Mergers and acquisitions have shown consistent annual growth over the last decade or so. It has been a global and India has not lagged behind, with 2018 being a record-breaking year in terms of the total value of the M&A deals completed. In the next 2 to 3 years, the trend is expected to continue. The spurt in M&A activities has led to a significant increase in the demand for M&A advisory firms in India.
The key reason behind the sudden spurt can be attributed to companies’ desire to expand or diversify their business, enter into new markets, and transform their existing portfolios of product and services in quick time, which can only be accomplished through mergers and acquisitions. Another factor behind this trend is the interest shown by foreign investors in acquiring distressed assets in the country. The business of distressed asset sale in India is evolving very fast and contributes significantly to the number of M&A transactions.
The record breaking cross-border M&A deals in India reflects on the resounding faith foreign investors have in the rapidly expanding Indian economy. It can also be linked to India’s continuous improvement in the “ease of doing business” rankings by the World Bank. India’s ranking leapfrogged 65 positions in the last four years, with 53 positions jump coming in the last two years itself. A significant aspect of the M&A transactions in India has been the balanced spread of both strategic and private equity investment.
In light of all these events, the M&A law in India has also been evolving fast to keep pace with the M&A activities. Several provisions of the law have been modified and strengthened over the years. In this article we will throw some light on the important laws that apply to mergers and acquisitions in India.
The Companies Act
The Companies Act of 1956 was the original legislation that governed all the companies operating in India. That Act was comprehensively overhauled in 2013 with several provisions being removed and new provisions being added to address the demands of the changed economic scenario in the country. The new Act has come to be known as The Companies Act 2013, and is now the primary legislation that governs the functioning of companies in India. All corporate transactions, including mergers and acquisitions and private equity, have to be done within the provisions of this Act and the rules contained therein.
Foreign Exchange Management Act 1999
This Act, also known as FEMA, lays down the rules and regulations regarding allotment and issuance of shares by an Indian company to a foreign company or individuals. Various rules and regulations are issued by the RBI under the FEMA to regulate foreign exchange transactions in India. Any Indian entity that issues shares or securities to a foreign entity or a person residing outside India has to do so under the strict guidelines of the above Act. According to M&A advisory firms in India, any foreign company engaged in a merger and acquisition transaction must strictly follow the RBI guidelines on foreign investment in India, or face severe penalties.
The Competitions Act 2002
This Act, together with the Competition Commission of India Regulations 2011, deals with combinations (both, exclusively in India, and in India and outside India) with reference to assets and turnover. The law basically aims at governing and regulating M&A transactions that can likely have adverse effect on competition in India. The law ensures that such transactions do not adversely affect the competitive fabric of the market.
SEBI Takeover Code
The Securities and Exchange Board of India (SEBI), It regulates the trading of shares of publicly listed companies. The SEBI takeover regulation (Substantial Acquisition of Shares and Takeovers) govern all mergers and acquisitions transactions in which the acquirer takes a substantial stake in a listed company. It regulates the accumulation of shares beyond 15% and up to 55%, provided that not more than 5% is acquired in a single financial year. Acquisition of more than 26% shares, however, will automatically invoke the notification procedure under the Act.
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The Income Tax Act 1961
The tax implications arising out of mergers and acquisitions transactions in India are governed by the Income Tax Act 1961. An M&A transaction will also come under the purview of the “Double Taxation Avoidance Treaty” if India has signed such a treaty with the jurisdictional country of the non-resident person or entity involved in the transaction. The Income Tax Act has always given prime importance to merger and demerger to encourage restructuring of businesses. The Finance Act 1999 clarified its stand on various issues concerning reorganization paving the way for business restructuring to be made tax neutral.
Everybody who is a party to an M&A transaction in India must adhere to and comply with the M&A law in India that governs mergers and acquisitions. M&A advisory firms in India have teams of expert lawyers who specialize in the above laws to cater to the demands of the industry.
