Law assumes no responsibility or obligation to update this publication. This publication intends to give the reader an overview of the various aspects of doing business in India including but not limited to the applicable legislations, compliances and processes. It is not intended and cannot be construed as a comprehensive and detailed analysis of Indian Law or, under any circumstances, as legal advice from Clasis Law
 PWC Report on “Deals in India: Annual review and outlook for 2021” dated December 2020 - https://www.pwc.in/assets/pdfs/services/deals/deals-in-india-annual-review-and-outlook-for-2021.pdf#:~:text=Consolidation%20was%20a%20major%20driver,a%20bumper%20year%20in%202021  https://dipp.gov.in/sites/default/files/pn3_2020.pdf  https://dipp.gov.in/sites/default/files/pn4-2020_0.PDF  https://www.sebi.gov.in/reports-and-statistics/reports/nov-2020/consultative-paper-on-re-classification-of-promoter-promoter-group-entities-and-disclosure-of-promoter-group-entities-in-the-shareholding-pattern_48236.html
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