Answer ... Private and public M&A transactions in the Indian market commonly take place through various modes of acquisitions and sale, which include the following.

Acquisition of securities: This involves acquiring a company’s securities through primary subscription or secondary purchases from existing shareholders. The process is governed by agreements such as:

• share purchase agreements;
• share subscription agreements; and
• shareholders’ agreements.

For listed companies, the acquisition of shares can occur through voluntary or mandatory tender offers under the Securities and Exchange Board of India (SEBI) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘SEBI Takeover Regulations’). Mandatory offers are triggered when the acquirer’s shareholding exceeds 25%.

As per Regulation 3(2) of the SEBI Takeover Regulations, if an acquirer, in conjunction with persons acting in concert, has already acquired and holds 25% or more voting rights in a target but less than the maximum permissible non-public shareholding, it cannot acquire additional shares in a financial year that would grant it more than 5% of the voting rights without making a public announcement of an open offer.

Acquisition of business: When engaging in the acquisition of a business, there are two fundamental approaches, as follows:

• Asset purchase: This involves acquiring identified assets of a business rather than the entire entity. Through this approach, specific assets – such as intellectual property, equipment or real estate – are targeted for procurement. Asset purchases are governed by agreements, referred to as ‘asset purchase agreements’.
• Business purchase (slump sale): A business purchase – often referred to as a ‘slump sale’ – entails the acquisition of the entire business as a going concern. A ‘slump sale’ is not explicitly defined under the Companies Act, 2013; although it is defined in Section 2(42C) of the Income Tax Act 1961 as when a business transfers all its assets and liabilities as a whole for a lump sum without assigning separate values to each item. A transaction is considered a slump sale only if it involves selling the entire business as a functioning entity, not just its individual parts. It can be carried out under Sections 230 to 232 of the Companies Act. It is tax efficient and does not require court approval. Business purchases are governed by agreements, referred to as ‘business transfer agreements’.

Section 50B of the Income Tax Act provides that profits from a slump sale in a year are treated as capital gains from the sale of long-term assets. These gains are considered income for the year of the sale, regardless of when they actually occurred.

The Indian courts have ruled that for something to be considered an ‘undertaking’ in a sale, it must be the entire business and operate independently without relying on something else. In Commissioner of Income Tax v Narkeshari Prakashan Limited (1970) 1 SCC 248, the Bombay High Court held that where a publishing house sold one of its two branches, this constituted a slump sale of that entire business, as the branches were independent and capable of functioning without each other.

Merger, demerger or amalgamation: The Companies Act is the main law governing how companies are formed and run in India. M&A transactions are covered in Sections 230 to 240. For transactions involving the shares of a listed company, additional regulations under the SEBI Act, 1992 apply. These include:

• the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;
• the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018;
• the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015;
• the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021;
• the SEBI (Prohibition of Insider Trading) Regulations 2015; and
• the Securities Contracts (Regulation) Act, 1956.

While the Companies Act does not provide a specific definition of a ‘merger’, the process involves combining two or more separate entities. This involves not only merging their assets and liabilities but also restructuring them into a single business entity.

Under the Companies Act, an ‘amalgamation’ refers to the legal process of combining two or more companies into a single entity. It involves the merging of their assets, liabilities and operations either into one of the amalgamating companies or to form a new company. The act provides a framework for the amalgamation process, including:

• preparing a scheme of amalgamation;
• obtaining the approval of the shareholders and creditors of the involved companies; and
• obtaining the necessary regulatory and court approvals, including the approval of the National Company Law Tribunal (NCLT).

The Income Tax Act defines a ‘demerger’ in Section 2(19AA) as the transfer of a demerged undertaking from one company to another – known as the resulting company – as a going concern. This transfer occurs following the approval of a scheme of arrangement under Sections 230-232 of the Companies Act.

The procedure for mergers and demergers involves several key steps, as follows:

• Scheme of arrangement: This is an NCLT-approved agreement between companies, shareholders and creditors, prepared in accordance with Sections 230 to 232 of the Companies Act and related rules. It outlines the intricacies of mergers and demergers.
• Principal approval of the scheme: The scheme proposing the merger or demerger must be approved by the board of directors of the transferor and transferee companies.
• First motion application: An application is filed before the NCLT under Section 230(1) of the Companies Act seeking dispensation of shareholder and creditor meetings if no objection certificates are provided. Alternatively, the application seeks orders to convene such meetings.
• Convening of meetings: If meetings are directed by the NCLT, notices and agendas are sent to creditors and shareholders and published on the company’s website and in newspapers. Approval by 75% of creditors/shareholders binds them to the scheme. A chairperson’s report and scrutiniser’s report are prepared, and regulatory bodies and authorities are informed.
• Second motion application: A second motion petition is filed before the NCLT seeking approval of the scheme. The NCLT may approve the scheme with modifications and oversee its implementation. Once approved, the scheme becomes binding on the companies, members and creditors.

A fast-track merger, regulated by Section 233 of the Companies Act, is designed to accelerate the merger process for specific categories of companies – particularly for small companies, holding entities, wholly owned subsidiaries and start-ups. It provides a cost-efficient approach with reduced timelines and eliminates the need for NCLT intervention. Ministry of Corporate Affairs (MCA) Notification GSR 367(E), dated 15 May 2023, established a 60-day deadline for finalising fast-track merger applications submitted to a regional director of the central government.

Joint venture: In a joint venture, two parties contribute capital to create a shared entity and engage in a collaborative business venture. A joint venture agreement detailing capital contributions, business roles and the allocation of management rights is crucial to provide a framework for the partnership’s financial and operational aspects.

Distressed acquisitions: The Insolvency and Bankruptcy Code, 2016 (IBC) consolidates the laws on corporate, partnership and individual reorganisation and insolvency resolutions. It sets out a time-bound process, overseen by the Insolvency and Bankruptcy Board of India, as follows:

• Initiation: A corporate insolvency resolution process begins when a debtor defaults on a debt of at least INR 10,000,000. A financial creditor, operational creditor or the debtor itself may file an application with the NCLT. The process must conclude within 270 days of admission, which may be extended by the NCLT for 90 days.
• Moratorium: Upon admission, a moratorium is imposed, halting all suits, proceedings or actions against the debtor. Exceptions exist for certain legal actions.
• Appointment of a resolution professional: An interim resolution professional manages the debtor’s affairs until replaced by a resolution professional, appointed by the creditors’ committee.
• Creditors’ committee: The creditors’ committee consists of:
• • financial creditors; and
  • if applicable, operational creditors and employee representatives.
• Resolution plans: Interested parties that meet specified criteria may submit resolution plans. Plans must address:
• • payment of the interim resolution professional’s costs;
  • payment of operational creditors’ dues;
  • dissenting creditors’ rights; and
  • stakeholder interests.
• They should:
• • outline implementation and management strategies;
  • include details of the resolution applicant and connected persons; and
  • provide for effective supervision.
• Liquidation value and fair value: Liquidation and fair values of the debtor’s assets are assessed and disclosed to the creditors’ committee.
• Due diligence and confidentiality: Resolution applicants undertake due diligence under time constraints, relying on information provided by the resolution professional while ensuring confidentiality.
• Resolution plan approval: The NCLT approves a resolution plan after reviewing:
• • its effective implementation provisions; and
  • its treatment of stakeholders’ interests.

In Binani Industries Ltd v Bank of Baroda, the National Company Law Appellate Tribunal clarified that a resolution under the IBC is not akin to a ‘sale’. The successful resolution applicant does not simply ‘buy’ the debtor. Rather, the process entails multi-stakeholder consultations and thoughtful planning for the debtor’s future viability. This process unfolds within the institutional framework of the IBC, emphasising a comprehensive approach beyond a mere transactional ‘sale’.

Answer ...

Answer ... One important aspect is the strategic alignment of the deal with the broader business goals and objectives of both the buyer and the seller. Ensuring that the deal not only meets immediate needs but also contributes to long-term strategic aims enhances its overall value.

When formulating the approach to structure a deal, several critical considerations come into play:

• Cost: A thorough assessment of the overall cost involved is vital for a clear understanding of the financial implications. For example, the stamp duty rates for mergers and amalgamations vary by state. Some states now include transactions under Sections 230-232 of the Companies Act within the definition of ‘conveyance’, with specific stamp duty rates applicable for NCLT-approved schemes of arrangement. Stamp duty varies from 1% to 10%. In case of legal costs, recent data from various sources indicates a significant increase of around 24% in professional and legal fees for firms compared to previous financial years, totalling approximately INR 730 billion.
• Regulatory approvals: Furthermore, the regulatory landscape cannot be overlooked. Understanding and navigating the regulatory environment – including compliance requirements and potential approvals from the NCLT, SEBI, the income tax authorities and the RBI, among others – is essential to a smooth and successful deal. Regulatory considerations can significantly impact the chosen structure, influencing whether it is an asset purchase, a stock purchase or another form of transaction.
• Tax: Prioritising tax efficiency is equally crucial to mitigate unnecessary tax burdens. It must be kept in mind that:
• • mergers/demergers are considered tax-neutral options;
  • a slump sale is taxable in the hands of the company; and
  • a share transfer is taxable in hands of the shareholders.
• As an anti-avoidance measure, the Income Tax Act establishes minimum valuation rules for share transfers. Additionally, when share transfers involve associated enterprises, transfer pricing implications must be considered. Where the transferor is a non-resident, capital gains are calculated in accordance with the provisions of any applicable DTAA between India and the relevant country.
• Timing: The timeline for the deal is a pivotal factor, necessitating a decision between a swift transaction and allowing more time, depending on the specific objectives. The timeline for completion of M&A transactions in India can vary significantly, ranging from six months to several years, contingent on the complexity of the deal.
• Specifics of the target: Evaluating the nature of the target is also imperative.

By weighing these factors, a comprehensive understanding emerges which can the deal structuring in a manner that aligns with the best interests of all parties.

Answer ... The initial stage documents are as follows:

• a term sheet, memorandum of understanding or letter of intent detailing the preliminary commercial understanding or terms of the handshake agreement for the proposed transaction;
• a confidentiality or non-disclosure agreement to protect the target’s information provided to the acquirer for due diligence purposes;
• often, an exclusivity agreement, which obliges the parties – typically the target – not to seek competing bids for a specified period; and
• where there is overlap in the business of buyers and sellers, potentially a ‘clean room agreement’ that facilitates due diligence on commercially sensitive documents of the target in accordance with the requirements of the Competition Act, 2002.

Following the mutual acceptance of the deal’s fundamental contours through the term sheet, the buyer initiates and conducts a comprehensive due diligence investigation into the target and/or its business operations, contingent upon the structure of the transaction.

The key documents required vary based on the transaction structure, as follows:

• for mergers, amalgamations or demergers, a scheme of arrangement among the relevant companies, their members and creditors;
• for share acquisitions, either a share subscription agreement (for new shares) or a share purchase agreement (for existing shares), along with a shareholders’ agreement outlining shareholders’ rights and obligations. The articles of association may be amended to reflect these terms; and
• for asset or business transfers, an asset purchase or business transfer agreement.

Ancillary documents may include:

• employment agreements;
• transfer agreements for intellectual or real property;
• novation or assignment of contracts; and
• non-compete agreements with shareholders.

The closing documents are as follows

• At the signing stage, principal agreements such as asset or business purchase agreements, share subscriptions or share purchase agreements and shareholders’ agreements are typically executed.
• During closing, for new share issuances, board resolutions for share allotment and the issuance of share certificates are prepared. For share transfers, SH-4 Forms are executed to effect the transfer of shares. In business or asset transfers, ancillary documents such as conveyance deeds for land transfer and assignment agreements for intellectual property transfer are executed.
• Mergers and demergers are executed through schemes of arrangement filed with the National Company Law Tribunal (NCLT). After obtaining the NCLT’s approval, filings are made with the registrar of companies (RoC) and a board meeting is convened to finalise the transaction.
• Certain corporate filings may be required from the RoC. For cross-border share acquisitions, filings are made to the Reserve Bank of India (RBI) on or within a specified period of closing.

Answer ... In an M&A deal, protection mechanisms are like safety nets. They give the buyer the right to compensation if the seller decides to go with a better offer from someone else. This safeguards the buyer’s interests if a more attractive deal comes along.

In India, there are no prescribed limits or regulations on break fees and the courts have yet to establish definitive guidelines on this matter. Despite this ambiguity, companies routinely incorporate break fee clauses into their agreements and these often play a pivotal role in major transactions. Examples include the following:

• The breakdown in merger talks between Swiggy and Uber Eats reportedly stemmed from disagreements over the break fee.
• In the proposed outbound acquisition by Apollo Tyres of Cooper Tire & Rubber Co, a reverse break fee of $112.5 million was agreed upon if Apollo withdrew, while Cooper would pay $50 million if it walked away. Despite Cooper terminating the agreement, citing Apollo’s failure to secure financing, the court ruled that Cooper had breached contractual obligations due to issues such as labour disputes in the United States and opposition from its Chinese joint venture partner. Consequently, Cooper was held responsible for paying the break fee.

India adopts a stringent ‘no frustration’ or ‘board neutrality rule’ in relation to defensive tactics during hostile takeovers. While this rule aims to empower shareholders in decision-making, directors must balance this with their fiduciary duties. Break fee clauses, introduced to attract friendly investors, should not unduly influence shareholders’ decisions. The treatment of break fees varies based on the nature of the deal and the type of company involved. In private company transactions, Section 74 of the Contract Act 1872 allows the courts to grant reasonable compensation for breaches.

In India, deal protection mechanisms such as break fees and reverse break fees are rare in public deals, particularly as they impose potential payment obligations on the target. Listed entities that include break fees in transactions will face scrutiny from the Securities and Exchange Board of India (SEBI). SEBI, through the draft letter of offer, can challenge excessively high or irrational break fees, emphasising the need for a reasonable nexus with the transaction. The SEBI may not approve offer letters with such provisions, especially if they impact the target’s finances. Additionally, the payment of break fees to non-residents might necessitate prior approval from the RBI.

Moreover, the Companies Act prohibits public companies from providing financial assistance for share acquisitions. Breach of this law will incur strict penalties, including:

• fines of up to INR 2.5 million for the company; and
• potential imprisonment for up to three years for officers, along with fines.

Answer ... The most common methods of financing transactions in India involve a combination of debt and equity. However, accessing debt financing from banks can be challenging unless the acquirer:

• can demonstrate profitability; and
• is acquiring a similar business.

Equity financing typically involves issuing new shares to investors or existing shareholders, thereby raising capital to fund the transaction. This method allows companies to raise funds without incurring debt obligations, but it dilutes existing shareholders’ ownership stakes.

Sources of debt financing include:

• banks;
• non-banking financial companies;
• corporate bonds; and
• public deposits.

Sources of equity financing include:

• private equity;
• angel investors;
• venture capital;
• initial public offerings;
• rights issues and private placements; and
• crowdfunding platforms.

If you are borrowing from outside India, you must comply with:

• the provisions on external commercial borrowings; and
• the Foreign Exchange Management (Non-debt Instrument) Rules, 2019.

Answer ... One key aspect in ensuring a successful M&A deal involves managing the expectations of diverse stakeholders, including shareholders, employees, customers, regulators and competitors. In a typical M&A transaction, various key stakeholders and advisers play integral roles. Legal, financial and tax advisers are engaged to structure the transaction and conduct due diligence on financial statements, undertaking valuation and tax-related work. Legal advisers are involved in due diligence and the preparation and negotiation of transaction documents, and may also appear before the NCLT. Investment bankers are also essential players in the M&A landscape:

• providing strategic advice and assistance throughout the transaction;
• assisting with deal structuring;
• identifying potential targets or buyers; and
• facilitating negotiations.

For deals with foreign parties, authorised dealer banks handle funds and facilitate regulatory reporting on foreign exchange. Independent merchant bankers, registered valuers and investment bankers handle tasks such as share and asset valuation and real estate title verification for the target.

Depending on the transaction structure, additional stakeholders such as lenders, institutional investors and other significant shareholders of the target may be involved, alongside the buyer and the seller. These diverse professionals collaborate to navigate the complexities of M&A transactions and ensure comprehensive expertise in financial, legal, regulatory and strategic aspects.

Answer ... Sell-side adviser costs are the fees incurred by the entity that is selling its assets or shares and are typically paid by the seller. Buy-side adviser costs are expenses associated with acquiring assets or shares and are usually paid by the buyer.

In India, it is customary for parties involved in M&A transactions to bear their respective adviser costs. However, the target typically incurs adviser costs only when it participates directly in the transaction. There is some ambiguity as to whether these costs constitute financial assistance under Indian law, which prohibits companies from aiding in the purchase or subscription of their shares.

Although the Indian courts do not forbid financial assistance, the English courts prohibit payment of the buyer’s adviser costs. To avoid potential legal complications and to promote fairness, parties should cover their own adviser costs in M&A transactions.

Answer ... (a) Commercial/corporate

• Assess the target’s corporate governance framework and practices and review its board composition, committee structures and adherence to governance norms.
• Scrutinise charter documents, share title verification and compliance with reporting requirements to regulatory bodies such as:
• • the National Company Law Tribunal (NCLT);
  • the Reserve Bank of India (RBI);
  • the Securities and Exchange Board of India (SEBI);
  • the Insurance Regulatory and Development Authority of India (IRDAI);
  • the Telecoms Regulatory Authority of India;
  • the Competition Commission of India (CCI); and
  • the Ministry of Corporate Affairs (MCA).
• Examine material contracts with suppliers, vendors and business partners to ascertain their terms and conditions.
• Review permits, licences, consents, registrations, corporate minutes and related filings to ensure adherence to applicable laws and regulations.

(b) Tax

• Identify and assess available tax benefits and exemptions.
• Examine the target’s tax filings for accuracy and compliance.
• Scrutinise cross-border transactions to identify any transfer pricing issues or potential exposure to international tax regulations.
• Evaluate any ongoing or potential tax litigation risks.
• Resolve material tax liabilities to mitigate risks.
• Examine the target’s deferred tax assets and liabilities to understand their impact on future tax positions and financial statements.
• Identify underreported tax liabilities and ascertain whether all tax liabilities are adequately provided for in the books etc.

(c) Financial

• Assess the accuracy of the target’s financial forecasts and projections against historical performance to gauge the reliability of future financial expectations.
• Scrutinise transactions with related parties to ensure transparency, fairness and compliance with regulatory requirements.
• Examine whether the target’s financial statements have been prepared and upheld in compliance with the relevant Indian accounting standards to accurately reflect the target’s financial position.
• Check any issues related to lenders and identify contingent, extraordinary and unfunded liabilities.
• Confirm the target’s overall financial wellbeing.

(d) Litigation

• Conduct a thorough examination of both pending and resolved civil and criminal proceedings involving the target and its shareholders in any court in India.
• Review any ongoing or concluded class action suits involving the target, assessing the potential impact and liabilities associated with such legal actions.
• Examine any disputes with shareholders, understanding the nature of disagreements and potential financial implications for the target.
• Prepare a detailed report:
• • outlining the outcomes of litigation matters;
  • specifying resolutions, judgments or settlements; and
  • assessing potential liabilities or compensation receivable.
• Examine ongoing or concluded regulatory investigations involving the target, including those conducted by authorities such as the SEBI or the CCI.
• Examine any legal disputes with contractors, vendors or third-party service providers that may impact ongoing operations or financial obligations.

(e) Employment

• Ensure adherence to labour and employment laws through a comprehensive review.
• Conduct a thorough review of registrations, licences and returns under pertinent employment laws.
• Scrutinise employee benefit plans and stock option schemes for alignment with legal regulations.
• Identify and assess any ongoing employee claims or disputes.
• Review contractual agreements with key employees to identify legal obligations and ensure enforceability.
• Review compliance with statutory payments, including:
• • provident fund allowances;
  • gratuities;
  • employee state insurance; and
  • bonuses.
• Verify compliance with factory and industrial workers’ regulations and ensure adherence to safety and welfare measures mandated by relevant laws.

(f) Real estate

• Authenticate present ownership through review of title documents, government notifications and orders.
• Identify and evaluate any existing liens, encumbrances or third-party interests affecting the property.
• Scrutinise and verify land use rights to ascertain alignment with zoning regulations and legal permissions.
• Review encumbrance certificates to ensure an unambiguous ownership history.
• Examine mutation extracts for accuracy and consistency with the title documents.
• Conduct a comprehensive review of real estate-related litigation, including ongoing and past cases.

(g) Intellectual property and information technology

• Scrutinise ongoing or past IP litigation to assess potential legal risks and liabilities.
• Evaluate the status and validity of trademark registrations to ensure compliance and safeguard brand assets.
• Rigorously review and analyse patents, design registrations and copyrights to ascertain their validity, scope and potential restrictions.
• Identify instances of infringement or potential conflicts with third-party IP rights that could impact the transaction.
• Ensure that all material intellectual property is appropriately licensed or registered, verifying compliance with legal requirements.

(h) Cybersecurity

• Evaluate the overall network architecture, infrastructure and configurations to identify vulnerabilities and weaknesses in the IT setup.
• Scrutinise complaints filed with enforcement agencies to ensure legal compliance.
• Review data collection and storage policies for compliance and best practices.
• Review practices for real-time monitoring and logging of network activities.
• Investigate data integrity checks, past breaches and remediation efforts.

(i) Data protection

• Assess the adequacy of data protection consents and policies to ensure compliance with regulations and best practices.
• Evaluate policies and practices relating to data protection and privacy.
• Evaluate historical data protection breaches, understanding their scope, impact and the effectiveness of remedial actions taken.
• Examine policies relating to the retention and disposal of data to align with regulatory requirements and reduce legal exposure.
• Scrutinise the contractual framework governing the collection and processing of data to ensure legal compliance and risk mitigation.
• To avoid legal complications, ensure adherence to data protection regulations, including:
• • the Information Technology Act, 2000;
  • the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data Or Information) Rules, 2011 (currently effective); and
  • the Digital Personal Data Protection Act, 2023 (yet to take effect).

Answer ... In India, customary public searches are integral to a due diligence investigation on a target, as follows:

• Scrutinise the target’s filings with the MCA over a specified look-back period, typically ranging from three to five years.
• Investigate the target’s financial health by reviewing audited financial statements, credit reports and financial disclosures filed with regulatory bodies such as the RBI.
• Review records with the NCLT and the National Company Law Appellate Tribunal to identify any ongoing or resolved corporate disputes involving the target.
• Investigate records maintained by the Indian Patent Office and Trademark Registry to assess IP-related matters.
• Scrutinise litigation records available on the websites of district and lower courts, high courts and the Supreme Court of India to ascertain any legal proceedings involving the target.
• Review real estate records with relevant government authorities to gain insights into the target’s property holdings.
• Review filings with sector-specific regulatory authorities beyond the MCA, such as the SEBI, the RBI and the IRDAI, to ensure compliance with industry-specific regulations.
• Analyse environmental compliance records and approvals from relevant authorities to assess potential liabilities related to environmental regulations and pollution control.
• Examine records with the CCI to identify any competition issues or pending merger filings related to the target’s business operations.
• Assess compliance with labour laws and regulations by reviewing filings with:
• • the Employees’ Provident Fund Organisation;
  • the Employees’ State Insurance Corporation; and
  • other relevant authorities.
• Review records with the Ministry of Environment, Forest and Climate Change for projects requiring environmental clearances and compliance with environmental laws.
• Investigate records with the RBI and other relevant authorities to assess compliance with foreign exchange regulations and restrictions on foreign investments.
• Analyse records with the Ministry of Housing and Urban Affairs and local municipal authorities for approvals related to land use, building permits and compliance with zoning regulations.

Listed companies and acquirers benefit significantly from the wealth of business data available in the public domain, as mandated by Indian law’s disclosure requirements for listed companies. However, conducting a thorough due diligence process requires careful adherence to the constraints outlined in the SEBI (Prohibition of Insider Trading) Regulations 2015. The regulations generally prohibit the communication and receipt of unpublished price sensitive information (UPSI) related to listed companies, except in specific situations.

UPSI may arise when a listed company is not legally obliged to disclose certain information, potentially leading to the trading of securities without market awareness of this material information. An exception to this prohibition arises in the context of a potential M&A transaction involving a listed company. In such instances, the board of the listed company must pass a resolution acknowledging that the sharing of UPSI is in the best interests of the listed company. Subsequently, the information can be shared under the protection of a non-disclosure agreement.

However, this process introduces complexities, particularly where the acquirer is a competitor of the target. The information being shared could have adverse commercial implications for the target if the takeover does not proceed. Careful consideration and navigation of these intricacies are imperative to ensure compliance with regulatory requirements and safeguard the interests of all parties involved.

Answer ... In India, pre-sale vendor legal due diligence is infrequently undertaken. Such due diligence is occasionally conducted for the seller to organise relevant information and identify existing issues, especially if the vendor intends to sell the target through an auction/bid process. Even if a vendor’s legal due diligence report is disclosed to potential buyers, this is merely for information only. Reliance by buyers and lenders on this report is contingent on the completion of the transaction, as it assumes validity solely upon the successful conclusion of the deal.

Despite its limited prevalence, the utility of pre-sale vendor legal due diligence in certain scenarios underscores its potential value in optimising the deal preparation phase and facilitating smoother transactions, particularly in competitive sale processes.

Answer ... M&A transactions in India are subject to various regulatory approvals, both general and sector specific. The relevant approvals required can vary based on:

• the nature of the transaction;
• the industries involved;
• the size of the deal; and
• in the case of regulatory approvals, the types of companies involved. The regulations governing Indian companies vary based on several factors, including whether the companies are:
• • private or public;
  • listed or unlisted;
  • non-resident (ie, foreign owned and controlled companies) or resident; and/or
  • operating in specific sectors.
• As distinguished from private companies, public listed companies face more stringent compliance and reporting obligations under the Companies Act.

It is crucial to conduct a thorough due diligence process to identify all the necessary regulatory approvals specific to the transaction in question. Key regulatory approvals that are commonly required in India include the following.

Non-sector specific approvals:

CCI approval: This is mandatory under the Competition Act, 2002 for combinations exceeding certain thresholds and that do not qualify for exemptions. Notification to and approval from the CCI are required before the transaction can be finalised.

The CCI will assess the impact of the combination on competition in the relevant market.

National Company Law Tribunal (NCLT) approval: The NCLT’s approval is required for schemes of arrangement and compromises involving mergers and demergers and insolvency matters. The process of authorising a merger or amalgamation involves several key steps. First, the memorandum of association and articles of association are reviewed to ensure that they allow for mergers. Next, a draft scheme outlining the merger details is prepared. A board meeting is then called to pass a resolution consenting to the merger and authorise an application to the NCLT, which is filed with the NCLT along with necessary documents. Upon hearing the application, the NCLT may give directions for a meeting of creditors and members. Notices for this meeting are sent out and the scheme is approved if three-quarters of those present and voting at the meeting agree. The chairman of the meeting submits a report to the NCLT and a petition for confirming the merger scheme is filed. The NCLT may then sanction the scheme with or without modifications. If sanctioned, a certified copy of the order is filed with the registrar of companies (RoC).

Reserve Bank of India (RBI) approval: Approval from the RBI may be required for transactions involving foreign exchange. The Foreign Exchange Management Act, 1999 (FEMA) constitutes a framework that grants authority to the RBI to enact regulations and empowers the government to formulate rules concerning foreign exchange in alignment with India’s foreign trade policy.

Securities and Exchange Board of India (SEBI) and stock exchange approval: SEBI and stock exchange approval may be necessary for transactions involving listed companies, especially if there is a change in control. For instance, listed companies undergoing merger or amalgamation must provide details of the shareholding structure, both pre-and post-arrangement, and documentation outlining the capital structure, to the stock exchanges on which their securities are listed.

Under the SEBI Takeover Regulations, in the event of delays in obtaining the necessary regulatory approvals for completing the open offer and acquisition, the acquirer may face challenges in making payments within the stipulated 10 working days after the closing of the open offer. SEBI has the authority to grant an extension of time for making payments, provided that the acquirer agrees to compensate shareholders of the target for the delay by paying interest at a rate specified by SEBI.

If statutory approvals are required for certain shareholders but not all of them, the acquirer has the option to make payments to shareholders for which no statutory approvals are necessary to complete the open offer.

Foreign investment approvals: Transactions involving foreign investors may necessitate approval from regulatory bodies such as the Foreign Investment Promotion Board or the Department for Promotion of Industry and Internal Trade (DPIIT), as applicable. Additionally, adherence to foreign exchange regulations is crucial, encompassing sector-specific conditions that must be met for foreign direct investment (FDI). For instance, in sectors such as telecoms, where 100% FDI is permitted, compliance with licensing and security conditions outlined by the telecoms regulator is imperative.

Sector-specific approvals:

Sectoral regulators: Dedicated legislation applies to transactions involving Indian companies within specific sectors, such as:

• the Banking Regulation Act, 1949;
• the Insurance Act, 1938;
• the Mines and Minerals (Development and Regulation) Act, 1957;
• the Drugs and Cosmetics Act, 1940; and
• the Telecoms Regulatory Authority of India Act, 1997.

In highly regulated industries such as insurance and banking, sector-specific regulators – such as the Insurance Regulatory and Development Authority of India and the RBI – establish guidelines for companies operating in these sectors. Prior approval from these regulatory bodies may be mandated for the acquisition of shares, business or assets of companies operating within these regulated sectors.

Department of Pharmaceuticals (DOP): Prior approval from the DOP is mandatory for foreign investments exceeding specified thresholds in the brownfield pharmaceutical sector.

Ministry of Civil Aviation: Certain categories of investments in the aviation sector require prior approval from the Ministry of Civil Aviation. To enter India’s civil aviation industry, companies must obtain licences and approvals from various regulatory bodies. The key regulators include:

• the Directorate General of Civil Aviation, which oversees approvals of permits such as:
• • the Air Operator Permit;
  • the Non-scheduled Operator Permit; and
  • the Maintenance Repair Overhaul; and
  • other relevant licences depending on the nature of aviation activities;
• the Bureau of Civil Aviation Security;
• the Airports Authority of India; and
• the Airports Economic Regulatory Authority of India.

The Airlines Operation Plan mandated by the International Civil Aviation Organization covers both scheduled and non-scheduled transport and cargo services.

Ministry of Petroleum and Natural Gas: In India, the oil and gas sector is regulated by a mix of federal and state authorities. The Union Parliament, the federal legislative body, has jurisdiction over the regulation and development of oil fields, mineral oil resources, petroleum and petroleum products. State governments have authority over matters such as land use, labour and local government.

Key legislation governing the upstream oil and gas sector includes:

• the Oilfields (Regulation and Development) Act, 1948, which covers licensing and leasing of oil and gas blocks;
• the Petroleum and Natural Gas Rules, 1959, which provides detailed provisions for granting licences and leases for both offshore and onshore areas;
• the Mines Act, 1952, which addresses the health, safety and welfare of workers in mines; and
• the Petroleum and Natural Gas Safety Rules, 2008, which set safety standards for offshore operations.

Regulatory oversight is provided by several agencies:

• The Ministry of Petroleum and Natural Gas oversees exploration and production activities and administers relevant legislation;
• The Directorate General of Hydrocarbons advises on the exploration and exploitation of hydrocarbons and assesses development plans;
• The Oil Industry Safety Directorate regulates safety in offshore operations;
• The Directorate General of Mines Safety ensures safety in onshore blocks; and
• The Petroleum and Natural Gas Regulatory Board regulates midstream and downstream sectors, including refining, storage, transportation and distribution.

Ministry of Power: The Ministry of Power issued an order on 9 June 2023 delegating its approval powers under Sections 68 and 164 of the Electricity Act, 2003 to the joint secretary (transmission). This change might relate to the recent judgment of the Karnataka High Court in Emmanuel Vincent D’Sa v Union of India, WP 20819 of 2021, which held that the previous delegation of authority to the chairperson of the Central Electricity Authority (CEA) was not legally valid. The high court invalidated a prior approval given by the CEA for laying transmission lines. However, this ruling does not invalidate all approvals granted by the chairperson of the CEA. Alongside the delegation, the ministry has introduced a new Standard Operating Procedure for obtaining approvals under Sections 68 and 164 of the Electricity Act, 2003.

Environmental clearance: If the business activities involve environmental concerns, clearance from the Ministry of Environment and Forests and Central Pollution Control Board and state pollution control boards may be required.

Antitrust approvals: In addition to CCI approval, specific antitrust approvals may be needed for certain regulated sectors.

IP office approval: If the transaction involves significant IP assets, approvals from the relevant IP office may be necessary.

Answer ... In the M&A process under the Companies Act, various authorities – including the RoC, a regional director of the central government, the official liquidators and the NCLT – may play distinct roles. The NCLT has the pivotal role of granting final approval for mergers. According to Section 230(5) of the Companies Act, a notice under Section 230(3), along with all the required documents in the prescribed format, must be sent to various authorities, including:

• the central government;
• the income tax authorities;
• the RBI;
• SEBI;
• the RoC;
• stock exchanges;
• the official liquidators; and
• the CCI.

These notices should be sent within a specified timeframe, typically 30 days, requesting any representations to be made by them within that period. If no representations are received within this timeframe, it will be assumed that they have no objections to the proposed compromise or arrangement.

Regional directors: The regional directors represent the central government and are tasked with:

• examining the scheme from all aspects, including its implications on various laws; and
• offering comments and views to the court.

The court is mandated to consider these views before sanctioning the scheme. The regional director must ensure that the scheme complies with the law and does not prejudice the interests of shareholders or the public.

Each regional director oversees a specific region, which includes several states and union territories. The regional directors:

• supervise the operations of the RoC and the official liquidator in their regions; and
• coordinate with state and central governments regarding the administration of the Companies Act and the Limited Liability Partnership (LLP) Act, 2008.

Some powers of the central government under these acts are delegated to them and they are designated as heads of their departments.

RoC: Once the sanctioned by NCLT, the involved companies must file a certified copy of the order with the RoC within 30 days. Failure to do so incurs a penalty. This form, known as Form INC-28, notifies the RoC of the acquisition or sale of a business. If the involved companies are in different Indian states, both NCLTs of the respective states must approve the scheme. In such cases, the scheme’s approval is contingent upon the other NCLT’s approval.

In general, the RoCs in different states and union territories are responsible for registering companies and LLPs formed in their respective areas. They ensure that these entities follow the legal requirements outlined in the law. These RoC offices serve as repositories of records related to registered companies and LLPs, which can be accessed by the public upon payment of a fee. The central government oversees these offices through the regional directors.

NCLT: Before the NCLT was established, there was no centralised institution to handle all company-related matters in India. Instead, parties had to go to different institutions, such as:

• the high courts, which dealt with the winding up of companies and mergers;
• the Company Law Board, which handled cases of oppression or mismanagement; and
• the Board for Industrial and Financial Reconstruction, which was approached to declare a company as sick.

This decentralised system led to many difficulties, due to the different procedures and rules governing each institution. However, with the formation of the NCLT, all of these procedures, rules and powers were consolidated under one authority. The NCLT can now:

• adjudicate disputes;
• approve or reject mergers and acquisitions; and
• oversee the actions of Indian companies.

In relation to mergers, the NCLT ensures fairness and compliance with the Companies Act. It plays a crucial role in overseeing deals and ensuring that they are carried out according to the law.

Companies that intend to merge must submit a petition with a detailed merger scheme to the NCLT. Prior approval from shareholders and creditors representing 75% in value is required, obtained at NCLT-prescribed meetings. The NCLT has the discretion to dispense with creditors’ meetings upon receiving affidavits from 90% of the creditors. Similarly, if 90% or more of the members consent via affidavit, the NCLT may waive the requirement for a members’ meeting. Objections to the merger can be raised by members with a shareholding of at least 10% or creditors with outstanding debt comprising at least 5% of the total outstanding debt per the latest audited financial statement.

Official liquidators: Official liquidators are appointed by the central government and are attached to different high courts. They are supervised by the regional director, who ensures that they carry out their duties properly and follow all requirements of the law. Although the regional directors oversee their work, official liquidators are responsible for winding up companies’ affairs.

M&A in the Indian jurisdiction are principally governed by a comprehensive set of laws, encompassing the following key statutes and regulatory frameworks:

Answer ... Share transfers: The following transfer taxes apply:

• Security transaction tax (STT): The transfer of shares through a recognised stock exchange in India incurs STT at a rate of 0.1% on both the purchase and sale of certain listed instruments. However, STT does not apply to:
• • off-market transactions; or
  • transfers of shares in unlisted companies.
• Stamp duty: Delivery-based transfers of shares are generally subject to stamp duty at a rate of 0.015% of the market value of the shares.
• Income tax on capital gains: Capital gains from the transfer of equity shares held for more than a specified holding period are subject to taxation. Long-term capital gains apply after 12 months (listed shares) or 24 months (unlisted shares); while short-term capital gains are applicable otherwise.
• Income tax in the hands of the transferee: If shares are transferred below fair market value, the excess is taxed as income from other sources for the transferee, with applicable tax rates ranging from 30% to 40%.
• Indirect taxes (goods and service tax (GST)): No GST implications arise on the transfer of shares.

Asset transfers: The following transfer taxes apply:

• Stamp duty: The transfer of assets through a slump sale incurs stamp duty based on consideration received or market value, with rates ranging from:
• • 5%-10% for immovable property; and
  • 3%-5% for movable property.
• Income tax/corporate income tax: In slump sales, the excess of sales consideration over net worth is treated as capital gains. Rates vary for long-term and short-term gains. Itemised sales are computed based on asset holding periods.
• In Hindustan Lever v State of Maharashtra (2004) 9 SCC 438, the court determined that:
• • a scheme of arrangement approved by the court (as was previously mandated) constitutes an ‘instrument’; and
  • state legislatures have the authority to impose stamp duty on such decrees.
• The court ruled that the assets of the transferor company – including movable, immovable and tangible assets – are transferred to the transferee company without the need for further action or documentation, thus making the scheme of arrangement an ‘instrument’ under the Indian Stamp Act, 1899. Through this ‘instrument,’ the properties are conveyed from the transferor company to the transferee company based on the compromise or arrangement reached between the two entities.
• Indirect taxes (GST): Under the GST regime, services by way of transfer of a going concern are exempt, but GST applies to itemised sales.

Mergers and amalgamations: Mergers require NCLT approval. Amalgamations receive favourable treatment under the Income Tax Act, subject to conditions.

Demergers: A demerger under the Companies Act necessitates approval from the NCLT. It involves the transfer of one or more business undertakings of a company to either a newly formed or existing entity, with the remainder of the company’s operations retained by the original entity. Consideration for the transfer can be in the form of shares issued by the resulting company or cash, to ensure tax neutrality.

The Income Tax Act defines the conditions for a demerger, including:

• the transfer of all assets and liabilities at book value;
• the issuance of shares to demerged company shareholders; and
• the requirement for a going-concern basis.

Compliance with additional conditions as notified by the central government is essential for tax neutrality and exemption from capital gains tax.

Section 47 of the Income Tax Act exempts certain transfers from capital gains tax liability, including:

• transfers of capital assets in a demerger scheme;
• the issuance of shares by the resulting company; and
• transfers of shares in a demerged foreign company meeting specified criteria.

However, there is uncertainty regarding the potential capital gains tax implications for resulting foreign companies issuing shares, as no similar exemption is provided under Indian tax laws.

Answer ... The terms ‘representation’ and ‘warranty’ lack specific definitions under the Contract Act. However, the Sale of Goods Act, 1930 (SOGA) defines these terms in transactions involving goods or services. According to SOGA, a ‘warranty’ is a condition that is incidental to the primary objective of the contract.

‘Representations’ are assertions of past or present facts or circumstances. They are essentially statements made by the party affirming that a certain fact or circumstance is presently true and/or has been true in the past. Such statements serve as the foundation upon which a contract is formed. On the other hand, warranties are declarations concerning current and future conditions. They represent contractual assurances that a specific condition or quality is and/or will remain true for a defined period, often spanning the term of the agreement.

In All India General Insurance Co Ltd v SP Maheswari (AIR 1960 MAD 484), the court noted the difference between representations and warranties in insurance contracts. The key distinction, as per the court, is that responses to questions are generally considered representations unless otherwise agreed by the parties to form the basis of the contract. In the case of a representation, inaccuracies can serve as a defence to a policy action, even if made in good faith and minor. To void a policy based on a representation, the insurer must prove that the statement is false and fraudulent or materially affects the risk.

In M&A transactions, customary representations and warranties play a crucial role in shaping the agreement between the parties. These representations and warranties are assurances made by the seller to the buyer regarding various aspects of the business being acquired. The consequences of breaching these assurances can have significant implications.

Representations and warranties serve three main purposes:

• They provide information, allowing the buyer to gain insights into the seller’s business before finalising the acquisition agreement.
• They act as a protective mechanism, enabling the buyer to renegotiate or even walk away from the deal if facts contrary to the representations emerge between signing and closing.
• They establish the framework for the seller’s indemnification obligations to the buyer after the transaction is completed.

Representations and warranties in a transaction typically span various crucial aspects. These include matters related to:

• ownership and good title to assets/shares;
• corporate organisation, authority and capitalisation;
• the nature of intangibles;
• adherence to the memorandum and articles of association in conducting business;
• existing financial indebtedness and security;
• the accuracy of financial statements and records;
• the diligent payment of taxes;
• the status of contracts, leases and commitments;
• the pattern of shareholding;
• considerations regarding employment matters;
• compliance with laws and litigation;
• the absence of defaults under existing borrowings;
• the integrity of audited accounts;
• insolvency status;
• environmental compliance;
• insurance coverage;
• anti-corruption practices;
• transparency in related-party transactions;
• obtained consents and approvals;
• intellectual property;
• disclosure of material business changes;
• adherence to ESG-related representations and warranties;
• specifics related to tax assurances; and
• compliance with competition regulations.

Verification of certain information can be challenging, especially when it comes to:

• unregistered charges or pledges;
• industry-specific filings; and
• undisclosed litigation.

In such cases, the buyer relies heavily on the representations made by the seller.

These representations and warranties typically survive the closing of the transaction, allowing the buyer to seek indemnification for misrepresentations post-closing. The law generally does not impose a specific limitation on the time within which indemnification claims must be made, but parties can agree to contractual limitations.

Breach of representations: Representations are regarded as sacrosanct within the agreement and a breach affords the non-breaching party various contractual or legal remedies. These may include:

• seeking to void the agreement; or
• invoking indemnification rights for losses resulting from such misrepresentation.

Additionally, under the Contracts Act, specific consequences are outlined in case of misrepresentation. Section 19 stipulates that if an agreement is tainted by coercion, fraud or misrepresentation, the aggrieved party has the following remedies:

• The contract becomes voidable at the discretion of the aggrieved party; and
• The aggrieved party may demand specific performance and pursue restitution for any unjust enrichment by the other party.

Breach of warranties: If a warranty is breached, the party not in breach may be entitled to damages arising from the violation. Many contracts outline specific remedies related to a breach of warranty, such as requiring commercially reasonable efforts to address and rectify the breach. Unlike breach of a representation, breach of warranty does not render the contract voidable at the discretion of the aggrieved party.

Answer ... The principles governing damages in India are encapsulated in Sections 73 and 74 of the Contracts Act. Section 73 provides that a party experiencing a breach of contract can seek compensation from the party responsible for the breach. This compensation is for any loss or damage directly resulting from the breach arising in the ordinary course of events or anticipated by the parties at the time of contract formation. Notably, Section 73 restricts the award of compensation to losses that are proximate and foreseeable, excluding compensation for remote or indirect damages resulting from the breach of contract.

Contracting parties can often exclude or limit liability for specific types of losses that may be incurred by one or both parties. While clauses that restrict liability are generally upheld, their enforcement can be contingent on factors such as:

• the bargaining power of the parties; and
• adherence to principles of public policy.

Sellers commonly employ various strategies to circumscribe their liability in M&A transactions, employing measures such as the following:

• Sellers incorporate cure periods, allowing them a specified duration to rectify identified breaches before the buyer can initiate indemnity claims, fostering a proactive resolution approach.
• Sellers impose caps on the indemnity amount, thereby limiting their financial exposure and delineating the maximum liability that they will bear in the event of a breach.
• Sellers utilise de minimis provisions as a mechanism to establish minimum thresholds below which indemnification claims may not be pursued, thereby mitigating exposure to minor breaches.
• Contracts may expressly stipulate that indemnity serves as the exclusive monetary recourse for breaches, precluding other avenues of financial remedy for the buyer.
• Sellers establish distinct claim and survival periods for various categories of warranties, tailoring the temporal framework to the nature of the warranties, such as:
• • seven years for tax warranties; and
  • 12 months to three years for business warranties.
• Sellers provide disclosure letters, delineating specific exceptions to the representations and warranties, thereby transparently communicating known issues to the buyer.
• Sellers incorporate knowledge qualifiers, specifying that their representations and warranties are made to the best of their knowledge, mitigating liability for undisclosed information outside their awareness.
• Sellers set materiality thresholds, establishing criteria that breaches must meet to trigger indemnification, ensuring that only significant deviations from the agreed-upon terms warrant financial redress.

In Bharathi Knitting Company v DHL Worldwide Express Courier Division of Airfreight Ltd (1996) 4 SCC 704, the Supreme Court addressed a limitation of liability clause in the terms and conditions of a consignment note for the shipment of a package. The Supreme Court upheld the National Consumer Disputes Redressal Commission’s decision, which restricted the compensation amount to the consignor for service deficiency to the limit specified in the liability clause. Emphasising that parties signing documents with contractual terms are typically bound by the contract, the court dismissed the argument that there was no mutual agreement on the limitation of liability. This was based on the National Commission’s factual finding that the consignor had indeed signed the consignment note.

In Simplex Infrastructure v Siemens Limited 2015 (5) MhLJ 135, the Bombay High Court considered a limitation of liability clause in a works contract. The petitioner sought to restrict encashment of a bank guarantee, citing the contract’s liability limit. The court found that the limitation clause did not cover the respondent’s claim for additional expenses due to the petitioner’s defaults. Additionally, the court deemed the petitioner’s conduct as wilful misconduct, excluding it from the limitation clause, and rejected the argument that liability was capped under the contract.

Answer ... Warranty and indemnity (WI) insurance in India operates under the regulatory framework of the Insurance Act, 1938. General insurers issue WI insurance policies, with no specific statute governing this type of insurance. For foreign investors or non-residents, policies are typically obtained from foreign insurance companies, complying with the relevant laws in their jurisdiction. Indian residents usually procure WI insurance from the Indian counterparts of foreign providers due to the global market’s more advanced and recognised status compared to the nascent stage of WI insurance in the Indian market.

WI insurance is gaining traction in the Indian M&A market, driven by an increase in global prominence and a surge in deals involving venture capital/private equity exits and strategic investments. This is particularly evident in bid processes where sellers aim for non-recourse or limited recourse deals, often utilising WI insurance as a substitute for seller indemnities.

In an M&A deal where WI insurance is utilised, both the buyer and the seller find reassurance as the insurer assumes the risk. This arrangement ensures that the buyer’s losses resulting from breaches of warranties are covered, relieving the seller of ongoing liability, as most WI insurance is non-recourse, except for instances of fraud or wilful misrepresentation. Essentially, WI insurance enables the seller to cap its potential liabilities post-closing.

WI insurance partially replaces the protection offered by holdbacks and escrows. However, buyers typically retain requests for holdbacks or escrows to cover the deductible under the WI insurance policy. Given that the insurer assumes the risk of breaching the seller’s warranties, it typically:

• conducts its diligence;
• reviews the buyer’s due diligence findings; and
• may propose adjustments to the warranties outlined in the transaction documents.

While WI insurance provides coverage for risks arising from business warranties, its scope is usually aligned with liability caps and limitations specified in the purchase agreement. This bespoke nature of WI insurance policies allows for additional requirements or pre-conditions to cover specific warranties, such as the need for a Section 281 certificate under the Income Tax Act. Additionally, buyers may seek additional insurance coverage for risks not included in standard WI insurance coverage, especially in cross-border transactions where withholding tax risks may arise.

Key features include WI insurance providing comfort to both buyers and sellers by shifting the risk to insurers. The insurance covers breaches of warranties, replacing the traditional mechanism combination of:

• holdbacks;
• escrows;
• price adjustments; and
• direct recourse against sellers for coverage on seller warranties.

The scope of coverage aligns with liability caps and limitations in the purchase agreement. W&I insurance is tailored to specific deals, with insurers conducting diligence on identified risks and proposing read-downs of warranties.

The deductible or ‘de minimis’ under WI insurance is typically tied to the enterprise value of the target rather than the policy cover amount. This means that the deductible represents a higher threshold relative to the policy cover amount. Concerning pricing, the premium on WI insurance is determined on a case-by-case basis but is usually 1% to 3% of the policy cover (subject to the insurer’s minimum premium). From an M&A deal perspective, this premium is viewed as a transaction cost and parties usually agree on:

• which party will bear liability for the premium; or
• whether such liability will be shared between them in an agreed proportion.

Despite a notable surge in the number of transactions covered by WI insurance in India, it remains a relatively new concept in the country. First, the availability of WI insurance in the Indian insurance market is limited, with only a few insurers currently offering such policies. Second, stakeholders in the Indian M&A market are not yet fully acquainted with the advantages and scope of WI insurance. As a result, there is still a learning curve and growing awareness regarding the benefits and applicability of WI insurance in the Indian context.

Answer ... In India, the customary approach to ensuring the financial viability of a seller in addressing potential claims by a buyer involves a thorough examination of the seller’s financial statements during the due diligence process. Additionally, fundamental warranties pertaining to the seller’s robust financial health and its ability to enter and fulfil obligations outlined in the transaction documents are typically sought in most, if not all, transactions within India. Apart from financial statements, due diligence on key contracts, customer relationships and supplier agreements is generally done. The strength and stability of these relationships can impact the ongoing success of the business.

Buyers can also explore the possibility of obtaining insurance policies, such as representations and warranties insurance. These policies can provide financial protection in case of breaches of representations and warranties made by the seller.

Specific indemnity items in Indian M&A transactions enumerate identified risks and offer protection to the buyer against these known risks. They are frequently incorporated into transaction documents, reassuring buyers to proceed with deals even without upfront purchase price valuation adjustments agreed upon by sellers. Usually, these specific indemnity items do not have limitations, such as time and amount caps, allowing buyers to recover the full amount of loss from the seller.

In instances where sellers may lack adequate financial substance, buyers often seek additional safeguards, such as warranty/payment guarantees from the seller’s parent entities, if applicable.

To further mitigate potential risks, buyers may insist on the establishment of an escrow arrangement, whereby a portion of the consideration is held in reserve to secure funds for the resolution of future claims. The release of funds from the escrow account to the sellers is typically contingent upon the fulfilment of agreed-upon milestones or the expiration of a specified duration.

Specific constraints on escrow arrangements exist for transactions involving non-resident entities as either buyers or sellers. These constraints encompass limitations on the amount (not exceeding 25% of the total consideration) and the timeframe (with a maximum period of 18 months from the date of transaction document execution) of the escrow funds. A longer holdback period will require the prior approval of the Reserve Bank of India. Such restrictions will not apply for a transaction between a foreign buyer and a foreign seller. A deferred consideration arrangement could also be structured through an escrow mechanism.

Answer ... The inclusion of restrictive covenants in sale and purchase agreements in India is heavily restricted by Section 27 of the Contracts Act, which renders void any agreements that impose unreasonable restrictions on trade. Nonetheless, it provides a notable exception permitting individuals selling a business, along with its associated goodwill, to enter into agreements with buyers. These agreements allow the seller to refrain from conducting a similar business within specified geographical limits for a duration corresponding to the period during which the buyer, or any subsequent holder of the goodwill, operates a similar business.

The primary aim is to prevent contracts from impeding individuals’ rights to engage in trade, business or lawful professions. The sellers commonly include restrictive covenants in sale and purchase agreements, focusing on:

• confidentiality;
• non-competition; and/or
• non-solicitation post-closing.

These covenants are relevant when there is a risk of the seller engaging in competitive activities. However, Indian law generally considers agreements restricting lawful professions unenforceable. An exception exists for goodwill sales, where non-compete agreements are valid within reasonable local limits and timeframes. Indian competition law deems agreements causing adverse competition effects as void. Courts uphold non-compete clauses during contract terms if deemed reasonable, typically lasting two to three years in M&A transactions. Despite judicial reluctance, such clauses are standard in balancing the interests of both parties.

The interpretation of agreements or covenants in restraint of trade under Section 27 of the Contracts Act has evolved through judicial scrutiny. While the Constitution guarantees the right to practise any trade or profession, it acknowledges that reasonable restrictions can be imposed in the public interest. The validity of such restrictive covenants has been subject to judicial review, with courts upholding or rejecting them based on case-specific facts and circumstances.

Landmark precedents include the following:

• In Madhub Chunder Poramanick v Rajcoomar Doss (1874) 14 Beng LR 76, the Calcutta High Court emphasised that Section 27 of the Contract Act is not limited to total restraints but also applies to partial restraints. The court declared that an agreement where one party agrees to close its business in a specific locality in exchange for a promise of payment from the other party is deemed in restraint of trade and is therefore void. This case laid a foundational understanding of the scope of Section 27 and its applicability to both complete and partial restraints on trade or business activities.
• The Supreme Court, while addressing the validity of negative covenants under Section 27 in Niranjan Shankar Golikari v The Century Spinning and Manufacturing Company Ltd 1967 SCR (2) 378, established that negative covenants can be deemed valid if they are reasonable and not against public policy. It differentiated between restrictions applicable during the employment contract and those extending post-termination. Negative covenants during the employment period, when an employee is obliged to exclusively serve the employer, are generally not considered restraints of trade and fall outside the scope of Section 27 of the Contracts Act. The court adopted a liberal stance, asserting that post-termination non-compete clauses are not inherently in restraint of trade, emphasising reasonableness and fairness in contractual terms. The judgment highlighted that a negative covenant prohibiting engagement in similar trade or employment post-termination is not a restraint of trade unless deemed unconscionable or excessively harsh.
• The Delhi High Court, in Pepsi Foods Ltd v Bharat Coca-Cola Holdings Pvt Ltd (1999) ILR 2 Delhi 193, held that a covenant preventing an employee from engaging in similar or competing employment for 12 months after the termination of the employment contract constitutes a restraint of trade. The court affirmed the well-established principle that post-termination restrictive covenants violate Section 27, rendering such contracts unenforceable, void and against public policy. This decision reinforces the judicial stance on the unenforceability of agreements imposing restrictions on an individual’s trade or profession after the termination of the contractual relationship.
• In Arvind Singh v Lal Pathlabs Private Limited, FAO (OS) 473/2014 & CM 20860/2014, the respondent had acquired 100% of the shareholding of M/s Amolak Diagnostics Private Limited and its goodwill from the appellants, Dr Arvind Singh and another, under which the appellants were restricted, under a provision in the share purchase agreement, from engaging in any business that competed with Lal Pathlabs Private Limited. A single bench of the Delhi High Court held that such a clause was enforceable and passed an injunction order restraining the appellants from practising as radiologists or pathologists in the city of Udaipur, India for five years. This decision was reversed by the Delhi High Court on the premise that the activity of a profession is not akin to that of the business of Lal Pathlabs Private Limited and therefore does not fall within the Section 27 exception. That said, the court did succinctly note that the appellants could not “overtly or covertly carry on a business of running a Pathlab or an X-ray Diagnostic Centre by forming a venture where the organizational structure has the essential attributes of a business”.
• In Affle Holdings Pte Limited v Saurabh Singh, OMP 1257/2014, the Delhi High Court passed an interim order holding that a non-compete clause in a share purchase agreement restraining a promoter from engaging in a business similar to that of the target for 36 months was valid. This was further upheld and confirmed by the Delhi High Court in a judgment dated 22 January 2015. In arriving at this conclusion, the courts noted that the promoter had received the total consideration for the sale share and had also transferred the goodwill in the business to the investor, which is a key requirement under Section 27.

Answer ... While contractual mergers are common in many foreign jurisdictions, in India, M&A transactions are primarily governed by court processes outlined in:

• Sections 230 to 240 of the Companies Act; and
• regulations of the Securities and Exchange Board of India (SEBI).

Although certain business transfers, such as slump sales and joint ventures, can be executed through contracts, tribunal approval is typically required for most M&A transactions. Consequently, the scope for MAC clauses in India is limited. Despite this, MAC clauses have recently found application in share purchase agreements and related disputes in the Indian context.

In M&A transactions characterised by a substantial time gap between the execution and closing of an agreement, the introduction of conditions to closing has become a common practice. These conditions, such as the absence of a MAC and the confirmation of warranties, serve as mechanisms to manage financial and other risks for both the buyer and the seller.

The negotiation of the specific language in MAC clauses is often a contentious process. Acquirers generally prefer broadly defined MAC clauses, while sellers seek precise definitions based on objective criteria. Paradoxically, parties may find it strategically beneficial not to define what constitutes a ‘material’ adverse change, as the resulting ambiguity may foster opportunities for constructive renegotiation.

In the context of listed companies in India, Regulation 23 of the SEBI Takeover Regulations outlines conditions for withdrawing a public offer. An acquirer has the right to withdraw a public offer if a condition precedent stated in the acquisition agreement remains unmet due to reasons beyond the acquirer’s control. Importantly, this condition precedent must be disclosed in both the detailed public statement and the letter of offer. However, the Indian securities regulator and courts interpret this provision narrowly, restricting the circumstances under which a public offer withdrawal is permissible.

In SEBI v Akshya Infrastructure Pvt Ltd, the Supreme Court addressed whether a voluntarily made public offer for share purchase could be withdrawn due to economic difficulties. The court, adopting a narrow interpretation, held that economic challenges did not constitute an exception under Regulation 27(1) of the SEBI Takeover Regulations, disallowing the offeror from withdrawing the takeover. This reasoning was reiterated in Pramod Jain v SEBI, where the Supreme Court emphasised that an inordinate delay by SEBI and the target’s financial decline did not justify the acquirer’s withdrawal of the offer. These cases highlight the judiciary’s inclination towards a stringent interpretation of Regulation 27(1) of the SEBI Takeover Regulations, indicating limited room for enforcing MAC clauses in acquisition agreements.

The Companies Act and the SEBI (Listing Obligations and Disclosure Requirements) Regulations (SEBI LODR) employ distinct materiality standards. Under the SEBI LODR, a ‘material subsidiary’ is a subsidiary with income or net worth exceeding 10% of the listed company’s consolidated income or net worth. In contrast, the Companies Act requires shareholder approval for the sale of an ‘undertaking’ where:

• the investment exceeds 20% of the company’s net worth; or
• the undertaking generates 20% of the total income of the company.

In India, the practice of bring-down diligence is not prevalent. Instead, the customary approach involves restating warranties during the closing process, accompanied by the provision of an updated or closing disclosure letter.

Answer ... The Securities and Exchange Board of India (SEBI) Takeover Regulations govern the processes involved in the direct and indirect acquisition of significant control, shares or voting rights in listed companies. In publicly traded companies, commonly employed structures include:

• the acquisition of substantial voting rights or control, followed by a mandatory tender offer; and
• tribunal-approved mergers, which are typically exempt from tender offer obligations.

The SEBI Takeover Regulations also govern the takeover processes for publicly listed companies. They stipulate mandatory actions in the case of:

• an acquisition of 25% or more of the voting rights at any point;
• any subsequent acquisition exceeding 5% of the voting rights within a financial year in India; or
• the acquisition of control over a listed target in India.

These regulations trigger a mandatory offer by the acquirer to purchase at least an additional 26% of the voting capital of the target. In cases of indirect acquisition, if the publicly listed target represents over 80% of the total net asset value, sales turnover or market capitalisation on a consolidated basis of the acquired entity or business, it is treated as a direct acquisition.

The regulations afford acquirers flexibility in managing their stake in the target. Specifically, they can adjust their acquisition and tender offer to ensure their shareholding does not exceed 75%, thereby avoiding the need to reduce their stake later to meet public shareholding norms. However, the acquirer must not take joint control of the listed target or have had significant involvement (as a promoter or holding a stake of over 25%) with the target in the preceding two years.

Furthermore, the regulations allow for the possibility of combining tender offers with attempts to privatise the company. Here, the acquirer, which is not a promoter, proposes both a tender offer price and a higher indicative price for privatisation, contingent on acquiring 90% of the company’s shares. If the privatisation threshold is met, shareholders are compensated at the higher indicative price; if not, they receive the tender offer price. If privatisation does not succeed but the acquirer ends up with more than 75% ownership, it has a year to retry privatisation or reduce its stake to 75%.

This combined approach:

• does not require a reverse book-building for privatisation;
• allows for different prices between the tender and privatisation offers; and
• eliminates any interest charges for the gap between these two offers.

Moreover, the SEBI (Listing Obligations and Disclosure Requirements) Regulations (SEBI LODR) outline the need for regulatory approvals, shareholder votes and disclosures, among other prerequisites, for court-sanctioned schemes involving listed entities, complementing the disclosure norms set by both the SEBI Takeover Regulations and the Insider Trading Regulations for public company mergers and acquisitions.

In the case of a merger, the consideration generally entails the issuance of securities of the surviving entity to the shareholders of the merging entity. The process entails various procedural steps, including securing corporate approvals from the audit committee, board, shareholders and creditors of both the acquirer and the target. Additionally, regulatory approvals from entities such as stock exchanges and courts/tribunals are required. This process is inherently time-consuming.

Typical timelines: Upon the occurrence of the triggering event, except in specific indirect acquisition scenarios, the acquirer must promptly issue a public announcement to the stock exchanges and SEBI. Within five working days thereafter, a detailed public statement (DPS) must be published in newspapers and submitted to SEBI, with the creation of an escrow account. Following publication of the DPS, within five working days, the acquirer, through the offer manager, submits a draft letter of offer to SEBI for review.

After incorporating any changes suggested by SEBI, if necessary, the final letter of offer is dispatched to the shareholders of the target. The offer must open within 12 working days of receipt of SEBI’s observations, with an advertisement announcing the final schedule released one working day before the offer commences. The offer remains open for 10 working days from the opening date.

Within 10 working days of the closure of the offer, the acquirer must make payments to shareholders whose shares have been accepted. Subsequently, within five working days of completing payments, a post-offer advertisement detailing the acquisitions is published by the acquirer.

Answer ... In the landscape of M&A in India, buyers can build a substantial interest in targets both before the initiation and throughout the transaction. This process, however, is governed by stringent disclosure requirements designed to maintain transparency and protect investor interests.

Disclosure requirements in open offers: During open offers, acquirers are bound by a duty to reveal vital details through a series of disclosures, including:

• a public announcement;
• a DPS; and
• an offer letter.

These communications are critical at various junctures of the acquisition process, ensuring that all stakeholders are adequately informed.

M&A activities often necessitate comprehensive filings with the registrar of companies or the Reserve Bank of India for transactions involving foreign entities. These filings, which must be completed within specified timelines and in prescribed formats, can include information on share issuance or changes to the board of directors of the target.

Mandatory public announcement and subsequent disclosures: The acquisition of a voting right of 25% or more or control in the target mandates a public announcement of an open offer on the day the agreement is reached. Additionally, any subsequent acquisition exceeding 5% within a financial year necessitates similar disclosures. Post-acquisition or allotment of shares/voting rights that results in ownership of 5% or more of the target requires prompt disclosure of the aggregate shareholding to the target and relevant stock exchanges within two working days.

The public announcement provides minimum information about the offer, including details of:

• the transaction that triggered the open offer obligations;
• the acquirer; and
• selling shareholders (if applicable).

Additionally, it outlines the offer price and the mode of payment. SEBI has established a prescribed format for the public announcement, which can be accessed on the SEBI website.

The DPS offers a comprehensive disclosure regarding various aspects of the acquisition, including detailed information about:

• the acquirer/persons acting in concert (PACs);
• the target; and
• the financials of both entities.

Furthermore, it covers specifics about the offer, including:

• the terms and conditions; and
• the procedure for acceptance and settlement.

Details regarding the escrow account are also provided. SEBI has provided a prescribed format for the DPS, which can be accessed on the SEBI website for reference.

The letter of offer comprehensively presents details about the offer, including:

• the background of the acquirer/PACs;
• financial statements of the acquirer/PACs; and
• the arrangement of the escrow account.

It also delves into the background of the target, along with its financial statements. Furthermore, the justification for the offer price, financial arrangements and the terms and conditions of the offer are provided. Additionally, the procedure for acceptance and settlement of the offer is outlined. SEBI has established a prescribed format for the letter of offer, which outlines minimum disclosure requirements. The manager of the offer or the acquirer has the flexibility to include any additional disclosures deemed material for the shareholders. This format is accessible on the SEBI website for reference.

Private M&A considerations: In private M&A transactions, the extent and timing of disclosures largely hinge on the agreement between the parties involved. Public announcements, if deemed necessary, are strategically timed, usually at the point of executing binding transaction documents or following the closure of the deal.

Typically, an acquirer is expected to execute a mandatory tender offer (MTO) before concluding the underlying acquisition. An exception allows for the acquisition to proceed prior to completing the MTO, provided that the full consideration of the open offer is secured in an escrow account. This enables the acquirer to finalise the acquisition 21 working days following publication of the DPS, potentially deterring competitive bids.

Acquisitions during the MTO are subject to specific limitations, including:

• a blackout period up until the tendering period’s end;
• the requirement to escrow the acquired shares; and
• restrictions on the method of share acquisition.

Acquiring shares at a price above the MTO offer price automatically raises the offer price to the higher amount paid.

The following disclosure requirements apply:

• Periodic disclosure by acquirers: According to the SEBI Takeover Regulations, acquirers holding 5% or more shares in a listed company must periodically report their cumulative shareholding to both the company and the stock exchanges, in line with SEBI’s stipulated formats. Listed companies, in turn, must quarterly disclose their shareholding pattern, detailing significant shareholders.
• Event-based disclosures: These require timely reporting of shareholding and voting rights to the target and relevant stock exchanges. Where an acquirer, along with PACs, surpasses the 5% threshold, it must disclose its aggregate holdings within two working days. Similarly, shareholders holding 5% or more shares that acquire or sell 2% or more voting rights must report the details within two working days of the transaction.
• Continual disclosures of aggregate shareholding: These must be made annually to the target and stock exchanges by shareholders holding 25% or more voting rights and promoters, regardless of their percentage holding.
• Encumbered shares: Promoters must disclose details of shares encumbered or any changes in encumbrance within seven working days of the event. Detailed reasons for encumbrance must be provided if it reaches specific threshold limits. This disclosure requirement applies whenever the extent of encumbrance increases further from the prevailing levels.

Answer ... The term ‘squeeze-out’ typically denotes the compulsory acquisition of minority-held equity shares, with the minority shareholders receiving a ‘fair’ price, as determined under the Companies Act and the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016. The question of whether such an arrangement could be deemed unfair emerged in Sandvik Asia Limited v Bharat Kumar Padamsi (2009) 91 CLA 247. In this case, it was noted that if it is established that non-promoter shareholders are being offered a fair value for their shares and there is no suggestion that the amount is inadequate, the overwhelming majority of non-promoter shareholders voting in favour of the resolution makes it unjustifiable for the court to withhold its sanction to the resolution.

In India, provisions for the squeeze-out of remaining minority shareholders and the ability for minority shareholders to ‘sell out’ are primarily governed by:

• the Companies Act; and
• the delisting regulation of the SEBI.

Due to the stringent safeguards provided by delisting regulations, particularly granting minority shareholders authority over share acquisition prices and necessitating a supermajority of their votes, delisting is often considered less desirable and is rarely employed as a means of squeeze-outs. Consequently, controllers opt to utilise Section 66 of the Companies Act directly to execute a squeeze-out, bypassing the need for delisting procedures.

Sections 241 to 246 of the Companies Act offer remedies against oppression, mismanagement and prejudice to the interests of company members. These provisions aim to protect shareholders from unfair treatment by the majority or management of a company.

Oppression occurs when the company’s affairs are conducted in a manner detrimental to public interest or the interests of its members. The Supreme Court, in cases such as SP Jain v Kalinga Tubes Ltd, AIR 1965 SC 1535 and Needle Industries India Ltd v Needle Industries Newey (India) Holdings Ltd, 1981 3 SCC 333, has established principles for determining oppression. These include:

• wrongful conduct;
• lack of probity; and
• actions that unfairly prejudice minority shareholders.

Continuous oppressive acts by majority shareholders can establish a pattern of oppression, although a single egregious act may also qualify.

In Vikram Bakshi v Connaught Plaza Restaurant Ltd, 2017 SCC Online NCLT 560, the National Company Law Tribunal (NCLT) found instances of oppression, one of which involved a breach of a shareholders’ agreement regarding the management of the company. Specifically, the failure to vote in favour of the appointment of a managing director, as stipulated in the agreement, was deemed oppressive.

‘Mismanagement’ refers to gross mismanagement of a company’s affairs or actions prejudicial to its interests. Changes in management or control that led to actual or likely mismanagement can be challenged. Relief is granted if it is proven that such changes will harm the company’s interests or public interest. However, mere unwise business decisions do not constitute mismanagement.

Examples of oppression and mismanagement include:

• breaching shareholders’ agreements on management;
• diverting company funds for unauthorised purposes; and
• selling company assets at low prices without legal compliance.

Tata Consultancy Services Limited v Cyrus Investments Pvt Ltd, 2021 SCC OnLine SC 272 is a landmark decision on oppression and mismanagement. In this case, Cyrus Mistry was replaced as a non-executive director by Ratan Tata on the board of Tata Sons by resolution of the board of directors. He was also removed from directorship in various companies of the Tata Group, by resolutions passed at shareholders’ meetings. Upon his removal, two companies by the name of Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited that held shares in Tata Group filed a complaint under Sections 241, 242 and 243 of Companies Act, 2013 alleging prejudice, oppression and mismanagement. Mistry had controlling shareholdings in both of these companies.

On 3 February 2020, the Ministry of Corporate Affairs introduced Sections 230(11) and (12) through the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 and the National Company Law Tribunal (Amendment) Rules, 2020. These amendments – collectively known as the ‘Takeover Notification’ – enable shareholders of unlisted companies holding at least 75% securities with voting rights to acquire the remaining shares from minority shareholders through a court-approved compromise or arrangement.

The Takeover Notification allows the acquiring shareholder to make a takeover offer by filing a takeover application before the NCLT. Once approved by the NCLT, the order becomes binding on all minority shareholders, compelling them to sell their shares to the acquiring shareholder. This method is exclusive to unlisted companies; listed companies are subject to regulations prescribed by the SEBI.

Key aspects of the Takeover Notification include the following:

• Valuation: The acquiring shareholder must provide a registered valuer’s report, considering parameters such as:
• • the highest price paid for shares in the past 12 months; and
  • fair share valuation based on financial metrics.
• This aims to ensure a fair and reasonable offer to minority shareholders.
• Deposit of funds in escrow: The acquiring shareholder must deposit at least 50% of the total consideration in a separate bank account. However, the process lacks specificity regarding fund withdrawal and disbursement procedures, particularly concerning non-resident acquiring shareholders and minority shareholders residing in India.
• Minority shareholder protection: If minority shareholders are dissatisfied with the takeover offer, they can approach the NCLT with a grievance application. While no specific timeframe is prescribed for resolution, it introduces a mechanism for minority shareholders to voice concerns and seek redress.

Other methods of minority squeeze-outs include the following:

• Selective reduction of share capital: Section 66 of the Companies Act allows companies to reduce their share capital, potentially involving the cancellation of shares held by minority shareholders. However, this process requires approval from shareholders and the NCLT.
• Purchase of minority shareholding (Section 236): An acquirer holding 90% or more of the issued equity share capital can buy out minority shareholders. The process involves:
• • notifying the company;
  • determining the price through a registered valuer; and
  • depositing funds in a separate bank account.

Answer ... According to the SEBI Takeover Regulations, an acquirer must place specific amounts in an escrow account two working days before publication of the DPS. The calculation involves depositing 25% of the initial INR 5 billion for the mandatory offer, along with 10% of the remaining mandatory offer balance. These computations are based on the assumption of complete acceptance of the mandatory offer. The escrow account can be established using various forms, such as:

• cash;
• a bank guarantee; or
• freely tradable securities.

Irrespective of the chosen form of escrow, it is imperative that at least 1% of the total consideration, taking into account full acceptance of the MTO, be provided as a cash deposit if the escrow is created through a bank guarantee or the deposit of securities. This requirement underscores the significance of financial commitment and adherence to regulatory norms in the context of takeover transactions governed by SEBI regulations.

Moreover, contingent upon obtaining regulatory approvals, if an acquirer deposits the entire consideration payable under the open offer into an escrow account in cash, it can appoint a director to the target’s board. This appointment becomes effective 15 working days from the date of the detailed public statement. Any director representing the acquirer on the board does not have the right to vote on matters related to the open offer.

Answer ... In the dynamic landscape of corporate restructuring, the process of delisting equity shares has significant implications for both companies and investors. SEBI plays a pivotal role in regulating this intricate process through the SEBI (Delisting of Equity Shares) Regulations, 2021.

A critical aspect of delisting offers is the threshold for success, which remains consistent at 90% under the SEBI Delisting Regulations. This threshold encompasses the acquirer’s post-offer shareholding, shares tendered by public shareholders and accepted at the discovered price or counteroffer price. Notably, shares held by custodians, trusts for implementing employee benefit schemes and inactive shareholders are excluded from this calculation. Furthermore, the previous requirement mandating the participation of at least 25% of public shareholders holding shares in a dematerialised mode in the book-building process has been eliminated, easing the delisting process for acquirers.

SEBI regulations empower both promoters and acquirers to initiate the delisting of a company. Regulation 5A of the SEBI Takeover Regulations delineates the process for an acquirer to pursue delisting through an open offer, provided that the intention to delist is explicitly expressed upfront. This regulation has streamlined the delisting process, eliminating previous hurdles faced by acquirers combining open offers with delisting plans.

Regulation 7(5) of the SEBI Takeover Regulations imposes a one-year cooling-off period between the completion of an open offer and a delisting offer in scenarios where promoters’ shareholding exceeds the maximum permissible non-public shareholding of 75%. Additionally, in unlisted targets, majority shareholders holding at least 90% of equity shareholding have the right, subject to conditions, to buy out minority shareholders. However, this minority squeeze-out mechanism does not apply to listed targets, necessitating delisting to achieve 100% ownership.

Certain circumstances explicitly prohibit the delisting of equity shares, as outlined in the Delisting Regulations. These include restrictions on:

• delisting within three years of listing;
• outstanding convertible instruments; and
• recent equity share sales by the acquirer or associated entities.

Navigating the regulatory landscape of delisting offers in India requires a nuanced understanding of SEBI regulations and recent amendments. While the threshold for successful delisting offers remains consistent at 90%, regulatory changes have streamlined the process, facilitating smoother transitions for companies and investors alike. Understanding these regulations is imperative for stakeholders engaging in delisting activities, ensuring compliance and efficacy throughout the process.

Answer ... M&A activism involves activist investors pushing for changes in companies based on transactions rather than operational or governance improvements. There are three main strategies in M&A activism:

• urging the sale of the target;
• advocating for breaking up the target’s business; and
• opposing a pending transaction to improve its terms or price.

This last strategy – especially when investors buy into the target’s stock after the transaction announcement – is sometimes called ‘bumpitrage’ in a negative sense.

Bumpitrage is not very common in public takeovers in India. However, there have been instances where funds associated with bumpitrage have acquired minority positions in Indian listed companies. Companies should:

• revisit their ongoing disclosure to ensure M&A strategy is properly articulated, to avoid investor surprise; and
• carefully consider announcement materials to proactively communicate the merits of a transaction and pre-empt potential critique.

Answer ... If the target’s shares are frequently traded, the open offer price for acquiring shares under the minimum open offer must be the highest of the following:

• the highest negotiated price per share under the share purchase agreement (SPA) triggering the offer;

• the volume-weighted average price of shares acquired by the acquirer in the 52 weeks preceding the public announcement;
• the highest price paid for any acquisition by the acquirer in the 26 weeks immediately preceding the public announcement; and
• the volume-weighted average market price in the 60 trading days preceding the public announcement.

If trading activity in the target’s shares is infrequently traded, the open offer price for acquiring shares under the minimum open offer is determined on the basis of:

• the highest negotiated price per share under the SPA that triggered the offer;
• the volume-weighted average price of shares acquired by the acquirer in the 52 weeks preceding the public announcement;
• the highest price paid for any acquisition by the acquirer in the 26 weeks immediately preceding the public announcement;
• the price established by the acquirer and the offer manager, considering valuation parameters such as:
• book value;
• comparable trading multiples; and
• other customary metrics for valuing shares in such companies.

Additionally, the board may, at the expense of the acquirer, mandate a valuation of shares by an independent merchant banker or a chartered accountant with a minimum of 10 years of experience, separate from the offer manager.

Regulation 2(1)(zb) of the SEBI Takeover Regulations, 2011 defines the ‘volume-weighted average market price’ as the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange. Accordingly, the volume-weighted average market price for 60 trading days is calculated by aggregating daily turnover in the scrip over the period of 60 trading days and dividing the same by the total number of shares traded during that period.

Answer ... The SEBI Takeover Regulations typically restrict bidders from invoking conditions unless the circumstances hold material significance for the bidder within the context of the bid. Once a bid has been announced, bidders must exert all reasonable efforts to ensure the satisfaction of any conditions. In public takeovers, the invocation of MAC conditions by bidders is subject to specific circumstances as outlined in Regulation 23 of the SEBI Takeover Regulations. The withdrawal of a mandatory offer is permitted under the following conditions:

• refusal of statutory approvals required for the open offer or for the acquisitions necessitating the open offer, provided that such requirements for approval have been expressly disclosed in both the detailed public statement and the letter of offer;
• the death of the acquirer, who is a natural person;
• non-fulfilment of any condition specified in the acquisition agreement that triggers the obligation to make the open offer, due to reasons beyond the reasonable control of the acquirer. In such cases, withdrawal is contingent upon the rescission of the agreement, with the relevant conditions having been explicitly disclosed in both the detailed public statement and the letter of offer; or
• withdrawal under circumstances deemed meritorious by the SEBI.

Answer ... It is not customary for shareholders to provide irrevocable undertakings to accept a mandatory offer. Participation in the mandatory offer by public shareholders is voluntary and they are not obliged to partake in the offer.

Under the SEBI Takeover Regulations, a mandatory offer is extended to all shareholders of the listed company – excluding the acquirer, individuals acting in concert with it and parties involved in any related agreements, along with PACs – inviting them to sell shares of the listed company. Participation in mandatory offers by public shareholders is voluntary and they are not obliged to participate. Therefore, it is not common for shareholders to provide irrevocable commitments to accept the mandatory offer.

Answer ... In public M&A transactions in India, hostile takeovers are permissible, albeit infrequent. This is largely attributable to the prevalence of concentrated promoter shareholding in the majority of publicly traded companies. While there has been a gradual emergence of deal structures involving hostile takeovers, the practice is not widespread.

Upon the announcement of a tender offer during an M&A transaction, the company and its directors:

• must operate within ordinary business parameters; and
• are subject to specific regulatory standstill conditions.

These conditions may pose challenges to the adoption of defensive measures. Although Indian regulations do not explicitly incorporate the ‘Revlon Rule,’ which mandates directors to exert reasonable efforts to secure the highest value for a company in the face of an imminent hostile takeover, directors are obliged by their fiduciary duties to consider such approaches from a value accretion perspective. Depending on the timing of the hostile approach, directors may contemplate employing defensive actions, such as the sale of assets, selective preferential issuance, stock split or bonus, aligning with their fiduciary responsibilities.

Indian securities laws also envision a white knight defence mechanism against a hostile takeover in the form of a competing offer. Any entity, excluding the hostile acquirer, is permitted to submit a competing tender offer within a specified timeframe and for a minimum stake in the company. Acquirers are allowed to revise the terms of the offer for the better up to one day before the commencement of tendering. This framework for competing offers aims to enhance shareholder democracy by promoting choice and competition in the market for control over the target.

In the event of a hostile takeover, listed targets face limited avenues of defence. However, the implementation of a hostile takeover is challenging for various reasons, including:

• the family-owned and promoter-driven nature of most listed companies;
• regulatory approvals and requirements;
• reliance on publicly available information due to the lack of cooperation from the target; and
• risks associated with restrictions on the withdrawal of the MTO.

Successful attempts at hostile takeovers include the following:

• In 1998, India Cements effected a strategic and successful hostile takeover of Raasi Cements through the acquisition of BV Raju’s pivotal 32% stake.
• In 2019, Larsen and Toubro Ltd (L&T) secured a controlling interest in Bengaluru-based Mindtree Ltd, raising its stake to 60% through a successful hostile takeover. L&T completed the acquisition of an additional 31% stake for INR 49.88 billion via an open offer, gaining complete control over Mindtree’s board and management. This marked the culmination of a year-long effort by L&T, starting with the acquisition of a 20.4% stake from VG Siddhartha.
• The Adani Group executed a hostile takeover of NDTV, starting with a 2009 loan arrangement and culminating in a strategic acquisition of a 64.71% stake, finalised on 30 December 2022.
• ArcelorMittal, the world’s largest steelmaker, acquired Essar Steel India Limited for INR 42 billion, making this the largest stressed-asset deal in India. Aditya Mittal, representing the Mittal family, led the venture. Additionally, a joint venture named ArcelorMittal Nippon Steel India Limited was established with Nippon Steel Corporation to operate Essar Steel.
• Malaysian-based company IHH Healthcare Bhd acquired a controlling stake of 31.1% in Fortis Healthcare Ltd, becoming the major shareholder. In addition, four individuals from IHH Healthcare were appointed to Fortis Healthcare’s board. During a meeting held in Mohali, Fortis Healthcare approved the issuance of over 230 million shares to Northern TK Venture Pte Ltd, a subsidiary of IHH Healthcare. The shares were valued at INR 170 per share, with a face value of INR 10.
• Emami Ltd, based in Kolkata, merged the fast-moving consumer goods (FMCG) business of Zandu Pharmaceuticals, acquired in 2008, with its own FMCG business. Simultaneously, Emami’s real estate assets – including interests in Zandu’s non-core real estate business – were merged into a new company named Emami Infrastructure Ltd. Shareholders of Emami received shares in Emami Infrastructure Ltd, while Zandu shareholders retained shares in Zandu Realty Ltd.

Answer ... Hostile bids must be publicised under the regulatory framework governing public takeovers. The Securities and Exchange Board of India (SEBI) Takeover Regulations serve as a pivotal mechanism to prevent unauthorised and hostile takeovers, ensuring vigilant oversight of the acquisition process for public companies. Regulation 3(2) of the SEBI Takeover Regulations provides that in any acquisition where a 25% threshold of shares or voting rights of the target is reached or exceeded, the acquirer must make an open offer. In such instances, each time the acquirer accumulates more than 5%, a mandatory open offer is necessitated.

To safeguard the interests of stakeholders and uphold regulatory integrity, the regulations mandate the establishment of an escrow account two days prior to the public announcement. This escrow account serves as a security measure to ensure the acquirer’s commitment to fulfilling obligations under the regulations.

Moreover, the SEBI Insider Trading Regulations prohibit insider trading, imposing substantial fines on individuals with access to unpublished price sensitive information (UPSI) who exploit or disclose such information to the detriment of the company. UPSI encompasses confidential information not publicly available, including details about:

• financial statements;
• dividend policies;
• mergers;
• demergers;
• expansion plans; and
• capital structure.

Regulation 7 of the SEBI Takeover Regulations mandates the disclosure of hostile bids within 15 working days of the date of the detailed public statement issued by the acquirer making the initial public announcement.

Additionally, the Competition Act, 2002 addresses the anti-competitive aspects of significant combinations. Section 5 stipulates that all combinations exceeding a specified threshold must obtain approval from the Competition Commission of India (CCI). This approval process involves comprehensive disclosures about the transaction; and the CCI is empowered under Section 20 to initiate investigations into new combinations if there are concerns regarding the creation of an appreciable adverse impact on competition in the market.

Approval from both the government and the Reserve Bank of India (RBI) for foreign acquisitions was previously mandatory due to sector-specific foreign direct investment (FDI) restrictions and the need for clearances from the Foreign Investment Promotion Board (FIPB) and the RBI. These regulations traditionally served as barriers to hostile takeovers of Indian companies by foreign entities. However, recent government reforms have relaxed these restrictions, allowing for the possibility of hostile takeovers of Indian firms by foreign corporations.

Foreign acquirers attempting hostile takeovers in India may encounter two main challenges:

• sector-specific FDI limitations, often referred to as ‘FDI caps’; and
• the need to obtain approval from either or both:

Answer ... In the realm of Indian corporate law, conventional defences such as poison pills and staggered boards find limited efficacy, leaving targets with a restricted arsenal to counter hostile takeover attempts. Notably, the recent legislative changes permitting foreign hostile takeovers have heightened the vulnerability of Indian companies, underscoring the need for strategic defence measures.

Poison pills: The poison pill, also known as the shareholders’ rights plan, involves a strategic dilution of the target’s shares, making it economically challenging for the acquirer to attain a controlling position. Through this approach, the corporation issues securities with specific rights triggered by predefined events. Existing shareholders are granted a special privilege to purchase additional shares at a discounted rate if the triggering event occurs, typically at a threshold acquisition percentage such as 20%. While this strategy has both succeeded and failed, it remains a viable means to deter hostile takeovers.

White knight: In scenarios where the target board anticipates difficulty in warding off a hostile takeover, the option of seeking a friendly company – a ‘white knight’ – to acquire a controlling stake before the hostile bidder becomes instrumental. This strategic move is aimed at aligning with a more favourable entity to counter the hostile takeover attempt.

In 1980, Manu Chhabria aimed to acquire L&T, India’s largest engineering company. Dhirubhai Ambani intervened by acquiring a 12.5% stake and eventually increasing it to 18%. However, government intervention in 1989 forced the Ambanis out. In 2001, they sold their stake to Kumar Mangalam Birla. Birla targeted L&T’s cement division, leading to A M Naik rallying L&T employees to form an employee trust. In 2003, the trust bought Birla’s stake, preventing L&T’s acquisition and forming Ultratech Cement.

‘Pac-Man’ defence: The Pac-Man defence involves the target reversing roles by making a counteroffer to the acquirer and concurrently acquiring shares in the acquirer. This approach aims to shift the focus onto the acquirer’s vulnerability, compelling it to negotiate and potentially reach an agreement with the target.

Greenmail: Greenmail is a defensive strategy whereby the target repurchases its own stock from the acquirer at a premium. Notably, the SEBI (Listing Obligations and Disclosure Requirements) Regulations require the management to provide advance notice before contemplating a share buyback.

Crown jewels: The crown jewels strategy involves the target reducing its appeal to the acquirer by divesting its most valuable assets. This tactic may be coupled with the involvement of a white knight, whereby the target demerges and sells its prized asset to a friendly entity. However, Section 180 of the Companies Act mandates shareholder consent through a special majority in a general meeting for such transactions. Under the SEBI Takeover Regulations, the board is restricted from disposing of significant assets during the offer period without obtaining prior consent through a special resolution.

Shark repellent: Shark repellent, or anti-takeover amendments, entails altering the company’s constitution or articles of association to create formidable barriers against takeovers. Shareholders, as per the Companies Act, possess an absolute right to modify the articles of association through a special resolution. This may involve incorporating provisions such as a supermajority approval process triggered by acquisitions or a fair price requirement.

Refusal to register shares: While the refusal to register share transfers is a less favoured method due to potential legal disputes, the Companies Act permits a company to reject a share transfer with adequate justification. Legal precedents establish that a refusal to record a share transfer is legitimate when justified without malicious intent.

Answer ... The M&A landscape in India is nuanced. Despite an overall decline in deal numbers in 2023 compared to the previous year, the market witnessed a surge in record-breaking transactions. Against the backdrop of geopolitical tensions, inflationary pressures and recession concerns impacting market sentiment, numerous noteworthy transactions closed (see below).

Although the Indian public markets experienced volatility throughout the year, delivering relatively restrained returns compared to the exceptional performance in FY 2021-22, they continued to top global equity indices. The mixed M&A picture reflects resilience in the face of uncertainty, with substantial deals contributing to the overall dynamism of the Indian corporate landscape.

New developments include the following:

• Data protection: The long-anticipated Digital Personal Data Protection Act is a significant development as India’s inaugural data protection law. The act reflects the nation’s dedication to fostering a robust data privacy regime and establishes a comprehensive framework governing the processing of personal data within India.
• Overseas investment (OI): The Foreign Exchange Management (Overseas Investment) Rules, 2022, issued by the Ministry of Finance, alongside new regulations of the Reserve Bank of India (RBI), have streamlined and simplified the OI framework. Notably, various OI transactions that previously required prior approval now fall under the automatic route. For instance, deferred payment of consideration and the issuance of corporate guarantees to or on behalf of a second or subsequent level step-down subsidiary no longer require prior approval. This regulatory overhaul has broadened the investible scope for Indian entities. Entities not engaged in financial services can now invest in foreign entities involved in financial services activities (excluding banking and insurance), subject to specific conditions. Although certain aspects of the overseas investment framework await further clarification, these initiatives represent commendable steps toward establishing a more credible and contemporary regulatory regime.
• Competition: The enactment of the Competition (Amendment) Act, 2023 will have a significant impact on forthcoming M&A deals. One noteworthy change introduced by this amendment is the establishment of a ‘deal value threshold’. This transformative provision requires Competition Commission of India (CCI) approval for transactions exceeding INR 2 billion if the target has significant business operations within India.

Significant deals in the past 12 months include the following:

• Adani Group’s acquisition of Ambuja Cements and ACC: The Adani Group secured controlling stakes in Ambuja Cements and ACC from Holcim. With a combined value of $10.5 billion, this transaction has made the Adani Group the second-largest cement producer in India. Holcim finalised the deal by divesting its entire stake in Ambuja Cements at INR 385 per share and in ACC at INR 2,300 per share, yielding cash proceeds of $6.4 billion.
• Merger of PVR and Inox Leisure, rebranded as PVR INOX Pictures: PVR Pictures, a leading multiplex operator, underwent a transformative merger with Inox Leisure, resulting in the rebranding of the combined entity as PVR INOX Pictures in May 2023.
• Reliance Retail Ventures’ majority stake acquisition in Ed-a-Mamma: In September 2023, Reliance Retail Ventures Ltd finalised a joint venture agreement to acquire a 51% stake in Ed-a-Mamma, a child and maternity-wear brand founded by actor Alia Bhatt.
• Axis Bank’s acquisition of Citibank’s consumer business: In March 2023, Axis Bank completed the acquisition of Citibank’s consumer business and non-banking financial company consumer business. The deal, valued at around INR 11.603 billion, included payment based on Citibank’s previous assets, assets under management and liabilities.
• Adani Group/NDTV merger: Building on its existing 29.18% equity stake in NDTV through an indirect subsidiary (RRPR), the Adani Group acquired an additional 27.26% equity stake from NDTV’s founders. The acquisition, priced at INR 342.65 per share, amounted to a total sale value of approximately INR 6.02 billion.
• IHH Healthcare Bhd’s acquisition of a controlling stake of 31.1% in Fortis Healthcare Ltd: Malaysia-based IHH Healthcare Bhd acquired a controlling stake of 31.1% in Fortis Healthcare Ltd, making it the major shareholder. Additionally, four individuals from IHH Healthcare were appointed to Fortis Healthcare’s board. In a meeting held in Mohali, Fortis Healthcare approved the issuance of over 230 million shares to Northern TK Venture Pte Ltd, an IHH Healthcare subsidiary, at INR 170 per share (with a face value of INR 10).
• The acquisition of a shareholding in Religare Enterprises Limited by Puran Associates Private Limited, MB Finmart Private Limited and VIC Enterprises Private Limited, Milky Investment and Trading Company: The CCI approved the acquisition by Puran Associates Private Limited, MB Finmart Private Limited, VIC Enterprises Private Limited and Milky Investment and Trading Company of shares in Religare Enterprises Limited. The deal involved the purchase of 5.27% of Religare’s shares through the market and an open offer for up to 26% of its total voting share capital.
• Kotak Mahindra’s acquisition of Sonata Finance: In October 2023, Kotak Mahindra received approval from the RBI to acquire Sonata Finance for INR 5.37 billion. Following completion of the transaction, Sonata Finance will become a wholly owned subsidiary of Kotak Mahindra, representing a strategic move in the non-banking finance sector.

Answer ... While M&A activity surged in 2021 and the initial months of 2022, there was a subsequent slowdown in the second half of the year and the initial eight months of 2023. As of August 2023, companies had announced approximately 21,500 deals, with a cumulative value of $1.18 trillion. Notably, deal volume declined by 14% compared to the same period in 2022, while deal value witnessed a significant drop of 41%.

However, the landscape of M&A and private equity investment is undergoing a transformative shift, as sustainability and environmental, social and governance (ESG) criteria assume ever-greater importance. Investors and companies alike are increasingly recognising the importance of integrating environmental and social responsibility into their strategic considerations. This year, alignment with global ESG standards is expected to become a crucial feature of assessments in the M&A and private equity spheres. This trend is reflected in recent private equity transactions, such as the Eco Power India renewable energy project – a venture distinguished by stringent adherence to sustainable practices which has successfully attracted private equity investment. The appeal of such deals extends beyond their green credentials to encompass the strategic advantage of capitalising on India’s escalating demand for clean energy solutions.

The banking and financial services sector will see a significant development this year with the much-anticipated strategic disinvestment of IDBI Bank. Market reports suggest that multiple bids have been received for the proposed stake sale, underscoring its pivotal role in meeting the government’s disinvestment targets for the forthcoming financial year. This development will bring about substantial changes and opportunities within the industry landscape.

While M&A and private equity opportunities are abundant, it is expected that e-commerce, healthcare, renewable energy and infrastructure will remain the focal points for investment activities. In the aftermath of the COVID-19 pandemic, the healthcare sector still has remarkable growth potential and continues to draw significant investments. A case in point is the acquisition of pharmaceutical company Health Cure India by global industry leaders, reaffirming India’s prominent position in the global healthcare arena.

The legislative reforms discussed in question 8.1 will also have a substantial influence on M&A activities in India.

However, as this year’s general election approaches, a potential deceleration in deal activity is on the horizon. The prevailing uncertainties surrounding the incoming government may contribute to this slowdown. Furthermore, the administrative machinery in India is expected to experience heightened workload and efficiency challenges as a result of the impending elections. This increased pressure may lead to delays in approvals, affecting the pace of deal execution during this period.

Foreign investments in India will also be subject to heightened scrutiny to prevent tax avoidance and combat anti-money laundering activities. The government places a key emphasis on safeguarding national security and interests, leading to stringent regulations in key sectors such as:

• defence;
• e-commerce (particularly inventory models);
• crucial infrastructure;
• digital news; and
• telecommunications.

This reflects its commitment to maintaining regulatory vigilance and ensuring the integrity of strategic sectors, aligning with broader national security imperatives.

Answer ... The entire deal process should be carefully planned and coordinated to ensure that it progresses smoothly and concludes on time. For example, it is crucial to educate the target on maintaining statutory records and filings according to a structured internal policy for document retention. Organising documents in this way makes it easier to conduct due diligence efficiently.

It is also important to mirror the target’s documents in the data room in a well-organised manner. This speeds up the due diligence process, allowing the deal to progress swiftly to the preparation and negotiation of transaction documents. Engaging relevant advisers promptly at each stage of the process to coordinate with various stakeholders, both internally and externally, can further streamline the deal process.

Our key tips are as follows:

• Develop a deep understanding of Indian laws and regulations governing M&A transactions, ensuring compliance from the outset.
• Conduct exhaustive due diligence, leveraging legal and financial experts, to identify and address potential issues before they become roadblocks.
• The purchase or sale of a business rarely goes smoothly. Issues may persist even once the deal has closed. Both seller and buyer must maintain a good working relationship to address such problems effectively.
• Keep legal documents straightforward and easy to understand. Simple documents help to prevent problems and reduce the risk of legal disputes. Faster transactions mean lower costs for everyone involved. Plain language reduces misunderstandings and conflicts. If litigation is necessary, clear documentation speeds up the process and reduces legal expenses.
• Prioritise open and transparent communication among all stakeholders to foster trust and collaboration throughout the process.
• Draft thorough and unambiguous transaction documents to minimise ambiguity and facilitate a seamless closing.
• Ensure compliance with Indian regulations, securing necessary approvals and proactively managing antitrust considerations.
• Address employee-related considerations, acknowledging and mitigating concerns as an integral part of the transaction.
• Execute a thorough financial due diligence process to identify and resolve financial concerns early in the transaction.
• Develop comprehensive post-closing integration plans to ensure a smooth transition and operational continuity.
• Engage legal professionals early on to navigate complexities, coordinate with stakeholders and proactively address challenges.

Potential sticking points include the following:

• Anticipate and manage expectations around potential delays in regulatory approvals.
• Implement a closing process with a comprehensive checklist, pre-agreed documents and timely communication.
• Consider and plan for fund remittance and foreign exchange factors well in advance to avoid last-minute complications.
• Coordinate the availability of signatories in advance to prevent unnecessary delays in the closing process.
• Educate the target on adhering to statutory document retention and filing requirements.
• Facilitate due diligence by maintaining a well-organised data room that mirrors the target’s documents.
• Engage and involve relevant advisers in a timely manner at each stage of the process to ensure efficient decision-making and coordination.

Co-Authored by Shammi Khanna and Anjali Dawar