PROJECT WORK

REGULATORY FRAMEWORK OF MERGERS AND ACQUISITIONS: A REVIEW OF INDIAN

STATUTORY COMPLIANCES AND POLICY RECOMMENDATIONS

SUBMITTED TO: SUBMITTED BY:

Ms. Pratima Soni Mayank Sen (L/1510)

Assistant Professor Palak Jain (L/1553)

School of Law School of

Law
Raffles University Raffles
University

TABLE OF CONTENTS

1. Acknowledgment
2. Research Methodology
3. Introduction
ACKNOWLEDGMENT

I take this opportunity to express my humble gratitude and personal regards to Ms. Pratima Soni
for inspiring us and guiding us during the course of this assignment work and also for her
cooperation and guidance from time to time during the course of this assignment work on the
topic.

I have prepared this assignment not only for marks but also to increase our knowledge.

Place: Neemrana - Mayank Sen & Palak Jain

RESEARCH METHODOLOGY

Aims and Objectives

The aim of the assignment is to present a detailed study of the topic “LEGAL ANALYSIS OF M&A
IN INDIA” forming a concrete informative capsule of the same with an insight into its relevance
in the Corporate Law.

Research Plan
The researcher have followed Doctrinal method

Method of Writing
The researcher has used both a descriptive and analytical method of writing in order to
understand the issues better. The researcher has also relied on case law, to get an in depth
understanding of the subject. The method of writing followed in the course of this research
project is primarily analytical.

Sources of Data
The researcher has used secondary sources in order to obtain sufficient data for this project,
namely,

 Online Research Portals

 Books
 Articles

CITATION
The author had followed Bluebook mode of citation for this research project.

I. OVERVIEW OF M&A ACTIVITY

India is one of the fastest growing major economies and growth in its gross domestic product
during 2018 and 2019 should be approximately 7.5 per cent. 1 While aggregate M&A transaction
volume has increased (1,022 transactions in 2017 compared to 895 in 2016), the aggregate
transaction value in 2017 decreased by 12 per cent from the US$53.2 billion in 2016. The fall in
the value is a result of fewer 'big-ticket' deals in 2017. This may be on account of regulatory
changes such as demonetization, implementation of goods and services tax (GST) and greater
scrutiny by regulators. During 2017, there were 682 domestic M&A transactions accounting for
67 per cent of the aggregate transaction volume. The aggregate volume of outbound M&A
decreased to 340 in 2017 from 367 in 2016. Communication, energy and natural resources,
manufacturing and information technology and information technology-enabled services
witnessed maximum traction in M&A in 2017 (see Section V for details). The acquisition of the
government's stake in Hindustan Petroleum Company by Oil and Natural Gas Corporation has
been the largest M&A transaction so far in 2018, valued at around US$5.5 billion. While the
communication sector was the forerunner in terms of aggregate transaction value, it was the
financial services sector that witnessed the largest number of transactions.

II. GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A

The principal statutes governing M&A are the Indian Contract Act 1872 (the Contract Act), the
Companies Act 2013 (the Companies Act), the Competition Act 2002 (the Competition Act), the
Foreign Exchange Management Act 1999 (FEMA), the Insolvency and Bankruptcy Code 2016
(the Insolvency Code) and subsidiary legislation. Listed entities must additionally comply
with, inter alia, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011
(the Takeover Code), the SEBI (Prohibition of Insider Trading) Regulations 2015 (the Insider
1
The World Bank has reported in its India Development Update of March 2018 that the Indian economy has
recovered from the effects of demonetisation and implementation of the goods and service tax regime.
See: (1) https://www.financialexpress.com/economy/indian-economy-to-grow-by-7-3-pct-this-fiscal-
demonetisation-gst-effects-over-says-world-bank/1135573/
Trading Regulations) and the SEBI (Listing Obligations and Disclosure Requirements)
Regulations 2015 (the LODR Regulations).

i. The Contract Act

The Contract Act sets the paradigm for definitive agreements. Importantly, non-compete
stipulations are relatively limited and damages will not be awarded in excess of the loss suffered.
Concomitantly, liquidated damages are, effectively, a cap on damages that may be awarded
depending on the extent of loss proved. Punitive damages are not awarded.2

ii. The Companies Act

The Companies Act addresses company law including mergers and restructuring, 3 while the
Insolvency Code applies to insolvency resolution and liquidation. Public companies are subject
to more onerous compliance requirements than private limited companies. The Companies Act
was recently amended primarily with a view to creating greater transparency in corporate
structures while also increasing the ease of doing business in India. While a few of the
amendments are still to become effective, the key amendments include (1) the introduction of
provisions to determine significant beneficial ownership and, therefore, significant influence or
control over an Indian company, (2) simplification and liberalisation of the private placement
process and (3) easing of the restrictions on providing loans to group companies. The
government has also recently enacted rules restricting the layers of subsidiaries that a company
may have.4

AUTHORITY AND CAPACITY

The board of an Indian company must approve any acquisition or divestment of shares. If the
aggregate of the consideration (including for business or asset transfers) and the amount of
guarantees or securities extended by the company (to a company other than any of its wholly
owned subsidiaries), or proposed to be extended, exceeds the greater of 60 per cent of the
acquirer company's paid-up capital, free reserves and securities premium account, or 100 per

2
Shivam Bhardwaj & Samyash Sibasish, Treatment of Non-Compete Clause in M7A: Finally Clarifying the Indian
Position, 7 NUJS L. REV. 263 (2014).
3
Prasad G. Godbole, Mergers Acquisition and Restructuring (2013).
4
Trilegal, Companies (Amendment) Act, 2017 – Key Changes.
cent of its free reserves and securities premium account, then at least 75 per cent of the
shareholders must also approve.

PRE-EMPTIVE RIGHTS, RESTRICTIONS ON TRANSFERS, AND PUTS AND CALLS

The Companies Act mandates free transferability of shares of a public company but recognises
private arrangements between its shareholders as valid contracts. Implicitly, pre-emptive rights
and restrictions on transfer are enforceable inter se shareholders.5

TYPES OF COMPANIES
Public, private, sole trader and 'small companies' are permitted. The latter two are geared towards
promoting domestic entrepreneurship.

SCHEMES OF MERGER AND DEMERGER

The Companies Act permits schemes of compromise or arrangement between a company and all
or a class of its creditors or members. Schemes can effect a restructuring, merger, demerger,
hive-off or other reorganisation.

Every scheme must be approved by the board of each company concerned, at least 75 per cent of
the shareholders of each company and at least 75 per cent of the creditors, and subsequently
sanctioned by the relevant National Company Law Tribunal (NCLT).6

Schemes involving listed companies require SEBI and stock exchange prior approval at two
stages: one month before the application to the NCLT for sanction and after NCLT sanction.7

Schemes involving foreign companies require approval from the Reserve Bank of India (RBI)
before filing with the NCLT. The transferee company must ensure that the valuation in respect of
such schemes is conducted by recognised professional valuers in accordance with the
internationally accepted principles on accounting and valuation.

RESIDENT DIRECTORS AND INDEPENDENT DIRECTORS

5
JOZSEF MOLNER, PRE-EMPTIVE RIGHTS IN HORIZONTAL MERGER: THEORY & EVIDENCE , (2002).
6
Approval of the National Company Law Tribunal is not required for a merger of two or more small companies and
a merger of a holding company and its wholly owned subsidiary.
7
Ashish S. Joshi, Merger & Acquisition in India: A Primer, MICHIGAN BUSINESS LAW JOURNAL (2008).
Under the Companies Act, every Indian company must have at least one director who was
resident in India for at least 182 days in the financial year; this period is proportionately adjusted
for newly incorporated companies at the end of the financial year of incorporation. 8 Every public
company, whether listed or unlisted, must additionally have at least two independent directors if
its paid-up capital exceeds 100 million rupees, its turnover exceeds 1 billion rupees or its debt
exceeds 500 million rupees.

RELATED-PARTY TRANSACTIONS
The Companies Act defines a 'related party' as including a holding, a subsidiary and associate
companies (including foreign companies) and entities in which directors are interested. All
contracts with related parties that are not at arm's length must be approved by the board in
meeting and, where the consideration exceeds specified thresholds, by a shareholders' resolution.

iii. The Competition Act

REGULATION OF COMBINATIONS
The Competition Act prohibits persons or enterprises from entering into a combination that has
or is likely to have an appreciably adverse effect on competition within the relevant market in
India.9

Separately, the Competition Commission of India (the Competition Commission) must approve a
combination if the assets or turnover of the entities proposing to combine exceed prescribed
thresholds. In March 2017, the government prescribed that, in the case of a business or asset
transfer, the exemption from Competition Commission approval would be available if the value
of the relevant assets being transferred or the turnover attributable thereto was within the
threshold. This is a welcome change that brings the requirements of Indian competition law in
line with global standards.10

The Competition Commission publishes a summary of every notice of a combination received

for stakeholders to review and submit their comments.

8
Parul Gupta, Legal Aspects of Business: Concepts and Application (2014).
9
T. RAMAPPA, COMPETITION LAW IN INDIA: POLICY, ISSUES AND DEVELOPMENT (2014).
10
GANAPATHY, K., JOSHIPURA , N., R ANA, S AND AGARWAL, R “M ERGERS AND ACQUISITIONS IN I NDIA : WITH
SPECIFIC REFERNCES TO COMPETITION L AW” (2010).
The Competition Commission approves a combination based on, inter alia, the actual and
potential levels of competition in the market, barriers to entry, market share, perceived benefits
and the perceived adverse impact of the combination.11

COMBINATIONS EXEMPT FROM REGULATION

The following combinations are, inter alia, exempt from the requirement of notifying the
Competition Commission:12

a. acquiring, solely as an investment or in the ordinary course of business, less than 25 per
cent of shares or voting rights and not control. Acquiring less than 10 per cent of the total
shares or voting rights of an enterprise will be 'solely' an investment if the acquirer is not
a member of the board, has no right to nominate any director on the board, has only such
rights as are exercisable by an ordinary shareholder, and does not intend to participate in
the affairs and management of the target;

b. acquiring less than 5 per cent in a financial year when the acquirer already holds between
25 and 50 per cent of the shares or voting rights;

c. any acquisition in which the acquirer already holds 50 per cent or more shares or
voting rights;

d. acquisitions of assets by an acquirer's business or acquired solely as an investment or in

the ordinary course of business, except where the acquisition represents substantial
business operations or the acquisition leads to acquisition of control;

e. an amended or renewed tender offer where prior notice has been given to the Competition
Commission;

f. an acquisition pursuant to a bonus issue or capital restructuring or buyback of shares or

subscription to rights issue not leading to acquisition of control;

11
G.R. Bhatia, Mergers & Acquisition under the Competition Law Regime, L&L Partners (2017).
12
BEENA SARASWATHY, THE GLOBALIZATION OF INDIAN BUSINESS: CROSS BORDER MERGERS AND ACQUISITION IN INDIAN
MANUFACTURING (2017).
 g. except for acquisitions of enterprises held jointly with enterprises not belonging to the
same group, an intragroup restructuring involving an acquisition of control over a group
company;

h. merger or amalgamation of two enterprises where one has more than 50 per cent of the
shares or voting rights of the other, or where 50 per cent of the shares or voting rights in
each enterprise is held by enterprises within the same group;

i. until March 2022, an acquisition or amalgamation in which the value of the assets being
acquired, taken control of, merged or amalgamated is less than 3.5 billion rupees or
turnover attributable to the assets is less than 10 billion rupees;13

j. until August 2022, any amalgamation of regional rural banks mandated by the central
government;14

k. until August 2027, any amalgamation, reconstitution or transfer of whole or any part
thereof of nationalised banks under the Banking Companies (Acquisition and Transfer of
Undertakings) Act 1970 and Banking Companies (Acquisition and Transfer of
Undertakings) Act 1980; and

l. until November 2022, any combination involving central public sector enterprises
operating in the oil and gas sectors under the Petroleum Act 1934 or under the Oilfields
(Regulation and Development) Act 1948.

The exemptions in points b, c and h are not available if the transaction results in a change in
control.

iv. Exchange control regulations

The Indian rupee is not freely convertible, and the FEMA and its subsidiary rules and regulations
restrict transactions between Indian residents and other persons.

13
This exemption was previously available only in the case of an acquisition, and the value of the assets and
turnover of the enterprise as a whole were to be taken into account instead of the value of the assets and turnover
being acquired.
14
Regional rural banks were established by the central government under the Regional Rural Banks Act 1976 with a
view to strengthening the rural economy.
Foreign direct investment (FDI), both primary subscription and secondary acquisition, is
permitted in most sectors without prior approval and subject to compliance with conditions
separate from licensing or domestic compliance of general application, including those relating
to sectoral caps and pricing. All FDI must be reported through the government's online eBiz
portal.15 Investment by a non-resident in less than 10 per cent of the capital of a listed entity will
be considered foreign portfolio investment.16

FDI is subject to pricing guidelines. These guidelines require the purchase price of shares to be at
least the fair value (in the case of an Indian selling shares) or not more than the fair value (in the
case of an Indian acquiring shares) determined by any internationally accepted pricing
methodology. The valuation must be contemporaneous with the transaction.17

Foreign investors may pay the entire consideration for an acquisition or subscription up front or
defer, including through escrow, up to 25 per cent of the total consideration for up to 18 months.
Similarly, indemnity obligations to a foreign investor of up to 25 per cent of the consideration
are permissible without prior government approval.

v. The Insolvency Code

The Insolvency Code is the first Indian legislation that contemplates a time-bound resolution of
insolvency. The NCLT shall within 14 days of the application being submitted either admit or
reject the application. The process under the Insolvency Code, once admitted, is required to be
completed within 180 days of the date of it being admitted. If no resolution plan is admitted
within these 180 days, the NCLT may pass an order for liquidation. A further extension of 90
days may be granted by the tribunal if 75 per cent or more of the committee of creditors approves
the extension. No extension after the expiry of 270 days is permitted. If still no resolution plan is
admitted within these 90 days, the NCLT may pass an order for liquidation.18

Currently, certain lacunae exist as, among others, tribunals across the country have interpreted
the provisions of the Insolvency Code differently. Additionally, applications, once accepted, may

15
Mallika Shekhar & Neeraj Dubey, Cross Boarder Mergers – Analysis of FEMA Provision, Lakshmikumarn &
Shridhan (2017).
16
Claire A. Hill & Steve Davidoff Soloman, Research Handbook on Mergers and Acquisition (2017).
17
MARK ZERDIN, MERGERS & ACQUISITION REVIEW (2017).
18
Jyoti Singh & Vishnu Sriram, Insolvency and Bankruptcy Code, 2016: Concepts and Procedure (2017).
not be withdrawn without leave from the Supreme Court. However, recommendations have been
made to resolve issues arising from the Insolvency Code and there continues to be hope that it
will facilitate quick and effective resolution of financial stress.19

vi. The Takeover Code

The Takeover Code is a comprehensive code that applies to a change of control of listed
companies (other than companies listed without making a public issue on the institutional trading
platform)17 of a recognised stock exchange. 'Control' includes the right to appoint a majority of
the directors, or control the management or policy decisions of a company, and applies to the
acquisition of shares or voting rights.

PUBLIC OFFERS

Mandatory offers and creeping acquisition

The Takeover Code mandates a public offer on acquiring 25 per cent or more of the shares of a
listed company and, if a shareholder already holds shares to that extent, on acquiring more than 5
per cent of the shares of that company in any 12-month period ending on 31 March.

A public offer must be for at least 26 per cent of the voting rights or shares of the target company
(excluding shares held by the acquirer), subject to maintaining the mandatory minimum public
float of 25 per cent.

Voluntary offers
A shareholder with 25 per cent of the shares or voting rights of a listed company may make a
voluntary public offer to acquire at least 10 per cent of the shares of that company, provided that
the mandatory minimum public float of 25 per cent remains unaffected.

Conditional offers
A public offer may be conditional on a minimum level of acceptance and on
regulatory approvals.

19
DEEKSHA MALIK& AISHWARIYA CHOUDHARY, EMERGING CHALLENGES IN MERGERS & ACQUISITION (2018).
Consideration and performance surety
An acquirer may offer cash, shares of another listed company or listed debt securities, or any
combination of these, as consideration for the shares tendered in response to the public offer.

The formula to calculate the minimum offer price is geared to the historical performance of the
shares of the listed company. However, if the negotiated acquisition price is higher than the
historical trading price, the negotiated price must be the minimum price of the public offer.
Every person making a public offer must deposit monies in an escrow account as performance
surety. Indian banks may provide guarantees as surety for non-residents if such guarantees are
covered by counter guarantees of a bank of international repute.

Disclosures of shareholding
Every person acquiring 5 per cent or more of the shares or voting rights of a listed company must
disclose aggregate shareholding or voting rights to the concerned stock exchange within two
working days of the acquisition.

Every person holding 5 per cent or more of the shares or voting rights of a listed company must
disclose every subsequent acquisition or divestment of 2 per cent or more of the shares or voting
rights of the company. Separate annual disclosures must be made on 31 March each year.

Delisting of target company

A target company may be delisted in compliance with the delisting regulations.

The promoters may offer to purchase shares held by the public and delisting may be permitted if,
following the offer, the promoters hold 90 per cent of the company and at least 25 per cent of the
public shareholders have participated in the offer.

Schemes of amalgamation
The open offer process does not get triggered if the shares of the listed company are bought
through a tribunal-approved scheme of amalgamation.

It was proposed in the HDFC Life–Max Financial Services reverse merger that the promoters of
Max were to be paid a non-compete fee of approximately 8.5 billion rupees from which the
minority shareholders of Max, a listed entity, would not benefit. Although the transaction was
called off as the requisite regulatory approvals were not received,18media reports suggest that the
SEBI is considering inclusion of such mergers and acquisitions under the purview of the
Takeover Code.

Non-compete payments
The Takeover Code provides for any non-compete fees paid to be included in the transaction
value, while in a scheme of amalgamation, the same may be paid outside the deal value.

vii. Insider Trading Regulations

The Insider Trading Regulations oblige shareholders, promoters, employees and directors of
listed companies to disclose any transaction or series of transactions involving shares of a listed
company having a trading value of 1 million rupees or more.

Insiders may also formulate irrevocable trading plans that are to be publicly disclosed and
mandatorily implemented.

viii. LODR Regulations

The LODR Regulations apply to listed entities that have listed 'specified' securities on an Indian
stock exchange, and mandate event-specific disclosure and separately, periodic disclosure
of, inter alia, changes in shareholding, proposals to change capital structure, information that
may have a bearing on the operation or performance of the company, M&A activity, as well as
transactions with group companies.

The LODR Regulations prevent directors and key management personnel of a listed entity from
entering into compensation or profit-sharing agreements with shareholders or third parties in
connection with shares of the listed entity without the prior approval of the board and the public
shareholders. This proscription was specifically included to regulate arrangements between
private equity investors and management of listed entities. Certain mergers, demergers and
schemes of arrangement involving a listed company require approval of the majority of the
public shareholders of the listed company.
 III. DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW
AND THEIR IMPACT

i The Companies Act

The provisions of the Companies Act relating to mergers and acquisitions have recently been
notified, changing the M&A landscape significantly.

MERGER INTO A FOREIGN COMPANY

Previously the Companies Act did not permit the merger of an Indian company with a foreign
company and only permitted the merger of a foreign company with an Indian company.
However, the Companies Act now permits cross-border mergers with foreign companies in
certain jurisdictions, subject to RBI approval. The provisions with respect to cross-border
mergers are effective from April 2017.

The RBI has recently implemented regulations for cross-border mergers. The Cross Border
Merger Regulations primarily combine compliances under various regulations and statutes (e.g.,
pricing guidelines, sectoral caps, as discussed above).

CREDITORS' OBJECTIONS
The Companies Act provides that a scheme can be challenged only by shareholders holding at
least 10 per cent of the shareholding by value or by creditors representing 5 per cent of the
outstanding debt of the company. This should shorten timelines and preclude frivolous
objections.

EASE OF DOING BUSINESS INDEX

India's ranking has improved significantly from 131 in 2017 to 100 in 2018. This improvement
can be attributed to the government's consistent efforts in this regard, including the migration of
several regulatory functions to e-portals, improving the country's position in the Enforcing
Contracts indicator, and the simplification of procedures for tax, labour and corporate regulatory
compliance.

ii FDI policy and foreign investment

FDI of up to 100 per cent is allowed in single brand product retail trading under the automatic
route for products branded during manufacturing with the same brand as is used globally. This
initiative aims to attract a larger number of foreign investors engaged in production and
marketing. However, given that local sourcing requirements remain for FDI over 100 per cent, it
remains to be seen whether the liberalisation will lead to further FDI.

Further, foreign investment in a company engaged in the business of investing and registered
with the RBI as a non-banking financial company would fall under the 100 per cent automatic
route. However, foreign investment in core and other investment companies is permitted only
under the government route.

iii Startup India

The Startup India initiative promotes entrepreneurship and innovation by helping start-ups secure
funding. A 'start-up' is a new entity that is headquartered in India, is less than seven years old and
has an annual turnover of less than 250 million rupees. Because of the muted success of this
initiative, the government made several changes, the most notable being tax benefits to start-ups,
as discussed later in this chapter.20 Certain additional benefits have also been introduced, such as
self-certification, funding corpus of 100 billion rupees, concessions on patent and trademark
filings, etc. The impact of these changes remains to be seen.

IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS

Although the value of inbound transactions has decreased by 71 per cent (US$ 6.5 billion in
2017 from US$ 20.9 billion in 2016), foreign investors continue to be key players in
Indian M&A.

V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES

i Significant transactions

RELIANCE/ADANI

20
The press information bureau release by the government of India dated 6 April 2018 stated that the time taken for
grant of recognition certificates has reduced from 10 to 15 days to one to four days, and, consequently, 7,968 start-
ups were recognised in 2017–2018.
One of the biggest deals of 2017 is the sale of Reliance Infratel Limited's Mumbai power
business to Adani Transmission Limited. The sale will further Reliance Infratel Limited's
deleveraging strategy. The transaction is valued at around US$2.8 billion.

ONGC/HPCL
The biggest deal of 2018 so far has been the acquisition of the government's stake in Hindustan
Petroleum Company of about 51 per cent by Oil and Natural Gas Corporation, which is India's
largest producer of hydrocarbons. The transaction is valued at around US$5.5 billion. The
acquisition aligns with the government's strategy of managing investments in public sector
enterprises and thereby improving the economic value of such enterprises.

FLIPKART/EBAY
In the biggest inbound transaction of 2017, Flipkart raised capital from a consortium comprising
eBay Singapore, Microsoft and Tencent, and acquired the Indian arm of eBay as part of this
transaction. The transaction was valued at US$1.4 billion.

RJIO/RCOM
Reliance Communications, Reliance Infratel and Reliance Telecom propose to sell their tower,
wireless spectrum, media convergence nodes and optical fibre assets to Reliance Jio. Media
reports indicate that the transaction is valued at approximately US$2.7 billion and that the
proceeds will be used to repay the debts of these entities. The sale is pending insolvency and
oppression and mismanagement proceedings before the NCLT and the National Company Law
Appellate Tribunal.

MOTHERSON/PKC
The automotive sector witnessed the biggest outbound transaction this year with Motherson
Sumi System acquiring PKC Group for approximately US$604 million.

ii 'Hot' industries

The telecom passive infrastructure sector was the focus of significant activity in 2018, with
American Tower Corporation purchasing Idea Cellular and Vodafone's stand-alone tower
businesses for an aggregate consideration of US$1.2 billion, and Bharti Infratel and Indus
Towers announcing a merger valued at approximately US$15 billion.

The financial services sector attracted the maximum number of deals in 2017. The biggest
transaction in this sector was the merger of IndusInd Bank Limited and Bharat Financial
Inclusion Limited, which was also the biggest transaction in Indian microfinance to date. The
transaction was valued at approximately US$2.4 billion.

The infrastructure sector continued to grow in terms of value, which is essentially attributable
to Reliance/Adani, and recorded an aggregated value of US$5.4 billion. Within the energy sector,
clean energy was the forerunner in terms of value, which amounted to around 75 per cent of the
volume.

iii Key trends

Indian industry is experiencing a digital revolution with each sector capitalising on technology.
Media reports suggest that convergence across sectors will be key in dictating, inter alia,
restructurings and M&A deals. The growth in the technology sector can be primarily attributed
to increased internet penetration and government initiatives facilitating the same.

The technology sector recorded the highest inbound activity in 2017. Some notable deals include
Google Inc's acquisition of Halli Labs, a start-up that is engaged in developing artificial
intelligence.

Fintech firms witnessed healthy activity; some notable deals include the acquisition of Accelyst
Solutions and Freecharge Payment Technologies (collectively, the 'FreeCharge' brand) by Axis
Bank, which marks the first acquisition of a digital payments company by a bank in India.

VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS

i Indian banks

Indian banks are precluded from funding M&A other than providing guarantees as surety for
offshore acquirers if such guarantees are covered by counter-guarantees of a bank of
international repute.
ii Non-banking financial companies

Non-banking financial companies (NBFCs) provide acquisition finance, but are subject to
exposure norms that apply to business sectors, a single borrower and affiliated companies.
Therefore, the available finance is limited and expensive.

While a foreign investor may encumber shares of the relevant Indian company to secure credit
facilities raised outside India, prior RBI approval is required if the proceeds of the credit
facilities are to be used for further acquisition, and the required approval is not forthcoming.

iii Leveraged buyouts

Leveraged buyouts (LBOs) are limited in Indian M&A as the Companies Act prohibits a public
company from providing financial assistance to any person for the purposes of acquiring the
shares of that public company. While this structure does not apply to private companies, LBOs
are rare, although slowly gaining ground.

iv Structured investments and structured payouts

Given the difficulties in raising finance from more 'traditional' sources, structured equity and
quasi-equity investments are the preferred routes to raise acquisition finance. Consideration may
be paid over time on the basis of earn-outs or other specific deliverables being achieved, but as
Indian law requires delivery of shares of a public company against payment, transactions must be
carefully structured.

VII EMPLOYMENT LAW

Contracts of employment cannot be specifically enforced under Indian law. Therefore, if an

employer company undergoes a change in control, there is a de facto requirement to obtain
employee consent.

Employees' consent must be handled sensitively, but as long the terms and conditions of their
employment are not adversely affected by the transaction, they are likely to give their consent. In
larger industrial establishments, the prior consent of the relevant state government may be
required, and this, too, is generally forthcoming.
As contracts of employment are not enforceable by the specific performance of Indian law, key
personnel may be offered a retention bonus or other incentive as appropriate.

VIII VIRTUAL CURRENCIES

The RBI prohibits all entities regulated by it (i.e., banks, NBFCs and payment system providers)
from dealing with virtual currencies, or providing services20 to facilitate any person or entity
dealing with virtual currencies. Regulated entities that are currently dealing with or facilitating
dealing with virtual currencies were required to discontinue such activities by 6 July 2018. The
RBI's proscriptions are currently being challenged before the Indian courts.

IX TAX LAW

M&A in India is subject to income tax, stamp duty and, in the case of asset sales (including
certain business transfers), GST. However, a business transfer structured as a transfer of an
undertaking as a going concern with no specific consideration allotted to each transferred assets
(a slump sale) is exempt from GST.

Indian law subjects any gains accruing on the transfer of a capital asset to tax. Capital gains
arising from both share transfers (of unlisted shares) and asset transfers are taxed as long-term
capital gains if the shares or assets are held for more than 24 months prior to completion of the
transaction. In the case of a transfer of listed shares, short-term capital gains tax arises if the
shares were held for less than 12 months; if held for more than 12 months, capital gains tax does
not arise. A transfer of listed shares on the market, whether long-term or short-term, is subject to
securities transaction tax. From 1 April 2019, capital gains arising from the sale of listed equity
shares, units of equity-oriented funds or units of business trust will be subject to long-term
capital gains tax if the shares have been held for more than 12 months and the gain exceeds
100,000 rupees.

i Tax efficiencies

For foreign investors, immediate tax efficiency is achieved if the applicable double taxation
avoidance agreement permits a lower rate of taxation.
No stamp duty applies to transfers of dematerialised shares, and a common condition precedent
to completion is that the vendor dematerialises the shares.

A slump sale is more tax efficient than an asset transfer simpliciter, as it allows for business
losses to be carried forward and, as long as the undertaking has been held for more than three
years prior to completion of the transaction, gains are subject to long-term capital gains tax
notwithstanding that individual assets may have been more recently acquired.

The Bombay High Court has held that the transfer of a business undertaking as a going concern
against bonds or preference shares issued was an exchange and not a sale, and was, therefore, not
subject to capital gains tax.21 'Slump exchange' structures are gaining popularity on account of
their tax efficiency.

A court-sanctioned scheme is also tax efficient if, inter alia, shareholders holding at least 75 per
cent by value of the original entity become shareholders in the resulting entity.

The recently enacted General Anti Avoidance Rules (GAAR) may also prove to be problematic.
Essentially, the GAAR enable the tax authorities to declare an arrangement as an 'impermissible
avoidance arrangement' if they are of the view that the arrangement has been entered into with
the primary intention of avoiding tax. The law provides that there is a presumption of an
arrangement being an impermissible avoidance arrangement and it is for the taxpayer to
demonstrate that it has commercial substance. As the GAAR provisions are recent, the approach
of the tax authorities is not yet known and, consequently, jurisprudence is yet to evolve.

ii Developments

After years of uncertainty, attempts are being made to make the tax regime in India more
transparent and investor friendly. While intention is articulated frequently, progress on the
ground is, arguably, slow.

REDUCED RATE OF CORPORATE TAX

From 1 April 2018, income tax rates of Indian companies having a total turnover or gross
receipts of less than 2.5 billion rupees have been reduced from 30 per cent to 25 per cent of the
total income.
TAX BENEFITS FOR START-UPS
For start-ups set up between April 2016 and March 2021, a 100 per cent deduction of profits is
proposed for three out of seven years. Further, start-ups and investors may seek exemption from
tax payable out of 'income from other sources' in respect of issuance of shares at more than fair
market value, subject to fulfilment of the required thresholds.

DEEMED BUSINESS CONNECTION

Indian law deems a foreign company to have a business connection in India if a dependant agent
of that foreign company habitually concludes contracts or has a principal role in concluding
contracts for and on behalf of the foreign company. This is in relation to contracts that are in the
name of the non-resident, or for the transfer of ownership of, or granting the rights to the
property owned by the non-resident, or for the provision of services by the non-resident.

IX OUTLOOK

India looks to FDI as a significant driver of economic development and the legislative support
for easing business process should facilitate further investments.

M&A activity should increase throughout the rest of 2018 and in 2019, and inorganic growth is
likely to rise exponentially. Domestic players are expected to dominate the M&A market. Media
reports indicate that the market will most likely witness greater divestments, particularly in
sectors that are capital intensive, illustratively real estate, infrastructure, power and cement.

Indian assets continue to suffer financial stress. The Insolvency Code, the resolution process
prescribed by it and the revamping of the debt restructuring framework by the RBI, have created
opportunities for revival of these stressed assets. It seems likely that insolvency will drive a
substantial portion of Indian M&A activity in 2018.