An Introduction to the Key Concepts and Practical Considerations in Indian M&A Transactions for an International Lawyer

By Narayanan, Nikhil | Business Law International, May 2018 | Go to article overview

An Introduction to the Key Concepts and Practical Considerations in Indian M&A Transactions for an International Lawyer


Narayanan, Nikhil, Business Law International


Introduction

India is a growing and dynamic emerging economy. The year 2017 saw the second-highest level of M&A transactions since 2001, with 379 deals announced with avalué $54.7bn. The M&A market is driven by a high volume of private equity and venture capital investment, foreign investment into key sectors of the economy and, increasingly, distressed M&A involving the businesses of some of the over-leveraged conglomerates in India. However, deal structuring and execution in India often involve a particular set of considerations. A first-time market participant will need quickly to get to grips with myriad regulations, cultural differences in working style and local market practice. This article seeks to provide a guide to navigating these waters effectively.

Overarching concepts

There are overarching regulatory concepts that affect different aspects of deal structuring. These are summarised below.

Types of foreign investment

Investment into India is regulated and the investment conditions that apply are driven by the form that the investment takes. Investment into equity shares or instruments that compulsorily convert into equity shares is known as 'foreign direct investment' (FDI). Investment in certain sectors is subject to investment caps (eg, insurance and defence) and in certain cases investment conditions also apply (eg, real estate). The ability of an FDI investor to lend to any Indian company or subscribe for any debt instruments is more limited (as discussed below).

International investors are also able to procure certain investor registrations. These registrations allow them to invest in a broader range of capital instruments, subject to certain conditions. For example, a 'foreign portfolio investor' (FPI) registration, which can be readily obtained within a short time horizon, broadly allows international investors the ability to invest in listed securities (including shares comprising less than ten per cent of the issued share capital of a listed company) and certain types of debt instruments known as 'non-convertible debentures' (NCDs). Another type of investor registration known as a 'foreign venture capital investor' (FVCI) registration provides for greater flexibility in investing in certain debt securities such as optionally convertible debentures, which would otherwise be restricted, in addition to equity investments.

Both these registrations are particularly useful for private equity investors seeking to structure their investments within the confines of what is possible in India. FVCI registration status takes longer to obtain (five to six months) as opposed to just a month or so for FPI registrations. FVCI registrations offer certain benefits such as greater flexibility as to pricing and the absence of a three-year regulatory lock-up requirement applicable to 'promoters' (see discussion under 'Promoter concept' below) in initial public offerings (IPOs), but it is limited to investments in certain defined sectors and is subject to certain conditions.1

It is possible for an investor to split its investment in any single target company between straightforward FDI and investment through any of the investment registrations available, provided they are undertaken through separate companies (ie, the same investment vehicle does not undertake both types of investment). However, all types of investment will be aggregated in determining the applicability of the caps on foreign investment.

Treatment of debt and guaranteed returns on investments

The Reserve Bank of India (RBI) closely regulates borrowings by Indian companies from international lenders or investors. Only certain types of investors are permitted to lend. These include shareholders holding a 26 per cent or greater interest, but apart from this category, the remaining permitted lender categories do not readily apply to most private equity funds. The use of funds by the borrower is regulated, as are the terms of the loan, including the cost of capital (that can be up to 500 basis points over a six-month London Inter-Bank Offered Rate (LIBOR)). …

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