The Mergers & Acquisition (M&A) market is setting records and presenting complexities, which regulators and policymakers cannot ignore. A recent report by Bain & Company indicated that M&A activity is at an all-time high and is also fuelled by first-time buyers with 85 strategic deals valued over USD 75M with first-time buyers accounting for 80% of the volume.
A pandemic disrupted economy and market has turned up the innovation on sustenance and growth. Significant options and structures are available in “deal-making” space for business owners to compulsorily innovate and transform businesses.
WHAT HAS CHANGED?
Lots, considering that the world is emerging from the aftermath of pandemic. The highest deals of 2021, both in value and volume have been valued at USD 115B, comprising of 2,224 deals, of which 499 were M&A worth USD 42.9M, 1,624 PE deals worth 48.2B and 101 IPOs and QIPs. Looking at the start-ups trajectory, it locked USD 9.5B. which included INR 70,600Cr. for exits like partial and full through IPO, M&A or secondary sale.
REGULATORS LOBBY
Swift changes by SEBI and CCI have progressively moved regulations to support M&A activity. SEBI has come up with the following changes-
- Gold and Social Stock Exchange: It has established the Gold and Social Stock Exchange in India (Gold and Social Stock exchange have introduced spot trading options for Retail Investors, banks and FPIs through Electronic Gold Receipts (EGRs) notified as securities. EGRs are meant to be made fungible and interoperable with vault operations);
- Related Party Transactions and SVR: tightened RPT and relaxed rules for Superior Voting Rights for promoters, enabling local listing of tech start-ups (the new rule is set to come into effect from April 2022, the definition of Related Party has been expanded to include persons and entities, forming part of the promoter or promoter group irrespective of shareholding. The promoter retention of voting rights allow promoters to have control even with dilution);
- Open offer and de-listing: It has made de-listing of target companies easier with modifications to the Takeover Code. This has made it possible for first time buyers to attempt de-listing by offering a commercially viable price (implantation is through an amendment to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations);
The process of de-listing the target company by the acquirer now requires the acquirer to propose a higher price with a suitable premium over the open offer price. If the response to the open offer results in meeting the de-listing threshold of 90%, then all shareholders tendering their shares would be paid the same de-listing price. However, if the offer fails to meet the 90% threshold, then the tendering shareholders would be paid the takeover price.
Earlier, if an acquirer was proposing to de-list a target and it triggered an Open Offer, then the Securities Contract (Regulations) Rules would need the incoming acquirer to first take his shareholding taken above 75% or even 90% and then compulsorily brought down to 75%, because the SEBI de-listing norms would not allow the acquirer even attempt de-listing till it would be at 75%. In the case of listed companies, these regulations cause enormous complexities, if the acquirer wants to de-list the target. SEBI has also proposed a cap on start-up IPO proceeds for M&A.
The CCI is also contemplating a relaxation in the disclosure requirements for entities seeking merger approvals. The current disclosure requirement is made under 30 queries, if the market share of the post-merger entity exceeds 15%.
CCI, is considering-
- Threshold Increase: an increase in this threshold of 15%; and
- Making queries as per International Best Practices: modifying the 30 queries for disclosures* to a more relevant international best practices involving information on the merging entities and making it deal focussed.
*CCI had suspended the Amazon-Future deal for non-disclosure of information.
India made some quick expansion provisions to the insolvency laws and this led to the acquisition of DHFL by the Piramal Group, being the first through the insolvency route.
There has been an additional development in the GST laws in a relaxing way for conglomerate acquisition and PE investors and M&A. The Authority for Advance Ruling (AAR) in a matter involving the Airport Authority of India and Adani Group has held that hiving off part of a business should not attract GST at the hands of the acquirer and allowed tax exemption. In doing so, it gave a very lenient interpretation of “transfer” under the GST.
Motivations and Challenges for M&A
M&A has significant diversity now, it almost feels that the challenges themselves are the motivations to get to the deals.
Businesses face a variety of challenges:
- Advent of AI with compelling and aggressive digitalisation is pushing businesses to increase their presence in that space;
- Geographic expansion for hedging risks;
- assimilating trained skill in the wake of labour disruptions which began almost 2 years ago and have not yet stabilised;
- supply chain disruptions have put tremendous pressure on the need for insurance, warehousing and freight stabilisation;
- Pandemic stricken years have created financial deficits and cheap loans, requiring the government policies to adapt swiftly and offer incentive linked schemes, which benefitted the start-up ecosystem.
The motivation, digitisation and AI empowered deals have increased M&A activity. In an era of pooling in strategic partnerships, most acquisitions in the digital space have revolved around accumulation of a user base Eg. MX Takatak and ShareChat.
The lesser-known M&As of the year:
Pharma and Medical Device:
- Mumbai based BDR Pharms has raised around INR 750 Crs. From a PE Fund to geographically expand through a controlling stake in a Belarus government owned Pharma unit. This was with an intent to benefit from a Eurasian Custom Union (ECU) between Belarus, Russia, Kazakhstan, Armenia and Kyrgyzstan, which allowed a national producer following the EAEU guidelines for safety of medicines to be automatically registered in five countries with a national producer status. BDR has plans to invest in Algeria too for anti-cancer drug manufacturing.
What does the recent Russia- Ukraine invasion mean for this geographic expansion?
- Chennai-based Trivitron which operates 15 manufacturing facilities in the world, has acquired a US-based, the Kennedy Company (a leading manufacturer of radiation protection x-ray shielding material and acoustic barrier products). With this, Trivitron will get access to 25,000 Sq. Ft. of production space in Alabama.
Retail:
- The Amazon – Future – Reliance stand-off is now taking the dreadest turn to a criminal complaint with Amazon claiming violation by Future despite a withholding order of a Singapore arbitrator, which was violated by Future in transferring the lease of the stores. Reliance has moved to rebrand these Future stores under its name, since Future has defaulted in repaying the credit of INR 4000 Cr. it owed Reliance.
- In its plans to expand its retail business, Reliance Retail has acquired a majority stake in designer wear Abraham & Thakore. Earlier this year, Reliance Brands formed a 60/40 JV with designer Rahul Mishra and another one with Anamika Khanna.
Telecom:
Bharti-Airtel is acquiring a 4.7% stake in Indus Towers from UK’s Vodafone Group Plc. In a Block deal. The condition for this investment is that, the amount will be inducted in Vodafone Idea and remitted to Indus to clear the dues of Vi.
The Indian telecom industry is oligopolistic, it is currently facing intense competition from Reliance’s Jio and Bharti-Airtel, two other significant providers. While Bharti-Airtel has been around for a very long time in the space, Jio a relatively new entrant, is a force to contend with. A SC judgement also requires telecom entities to pay crores in Adjusted Gross Revenue.
Vedanta is considering a potential merger between commodity’s Vedanta Resources Ltd. with (pioneer to be listed on the London Stock Exchange in 2003) cash rich, Mumbai traded, Vedanta Ltd.
IT:
In a hostile takeover of information technology services provider, Mindtree by Larson and Toubro, L&T was interested in purchasing a controlling position in Mindtree to expand its technology branch. In a creeping acquisition, L&T bought a 20.32 % stake in Mindtree from Mr. V.G. Siddhartha, a non-promoter stakeholder and then a 15% interest, and after that a 31% through an open offer, for a total of around 60% ownership. At least three co-founder promoters resigned as a result of the merger.
GoI is supporting through regulations and easing compliances, which can aid business survival. However, corporates have to be cognisant of competition law issues. The CCI, as a regulator has started taking active scrutiny of merger activities, as the mergers of many entities controlling a significantly large market share could bring out issues of adverse effect on competition in the market.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources: Livemint, PwC, MCA and ICSI