Mergers & Acquisitions Comparative Guide –

1 Deal structure

1.1 How are private and public M&A transactions typically
structured in your jurisdiction?

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’.

1.2 What are the key differences and potential advantages and
disadvantages of the various structures?

Type	Advantages	Disadvantages
Acquisition of securities	Ease of negotiations in the acquisition of securities. Execution is expedited as there is no need for court approval, except where the open offer is activated or government approval is mandated. Security transaction tax is charged at a rate of 0.1% on the sale of equity shares conducted through a recognised stock exchange in India. Goods and service tax (GST) may not apply. Stamp duty rates are much lower than for asset/business purchases. Streamlined implementation with lower costs and time requirements. Can be implemented quickly, subject to regulatory or third-party approval, if any.	The transaction may not be tax neutral and capital gains tax may arise for the sellers. Not possible to capture the value of intangibles. May require regulatory approval from the government and regulators such as SEBI. Valuation of shares may be subject to the pricing guidelines of the Reserve Bank of India (RBI). An acquisition of shares of listed companies that surpasses the 25% threshold will trigger the SEBI Takeover Regulations. This mandates the acquirer to purchase a minimum of 26% of the shares from the open market at a price determined by a specified SEBI formula. This could significantly increase the transaction costs and prolong the duration of completing the transaction, as the shares are transferred to the acquirer only after the open offer concludes. Investors must fulfil specific investment conditions. The acquisition of shares or capital contributions implies taking on the financial responsibilities of the target, often prompting buyers to use subsidiaries to avoid unspecified debts. Stamp duty on transfer of securities must be paid by the purchasers.
Acquisition of business Asset purchase	Asset purchases involve less complex due diligence than mergers. Execution is expedited as no court approval is necessary, except where acquiring a business through a demerger requires such approval. There is no obligation to initiate an open offer, unlike in the case of a share acquisition. Asset purchases offer tax advantages and faster completion times than mergers, enhancing transactional efficiency. There is flexibility to choose the type of property for purchase and sale. The purchaser is not directly responsible for the debts of the target. The owner, capital contributor or shareholder retains ownership of the target and only ownership of the selected asset is typically transferred.	Approval from financial institutions, among other entities, may be necessary for the transfer of assets or undertakings, potentially causing delays in the process. It is crucial to consider the continuity of incentives, concessions and unabsorbed losses under direct or indirect tax laws, as well as India’s export and import policy. It is not possible to transfer certain assets of the target, such as human resources, brands associated with the assets, commercial advantages and customer data. The stamp duty payable is higher. Asset purchases may leave behind certain liabilities or contractual obligations, exposing buyers to unforeseen risks and legal disputes post-acquisition. The transaction might not retain tax neutrality, unlike in the case of amalgamations and demergers, among other types of transactions. The tax rate is high with no capital gains tax exemption. It is essential to account for GST implications when itemising the sale of assets, as GST applies to the movable assets being transferred.
Acquisition of business Business purchase	Feasible for businesses selling any business division or unit. The business is transferred as a ‘going concern’. This encompasses the transfer of essential assets such as plant, machinery and personnel required for business operations, thus minimising disruptions. The process is time efficient. There is a valuation benefit, as the value of each asset need not be identified. The process is tax efficient, with exemptions from capital gains and goods and services tax liabilities. It is potentially more favourable under tax law than an asset deal.	The buyer assumes all rights and liabilities, leading to high liability risk. Thorough analysis must be conducted beforehand to ascertain the feasibility of transferring licences, registrations and permits of the target. Compared to a demerger, the tax is very high. The buyer cannot selectively choose key assets, as the sale encompasses the entire target business as a going concern. The formation of a new company is typically required, necessitating the renegotiation of all agreements.
Merger	Mergers and amalgamations undergo court scrutiny, ensuring adherence to legal standards and safeguarding stakeholders’ interests. Fast-track mergers expedite transactions for small companies and startups, fostering agility and efficiency in corporate restructuring. The existing market position advantage of the merged enterprises is utilised. Overall business performance is enhanced. The process is tax efficient and a capital gain tax exemption is available. The carry-forward of losses is possible. The transaction is cashless.	It is difficult to determine the value of the target. All parties must be corporate entities and the transferee company must be an Indian company. The process is time consuming and NCLT approval is required. Regulatory approvals are required (eg, from a regional director of the central government, the registrar of companies, the RBI, SEBI, stock exchanges and the Competition Commission of India). There is a risk of internal conflicts in management post-merger. There may be conflicts and incompatibility between company cultures. Some potential shareholders may leave due to a lack of belief in the merger.
Demerger	Involves a smooth operation whereby one entity splits into two or more companies. A demerger approved by the court is exempt from the requirement for government approval if, post-demerger, the foreign company’s investment will remain within the sectoral cap. It can increase operational efficiency due to specialisation and divestment of loss-making or non-core divisions. It is more tax efficient than a slump sale (no capital gains). There are no GST implications associated with a demerger conducted on a going-concern basis.	To maintain tax neutrality, it is essential to contemplate the issuance of shares of the resulting company to shareholders of the demerged entity. There can be a loss of economies of scale, especially for large companies. The process is time consuming and approvals are required. There may be a clash of interests and egos with multiple top management. There may be employee dissatisfaction due to potential relocation or job loss after the split.
Joint ventures	Incorporated joint ventures offer limited liability protection to the parties involved, shielding them from personal liability for the debts and obligations of the joint venture entity. Unincorporated joint ventures, such as consortiums, provide flexibility, especially for short-term projects, allowing parties to collaborate without the formalities of setting up a separate legal entity. Parties can leverage double taxation avoidance agreements (DTAAs) to mitigate tax liabilities, particularly for non-resident investors. Certain DTAAs offer preferential tax treatment, reducing the tax burdens on income, dividends and capital gains. Joint ventures facilitate the licensing or assignment of IP rights, allowing parties to leverage each other’s IP assets for mutual benefit. The parties can share resources and expertise. The joint venture facilitates risk sharing and diversification. It can open up access to new markets and technologies.	The establishment and operation of a joint venture require the parties to navigate complex legal and tax regulations – including compliance with company laws, tax laws and competition regulations – which can increase administrative burdens and costs. The Indian employment laws impose obligations on joint venture entities regarding employee rights, including compliance with labour laws, visa requirements for foreign secondees and the potential risk of creating a permanent establishment. It involves complex governance and decision-making. There is a high dependency on partner relationships. There is a risk of misalignment of objectives.
Distressed acquisitions	The IBC establishes a dedicated forum to oversee insolvency and liquidation proceedings, ensuring a streamlined and efficient process. All classes of creditors are empowered to initiate the resolution process in case of non-payment of valid claims, providing them with greater control over the recovery of their dues. The appointment of an insolvency professional to take control of the corporate debtor ensures effective management and resolution of financial distress. The IBC imposes a finite timeframe for assessing the debtor’s viability and reaching a resolution, promoting swift decision-making and reducing uncertainty. Creditors are granted the power to make commercial decisions regarding the revival or liquidation of the company, enabling them to maximise value and mitigate losses. In the event of liquidation, the IBC provides a clear mechanism for the orderly distribution of proceeds to creditors, enhancing transparency and fairness.	The legal framework and procedures under the IBC can be complex, requiring specialised knowledge and expertise to navigate them effectively. Debtors may face uncertainty and loss of control over their assets and operations during insolvency proceedings, potentially leading to disruptions in business operations. In cases of liquidation, there is a risk of distressed assets being sold at a significant discount, leading to suboptimal outcomes for creditors and shareholders. The IBC may face legal challenges and procedural delays, prolonging the resolution process and increasing the costs for all stakeholders.

1.3 What factors commonly influence the choice of sale
process/transaction structure?

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.

2 Initial steps

2.1 What documents are typically entered into during the
initial preparatory stage of an M&A transaction?

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.

2.2 Are break fees permitted in your jurisdiction (by a buyer
and/or the target)? If so, under what conditions will they
generally be payable? What restrictions and other considerations
should be addressed in formulating break fees?

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.

2.3 What are the most commonly used methods of financing
transactions in your jurisdiction (debt/equity)?

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.

2.4 Which advisers and stakeholders should be involved in the
initial preparatory stage of a transaction?

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.

2.5 Can the target in a private M&A transaction pay adviser
costs or is this limited by rules against financial assistance or
similar?

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.

3 Due diligence

3.1 Are there any jurisdiction-specific points relating to the
following aspects of the target that a buyer should consider when
conducting due diligence on the target? (a) Commercial/corporate,
(b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f)
Intellectual property and IT, (g) Data protection, (h)
Cybersecurity and (i) Real estate.

(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).

3.2 What public searches are commonly conducted as part of due
diligence in your jurisdiction?

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.

3.3 Is pre-sale vendor legal due diligence common in your
jurisdiction? If so, do the relevant forms typically give reliance
and with what liability cap?

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.

4 Regulatory framework

4.1 What kinds of (sector-specific and non-sector specific)
regulatory approvals must be obtained before a transaction can
close in your jurisdiction?

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.

4.2 Which bodies are responsible for supervising M&A
activity in your jurisdiction? What powers do they have?

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:

4.3 What transfer taxes apply and who typically bears
them?

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.

5 Treatment of seller liability

5.1 What are customary representations and warranties? What are
the consequences of breaching them?

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.

5.2 Limitations to liabilities under transaction documents
(including for representations, warranties and specific
indemnities) which typically apply to M&A transactions in your
jurisdiction?

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.

5.3 What are the trends observed in respect of buyers seeking
to obtain warranty and indemnity insurance in your
jurisdiction?

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.

5.4 What is the usual approach taken in your jurisdiction to
ensure that a seller has sufficient substance to meet any claims by
a buyer?

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.

5.5 Do sellers in your jurisdiction often give restrictive
covenants in sale and purchase agreements? What timeframes are
generally thought to be enforceable?

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.

5.6 Where there is a gap between signing and closing, is it
common to have conditions to closing, such as no material adverse
change (MAC) and bring-down of warranties?

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.

6 Deal process in a public M&A transaction

6.1 What is the typical timetable for an offer? What are the
key milestones in this timetable?

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.

6.2 Can a buyer build up a stake in the target before and/or
during the transaction process? What disclosure obligations apply
in this regard?

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.

6.3 Are there provisions for the squeeze-out of any remaining
minority shareholders (and the ability for minority shareholders to
‘sell out’)? What kind of minority shareholders rights are
typical in your jurisdiction?

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.

6.4 How does a bidder demonstrate that it has committed
financing for the transaction?

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.

6.5 What threshold/level of acceptances is required to delist a
company?

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.

6.6 Is ‘bumpitrage’ a common feature in public
takeovers in your jurisdiction?

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.

6.7 Is there any minimum level of consideration that a buyer
must pay on a takeover bid (eg, by reference to shares acquired in
the market or to a volume-weighted average over a period of
time)?

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.

6.8 In public takeovers, to what extent are bidders permitted
to invoke MAC conditions (whether target or market-related)?

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.

6.9 Are shareholder irrevocable undertakings (to accept the
takeover offer) customary in your jurisdiction?

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.

7 Hostile bids

7.1 Are hostile bids permitted in your jurisdiction in public
M&A transactions? If so, how are they typically
implemented?

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.

7.2 Must hostile bids be publicised?

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:

• the RBI, which oversees foreign investment concerning foreign
  exchange control; and




• the FIPB, a division of the Ministry of Finance responsible for
  regulating foreign investment in accordance with government
  industrial policy.

Regarding FDI, the Indian government imposes restrictions on
foreign ownership in various industrial sectors. However, following
the liberalisation of the Indian economy in 1991, many sectors were
opened up to foreign investment. Under the ‘automatic
route’, certain sectors allow for FDI without requiring
approval from the FIPB or the RBI.

7.3 What defences are available to a target board against a
hostile bid?

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.

8 Trends and predictions

8.1 How would you describe the current M&A landscape and
prevailing trends in your jurisdiction? What significant deals took
place in the last 12 months?

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.

8.2 Are any new developments anticipated in the next 12 months,
including any proposed legislative reforms? In particular, are you
anticipating greater levels of foreign direct investment
scrutiny?

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.

9 Tips and traps

9.1 What are your top tips for smooth closing of M&A
transactions and what potential sticking points would you
highlight?

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.