M&As: How the game is played in India

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Corporate India has been on an incredible drive when it comes to deal- making activity these past few years. But there has been many more outbound deals ie. Indian companies are buying foreign companies as opposed to inbound or domestic transactions. So, let's take a look at some of the tax and regulatory situations of the country that might be prohibitive when it comes to domestic transactions and we are also going to look at which international jurisdictions are more M&A friendly.

It's not just hostile takeovers or doing leveraged buyouts or for that matter, even complete buyouts in India, which is like fighting a losing battle. That's thanks to the rules of the game. For instance, take delisting, if you want to buy a public listed company and take it private, you cannot unless shareholders tender in at least 90% of the shares and while the price is determined by book-building, there is no prescribed upper limit that means even a few small shareholders can hold the deal to ransom.

Group Managing Director, Reliance ADAG, Gautam Doshi agrees and told CNBC-TV18, "What we really need is changes in the delisting guidelines, where we do have rules, which come in the way. Particularly, the pricing rules and the threshold - these two really need to be looked at. As far as pricing is concerned, permitting reverse book-building ie. allowing all those shareholders who are the public shareholders at that point of time to bid for the maximum price they want, is virtually allowing them or a cartel out of them to blackmail the promoters and therefore stop delisting."

"They can ask for an unfair price, we have never been able to find a formula which is fair to both, but I think if we had a formula based on market price plus premiums that should work as far as the pricing goes. And on the threshold, we need to look at whether it should be 90%-75% or somewhere between the two. With those two changes, I think we should be able to progress much faster.

So, that's how it is done in India but how about the rest of the world?  Head Transaction Services, KPMG, Abizer Diwanji explains, "Elsewhere in the world, this kind of legislation is there. There is investment protection for example in the US, it is extremely difficult to delist a company, possibly it's the more difficult market."

"The issue is that over there, we have far more deeper markets hence price discovery in those markets is much better, so if you have any regulation, which actually talks about a threshold price beyond which people have to surrender, it makes sense in those markets and they have those rules, hence it is easier to delist in those countries for pricing perspective."

He continues, "In India, that is a challenge because do we really have the kind of depth in the market which will enable a price discovery and hence protect the minority investor who really wants to come in? I guess in India, the rule will evolve but overseas frankly, it is because of the price discovery process, that the delisting norms become much easier to implement but the laws are the same. What Mr Doshi has pointed out is the logical next step forward."

But this apart, are there a bunch of other regulatory situations in the country that may not be M&A friendly? Doshi finds the the procedures under the Companies Act extremely cumbersome and he thinks it is just more formality than really achieving investor protection. He says, "If they were achieving investor protection, one would welcome any procedure but if that is not being achieved, the mere formality is a waste of time."

He elaborates, "So, one would prefer a situation where like most other things, you have an automatic approval type of situation where you prepare all the documents, you prepare a scheme, put together all the information, which an investor should know, give it to them, give it to the regulator and then if there is an objection - fine. If there is no objection, it automatically goes through rather than having a court hearing in every single case. M&As today would require you to go to the court a minimum of three times and it could be more - that is really asking too much."

There is a proposal for changing this process from the courts to a company law tribunal. For this, the Companies Act has already been amended but because of the stay order, the company law tribunal cannot come forward.

Executive Director, Tax and Regulatory, PWC, Amrish Shah adds that, "One more factor is that the Indian company being able to merge into a foreign company, which is not there in our law currently, which is there is some of the countries outside India. So, you could merge a foreign company into an Indian company but the reverse is not possible. When you are talking of cross border deals happening on a day-to-day basis, that is another thing, which needs to be looked at into."

He says that the Irani committee report did suggest looking into this issue but no one knows if the Companies Bill is actually going to look at this in any serious fashion.

In such a situation, it's a big deterrent because by the time one decides on a merger and in a dynamic economy, if it's not acted on promptly, the market forces can completely change in those situations. But this being India, Doshi admits that "one has found ways and means outside these problems. For example, you would acquire the shares, keep them in escrow, then go ahead with a court scheme saying that alright, whatever may happen, let it take two years. There are some people who have their financial resources or risk-taking ability, while others give it up."

Though Diwanji says that it does impair business because one is operating in an interim environment. So, the deals would happen because they are put in process but the question is are you actually optimizing it and what do you expect to get out of the deal?