Introduction

Mergers and Acquisitions (M&A) in India are governed by a comprehensive legal framework, designed to ensure fair play, protect stakeholders’ interests, and maintain market integrity. At the heart of this regulatory environment is the Securities and Exchange Board of India (SEBI), which plays a pivotal role in overseeing and regulating M&A activities. Additionally, cross-border M&A transactions are significantly influenced by the Foreign Exchange Management Act (FEMA), which addresses the nuances of international investment in the Indian context.

Understanding the Role of SEBI in M&A Transactions

SEBI, established under the SEBI Act, 1992, is the primary regulatory authority overseeing the securities market in India, including M&A transactions involving listed companies. The regulator ensures that such transactions are conducted in a transparent manner, providing fair opportunities to all shareholders, and preventing any adverse impact on market equilibrium.

Key SEBI regulations that directly impact M&A activities include:

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST): These regulations mandate the disclosure of substantial acquisitions and takeovers. They outline thresholds that, when crossed, trigger mandatory open offer obligations for acquirers, ensuring minority shareholders are protected during substantial shareholding changes.
• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR): LODR mandates continuous disclosures by listed entities, enhancing transparency and accountability in corporate governance, directly affecting M&A transactions by requiring timely disclosures of material events, including mergers, acquisitions, and takeovers.
• SEBI (Prohibition of Insider Trading) Regulations, 2015: This regulation prohibits trading based on unpublished price-sensitive information (UPSI), which often becomes a critical consideration during M&A negotiations and transactions, safeguarding the market against manipulative practices.

Impact of Foreign Exchange Regulations on Cross-Border M&A

Cross-border M&A transactions involving Indian companies are subject to the Foreign Exchange Management Act, 1999, alongside guidelines issued by the Reserve Bank of India (RBI). FEMA governs transactions involving foreign exchange and cross-border investments, ensuring such activities are managed within the economic interests of India. Key aspects of FEMA impacting cross-border M&A include:

• Foreign Direct Investment (FDI) Policy: The FDI policy under FEMA outlines the sectors in which foreign investment is permitted and the conditions applicable to such investments, including sectoral caps and entry routes (automatic vs. approval).
• Pricing Guidelines: FEMA’s pricing guidelines stipulate the minimum pricing for shares issued to or purchased by non-residents, ensuring that the valuation of shares in cross-border transactions is fair and transparent.
• Reporting Requirements: Cross-border M&A transactions require reporting to the RBI, facilitating the monitoring of foreign investment flows into and out of India, ensuring compliance with the FEMA regulations.

Key SEBI Regulations Influencing M&A Activities

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, commonly referred to as the Takeover Code, delineates the procedures and requirements for direct and indirect acquisitions of shares, voting rights, and control in listed companies. Key aspects include:

• Trigger Points: Acquisition of shares or voting rights entitling any entity to 25% or more of the voting rights in a listed company triggers the obligation to make an open offer.
• Open Offer Requirement: An open offer for acquiring at least 26% of the total shares of the target company must be made, ensuring minority shareholders have an exit opportunity.
• Disclosures: Entities must disclose acquisitions that change their shareholding beyond specified thresholds.

These regulations are crucial for maintaining market transparency and protecting minority shareholders during substantial acquisitions and takeovers.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), impose comprehensive compliance and disclosure requirements on listed entities to ensure transparency in their operations. Key provisions affecting M&A include:

• Continuous Disclosure Requirements: Listed companies are mandated to disclose any material events or information, including M&A activities, that could influence investor decisions.
• Corporate Governance: LODR specifies the composition of the board, the roles of independent directors, and the formation of various committees, ensuring that M&A decisions are taken with due diligence and fairness.

LODR strengthens corporate governance and ensures that all stakeholders are well-informed about significant corporate actions, including M&A transactions.

SEBI (Prohibition of Insider Trading) Regulations, 2015

The SEBI (Prohibition of Insider Trading) Regulations, 2015, are designed to prevent the misuse of unpublished price-sensitive information (UPSI) by insiders. For M&A activities, these regulations have significant implications:

• Restriction on Trading: Insiders are prohibited from trading in securities of a company based on UPSI, which often includes information about M&A transactions.
• Disclosure of UPSI: Listed companies must ensure that any UPSI is disclosed to the stock exchange(s) before it is shared with any other party, maintaining market integrity.

These regulations play a crucial role in preventing insider trading and ensuring that all market participants have equal access to information.

SEBI (Delisting of Equity Shares) Regulations, 2009

The SEBI (Delisting of Equity Shares) Regulations, 2009, provide the framework for voluntary and compulsory delisting of equity shares from stock exchanges. This regulation becomes particularly relevant in M&A transactions involving:

• Voluntary Delisting: An acquirer seeking to gain complete control over a listed company may pursue delisting. The regulations outline the process for seeking shareholder approval and the reverse book-building process for determining the exit price for public shareholders.
• Exit Opportunities for Shareholders: These regulations ensure that public shareholders are provided fair exit opportunities when a company is delisted as part of an M&A deal.

Comprehensive Overview of M&A Laws in India

The Companies Act, 2013: A Cornerstone in M&A Legal Structure

The Companies Act, 2013, significantly overhauled corporate law in India, introducing comprehensive provisions that directly impact M&A transactions. Sections 230-234 are pivotal, providing a legal basis for mergers, acquisitions, and corporate restructuring. This Act lays down the procedural aspects, including approval processes involving the National Company Law Tribunal (NCLT), mandatory disclosures, and the protection of minority shareholders.

For instance, Section 230(6) mandates the issuance of a notice to relevant authorities, including creditors and regulatory bodies, ensuring transparency and compliance. Moreover, Section 232 elaborates on the merger and amalgamation of companies, emphasizing the need for a detailed scheme to be filed with the NCLT, outlining the proposed arrangement and its rationale.

The Contract Act, 1872 and Its Implications on M&A Contracts

The Indian Contract Act, 1872, is fundamental to M&A transactions, underpinning the legality of agreements essential to these deals. It governs the enforceability of merger agreements, share purchase agreements, and other contracts that are instrumental in the transfer of assets and liabilities. The Act’s provisions on the validity of contracts, conditional agreements, and indemnities are particularly relevant, ensuring that M&A contracts are legally binding and enforceable.

The Competition Act, 2002: Ensuring Fair Play in M&A Deals

The Competition Act, 2002 regulates M&A activities to prevent adverse effects on competition within India. It requires companies to notify the Competition Commission of India (CCI) of mergers and acquisitions that exceed certain thresholds, as outlined in Sections 5 and 6. This pre-emptive measure is designed to assess the potential impact of a deal on market competition, preventing the formation of monopolies or abuse of dominant positions.

The Act’s recent amendments have streamlined the review process, facilitating a faster clearance mechanism for transactions that are unlikely to have a significant adverse impact on competition.

The Role of the Foreign Exchange Management Act in M&A Transactions

FEMA, 1999, and its regulations govern cross-border M&A transactions involving foreign investment in India. FEMA’s framework ensures that foreign investments are made through transparent channels and comply with the stipulated guidelines, particularly relating to pricing, sectoral caps, and reporting requirements. The Act, through the RBI, regulates the flow of foreign exchange to maintain the balance of payments stability while facilitating a conducive environment for foreign investment.

Key regulations under FEMA, such as the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017, outline the operational guidelines for foreign investments in Indian companies, encompassing both direct and indirect foreign investments. Each of these laws contributes to a structured, regulated M&A process in India, addressing different facets of transactions to ensure legal compliance, fair competition, and the protection of stakeholder interests.

Sector-Specific Regulations and their Impact on M&A

Understanding Sector-Specific Legislation impacting M&A Strategies

In India, sector-specific regulations significantly impact the structuring and execution of M&A deals. Legislation such as the Insurance Regulatory and Development Authority of India (IRDAI) guidelines for the insurance sector, the Telecom Regulatory Authority of India (TRAI) norms for telecom mergers, and the Banking Regulation Act, 1949 for bank mergers dictate the terms of engagement in these sectors.

The Banking Regulation Act, 1949, amended over time, outlines the framework for amalgamation of banking companies. Section 44A specifies that the scheme of amalgamation requires the sanction of the RBI and outlines the process for securing such approval. These sector-specific rules are designed to protect the interests of stakeholders, ensure fair competition, and prevent monopolistic practices.

RBI and CCI’s Influence on M&A Transactions: What You Need to Know

The RBI plays a critical role in regulating M&A activities involving entities in the financial sector, as well as any transaction implicating foreign exchange management. The FEMA, 1999 and the regulations issued thereunder are instrumental in governing cross-border M&A transactions. The FEMA rules outline the investment ceilings, reporting requirements, and compliance norms for foreign entities looking to invest in or acquire Indian companies.

Additionally, the RBI’s regulations on Non-Banking Financial Companies (NBFCs) and the Master Direction on Merger, Amalgamation, and Arrangement Between NBFCs outline the procedural aspects and prerequisites for M&A involving NBFCs. These regulations ensure financial stability and protect the interests of depositors.

CCI’s Influence on M&A Transactions

The Competition Act, 2002, empowers the CCI to review M&A transactions to prevent adverse effects on competition in India. Sections 5 and 6 of the Act mandate that certain transactions, meeting prescribed asset or turnover thresholds, require prior approval from the CCI. This regulatory oversight is aimed at preventing the formation of monopolies and ensuring that M&A activities do not have a detrimental impact on competition within the Indian market.

The CCI evaluates transactions on criteria such as potential to cause appreciable adverse effect on competition (AAEC) in relevant markets and provides either unconditional approval or conditional approvals specifying remedies. The 2020 amendment to the Competition Act introduced a “green channel” route for automatic approval of certain combinations that are unlikely to cause an AAEC, streamlining the approval process for M&A transactions.

Practical Guide to M&A Transactions

Step-by-Step Guide to Conducting M&A Transactions Under SEBI Regulations

Mergers and Acquisitions (M&A) in India are governed by a comprehensive regulatory framework, with the Securities and Exchange Board of India (SEBI) playing a pivotal role in overseeing transactions involving public companies. Here is a step-by-step guide to navigating M&A transactions under SEBI regulations:

1. Pre-Transaction Planning

– Assess the transaction’s compliance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations), focusing on trigger points for open offers and acquisition thresholds.

– For listed entities, ensure alignment with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), particularly regarding disclosure requirements and corporate governance standards.

2. Due Diligence

Conduct thorough legal and financial due diligence, focusing on regulatory compliance, intellectual property rights, contractual obligations, and potential liabilities. This step is crucial for assessing the risks and valuation of the target entity.

3. Structuring the Deal

Decide on the acquisition structure (share purchase, asset purchase, merger, etc.), considering tax implications, regulatory approvals, and sector-specific restrictions under the FEMA, 1999 and the Competition Act, 2002.

4. Drafting Transactional Documents

Prepare definitive agreements, ensuring they comply with SEBI regulations, the Indian Contract Act, 1872, and other relevant laws. Key documents include Share Purchase Agreements (SPA), Merger Agreements, and Shareholder Agreements.

5. Regulatory Approvals

Obtain requisite approvals from SEBI, the Competition Commission of India (CCI), and other regulatory bodies. For cross-border transactions, compliance with FEMA guidelines is mandatory.

6. Public Announcements and Filings

Make mandatory disclosures to stock exchanges as required under the LODR and SAST Regulations. This includes detailed public statements for open offers and disclosures of acquisition agreements.

7. Closing the Transaction

Fulfill conditions precedent, complete statutory filings, and implement the transaction. Ensure timely payment of consideration and transfer of shares or assets.

8. Post-Merger Integration and Compliance

Focus on integrating the operations, cultures, and systems of the merging entities. Ensure ongoing compliance with SEBI regulations and corporate governance norms.

Case Studies: Successful M&A Transactions in the Indian Market

1. Tata Steel and Bhushan Steel Acquisition (2018):

This transaction is a notable example of M&A under the Insolvency and Bankruptcy Code, 2016 (IBC). Tata Steel acquired Bhushan Steel, navigating through the Corporate Insolvency Resolution Process (CIRP), showcasing the synergy between IBC and SEBI regulations in facilitating distressed M&As.

2. Walmart’s Acquisition of Flipkart (2018):

A landmark deal in the e-commerce sector, Walmart acquired a 77% stake in Flipkart for $16 billion. The deal is significant for its cross-border element, requiring compliance with FEMA regulations and CCI approval, demonstrating the interplay between competition law and foreign investment norms in M&A transactions.

Conclusion

In the evolving framework of mergers and acquisitions (M&A) in India, adherence to the Securities and Exchange Board of India (SEBI) regulations emerges as a paramount consideration for corporations and legal entities aiming for successful transactions. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Prohibition of Insider Trading) Regulations, 2015, and SEBI (Delisting of Equity Shares) Regulations, 2009, collectively form the cornerstone of regulatory compliance in the M&A domain.

These legislations are designed to ensure transparency, protect investor interests, and maintain fair trading practices, thereby reinforcing the foundation for strategic growth and consolidation in the corporate sector.

Furthermore, the intricate interplay between these SEBI regulations and other pivotal Indian laws like The Companies Act, 2013, The Competition Act, 2002, and The Foreign Exchange Management Act underscores the necessity for meticulous legal scrutiny and strategic planning in M&A dealings. The legal obligations under these acts, combined with SEBI’s guidelines, necessitate a rigorous due diligence process and an informed approach towards structuring M&A deals.

For entities involved in such transactions, a thorough understanding of these regulations and a proactive compliance strategy are indispensable for navigating the complexities of M&A transactions in India, thereby enabling a seamless integration and realization of long-term business objectives.

Click to learn more about the Practice Areas of Agrud Partners.