The year 2021 has been an exciting year for public M&A in India. We have witnessed some of the largest and most complex listed company deals in recent times. We saw the acquisition of controlling interests in Justdial, voluntary open offer for Vedanta, subsidiary sale by Majesco and many more noteworthy moves in the listed space last year. According to reports, M&A deals (public and private) witnessed a 39% growth in 2021 recording 499 deals valued at a whopping USD 42.9 billion. That is a significant jump from the 360 deals worth USD 37.5 billion recorded in 2020. With M&A deal activity in India reaching pre-COVID levels in 2021, the time seems ripe for it to accelerate even further in 2022.

It is no secret that the rublic M&A regime in India is heavily regulated, complex and time bound. From deal initiation to due diligence, documentation and completion – each step is subject to regulatory oversight. Concepts such as structured information sharing, black-out periods, contra trades and tender offers play a central role in deal structuring. Dynamic pricing in listed company deals mandates quick, quiet and efficient execution, with untoward delays or leaks often resulting in deals becoming unviable.

Navigating the complex landscape of public M&A in India can be tricky. Here are the key concepts and considerations which must be kept in mind whenengaging in public M&A deals: 

1. Regulatory Regime: The regulatory regime for listed M&A is comprised of 5 key elements namely: 

• the Companies Act 2013 which regulates, among other things, non-pre-emptive issuances of shares, significant sales of ‘material’ undertakings, court-approved schemes and related party transactions);
• the Indian Contract Act 1872;
•  the Foreign Exchange Management Act 1999 which regulates cross-border transactions involving Indian residents and non-residents;  
•  the Competition Act 2002 which sets out the merger control regime in India; and (
• the securities regulations issued by the Securities and Exchange Board of India (SEBI) which lay out the primary framework for listed company deals including:
  • the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the Takeover Regulations) which govern takeovers and tender offers for listed companies;
  • the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (the Listing Regulations) which prescribe regulatory approval, shareholder voting, disclosure and other requirements for court-approved schemes involved listed companies; and

  • the SEBI (Prohibition of Insider Trading) Regulations 2015 (the Insider Trading Regulations), which contain certain conditions for sharing of price sensitive information and deal completion involving listed companies. 

2. Disclosure to market: The securities regulations mandate disclosure requirements to safeguard the interests of public shareholders given that a change in shareholding, voting rights or control will affect their interests. Accordingly, the Listing Regulations require timely public disclosure of basic information regarding an M&A transaction so that target securities trade in an informed market. In fact, the disclosure obligation is also triggered upon execution of the transaction documentation. The parties usually precede the definitive documents with a non-binding term sheet to avoid disclosure requirements early in a transaction. However, exactly when the market should be informed about the potential transaction remains a problematic issue given that shares will be trading in an uninformed market whilst discussions are taking place. Separately, acquisitions and disposals of shares beyond specified thresholds will trigger disclosure obligations under the Insider Trading Regulations and the Takeover Regulations. 

3. Due diligence: Upon identification of a target entity, it common practice to conduct a financial and legal due diligence. An advantage for listed companies and acquirers is the availability of substantial business data in the public domain (in accordance with the listed company disclosure requirements under Indian law). However, a deeper dive into the diligence exercise requires adhering to restrictions laid down by the Insider Trading Regulations which, except in certain specific situations, prohibit the communication and receipt of unpublished price-sensitive information (UPSI) in relation to listed companies. UPSI can arise where the listed company is not obliged to disclose the information as a matter of law and so securities are being traded without the market being aware of this information. One exception which permits communication of UPSI is a potential M&A transaction involving the listed company. In such a case, the board of the listed company is required to pass a resolution recognizing that the sharing of UPSI is in the best interests of the listed company, and the information can then be shared under the protection of a nondisclosure agreement. This can become complicated, for example, where the buyer is an existing competitor of the target and the information could be commercially damaging to the target if the takeover does not proceed. 

4. Mandatory Open Offer: Any direct or indirect acquisition of either an initial 25 per cent or more shares or voting rights (at any time), or subsequent acquisition of more than 5 per cent shares or voting rights (in a financial year) in a listed company will require the acquirer to make an open offer to acquire at least 26 per cent of the listed company’s shares from its public shareholders. In case of a cross border acquisition with underlying Indian listed companies, the acquirer would need to analyse the open offer risks in India even if the acquisition of control is entirely at the holding company level outside of India. In addition to acquisition of shares or voting rights, a mandatory open offer may also be triggered on account of acquisition of control of a listed company (irrespective of whether any shares or voting rights are acquired). Accordingly, a buyer would need to careful assess its ‘rights package’ to ensure it does not trip up any ‘control’ flags. To elaborate, ‘control’ under the Takeover Regulations has an inclusive definition and the test for ‘control’ varies on a case-tocase basis. However, protective rights as opposed to participative rights should not amount to control, with the key being that the rights should be only to protect the investment and not to participate in the management or business affairs of the company. 

5. Obligation to fund: Prior to making a public announcement of an open offer, the Takeover Regulations require the buyer to ensure that ‘firm financial arrangements’ have been made for fulfilling the payment obligations under the open offer and that the buyer is able to implement the open offer, subject to any necessary statutory approvals. Additionally, the Takeover Regulations also require the buyer to open an escrow account towards security for performance of its obligations under the Takeover Regulations. 

6. Hostile takeovers: While there is no specified regime for hostile takeovers of listed companies in India, there have been a few instances of successful (and unsuccessful) takeovers. In general, any person intending to acquire control of a listed company is permitted to announce an unsolicited takeover bid based merely on the intent to acquire control and substantial stake from existing shareholder. An underlying negotiated deal with an existing shareholder is no doubt a bonus. In cases of unsolicited bids, the board of the listed company is required to act in the best interests of shareholders, and it is ultimately the shareholders who decide on the success or failure of the bid. However, in practice very few takeovers in India are hostile. 

7. Transaction documents: Public M&A deals typically involve sale and purchase agreements being negotiated and executed between the parties with the transaction documents being governed by Indian law (with agreements mostly being entered into with promoter shareholders in India). In cases where a mandatory open offer is triggered, the buyer also needs to issue a public announcement, a detailed public statement and subsequently provide a letter of offer to all shareholders. Where the parties are taking the court-approved scheme route, the scheme document that is filed with the National Company Law Tribunal becomes the principal document with parties commonly entering into an implementation agreement (i.e. an agreement signed by the buyer and target that sets out key terms and conditions on which the buyer will acquire the target’s securities). 

These are only a few considerations which a buyer should be aware of and each public M&A deal comes with its own set of nuances, complications and workarounds. The value of having trusted Public M&A advisors to help the transacting parties navigate through these complexities cannot be understated. 

Khaitan & Co – Prasenjit Chakravarti,  Abhishek Dadoo and Siddarth Marwah

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at [email protected].