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CROSS BORDER MERGERS & ACQUISITIONS
The Legal Landscape
Madhurendra Nath Jha
© Paras Kuhad & Associates, Advocates
Introduction Merger - A Merger may be defined as the combination of two or more independent business corporations into a single enterprise, usually involving the absorption of one or more firms by a dominant firm. Mergers may be broadly classified as Horizontal, Vertical or Conglomerate Acquisition may be defined as an act of one enterprise of acquiring, directly or indirectly of shares, voting rights, assets or control over the management, of another enterprise .
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M&A Band Wagon
• Frenzied Activity in the field of M&A in recent years
• In 2007 out of Total 348 Cross Border Deals:Outbound: 240 ($32.37
billion) Inbound: 108 ($15.61 billion)
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Increase in M& A
0
100
200
300
400
500
600
700
2006 2007
No. of DealsAmount (USD million)
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India Inc. Goes Global
Tata Steel acquired UK based Corus for $ 8 billion.
Suzlon Energy Ltd acquired German firm Repower Systems AG for $ 1.7 billion.
United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion
Hindalco acquired Novelis for $ 6 billion
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India goes global TATA Chemical acquires US based Soda Ash Maker
General Industrial Products for $ 1 billion Indian shipping company Great Offshore acquires UK
based Sea Dragon for US$ 1.4 billion Essar Energy acquires 50% stake in Kenya
Petroleum refineries ltd. Banswara Syntex to acquire France firm Carreman
Michel Thierry for around US$ 125 million
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Graphical representation of Indian
outbound deals since 2000. Source:
IBEF
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Inbound Transactions Sistema, Russian Joint Stock
Company’s acquisition of 74% stake in Shyam Telelink – Telecommunications
French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million
Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million
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Fursa Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem
UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million
EMC Corporations Acquisition of Valyd Software Pvt. Ltd.
Orkla’s Acquisition of MTR foods for $ 100 Million
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Destination India
• Liberal FDI Policy Framework
• FDI allowed in most sectors
• Entry Routes for Investment in India– Approval– Automatic
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FDI and Portfolio Flows to India
Source: RBI
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Entry Strategies for Foreign Investors
• As a Foreign Company through:– Liaison office/Representative office– Project Office– Branch Office foreign company through:
• As an Indian company through:– a Joint Venture– Wholly Owned Subsidiary
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Joint Ventures As An Entry Strategy
• JV’S regulated by Policies and Laws governing FDI
• Two Tier Approval Mechanism for JV’S:
- Automatic Approval Route- FIPB Approval Route• If the Foreign Partner has
entered into JV in the same field before then NOC of the previous JV partner and approval of the Government also required
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India-entry• ‘Same Field’ may be defined as the 4 digit
National Industrial Classification (NIC) Code
Illustration: If the foreign investor has collaboration for the
manufacture of tarpaulin Code 268.3, he can invest in the manufacture of rubberized cloth Code 268.2 as there is no restriction to enter into JV’s in allied fields. The restriction shall apply to any item whose code NIC code is 268.2.
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India entry
• A ‘Conflict of Interest’ clause advisable in the JV/Collaboration agreement in case one of the Partners to the JV wants to set up another JV or wholly owned subsidiary in the same field
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India entry-JV
• The Following are exempted from the restriction of entering into JV in the same field:
1) Information Technology sector2) Investments made by multinational financial
institutions3) mining sector for the same area/mineral
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Other inbound
• Prior government approval not required in certain cases:
- Investment to be made by venture capital funds is registered with SEBI
- Existing JV investment is less than 3%- Existing venture is defunct or sick
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Remittances• Determination of sale Price of Shares- Listed Company- Unlisted Company/Shares Thinly Traded on
the Stock Exchange• Remittance of Sale Proceeds:i. NOC from Income Tax Authority requiredii. If the security has not been sold on a
recognized stock exchange then prior approval of the RBI in form TS 1 has been obtained
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Sectors Attracting Highest FDI Equity Flows
0
500
1000
1500
2000
2500
3000
2004-05 2005-06 2006-07 2007-08
Computer Software &HardwareConstruction Activities
Automobile Industry
Housing & Real Estate
Power
Drugs and Pharmaceuticals
Mettalurgic Industries
All Figures in US $(Million)
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Indian Overseas Investment
• Favourable Policy framework- Overseas Investment Limit – 400% of Net Worth- Overseas portfolio investment - 50 per cent of Net
Worth
• Permissible Funding:– Drawal of foreign exchange from an AD;– Capitalization of exports;– Swap of shares;
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Funding
Permissible Funding Cont.
– Utilisation of proceeds of External Commercial Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
– in exchange of ADRs/GDRs – Balances held in EEFC account of the Indian
party;– Utilisation of proceeds of foreign currency funds
raised through ADR / GDR issues.
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India’s Direct Investment Abroad
Source: RBI
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Data on Overseas Direct InvestmentsS.no. Country Outflow 2006-2007
(In US$ Million)1. US 313.3792 Canada 397.7723 China 3.1764 Netherlands 1005.5185 Czech Republic 26.0086 Italy 7.1047 Germany 22.8588 France 0.6939 Portugal 010 Poland 0.45411 Hungary 0
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Overseas Direct Investment –Sector wise Breakup
S.no. Sector Outflow 2006-2007(In US$ Million)
1. Manufacturing 2402.760
2. Financial Services 5.754
3. Non-Financial Services 2249.960
4 Trading 390.811
5 Others 985.587
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Regulatory Framework
• Applicable Indian Laws- Companies Act - Competition Act- Income Tax Act- Indian Stamp Act- SEBI Takeover
Code- FEMA
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Companies Act, 1956
• Merger is a scheme of arrangement • Scheme of arrangement has to be presented
before the High Court for sanction• Relevant Sections 391-394• Limited Scope in Cross Border M&A’s because
Transferee company has to be a company incorporated in India
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Competition Law, 2002
• Salient Features:– Anti-competitive agreements;– Prohibition of abuse of dominant position – Regulation of Combinations including
mergers– Unfair Trade Practices
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India : Merger Law
• Monopolies and Restrictive Trade Practices Act, 1969 – Inadequate– Obsolete
• Still Prevailing
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New Merger Law
Competition Act, 2002• Combination
The Indian law uses the word combinations to cover acquisition of control, shares, voting rights and assets, and mergers and amalgamations
• Relevant Sections: 5-6 & 29-32
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Areas of Concern
• Applicable threshold Limits Based on:– Value of Assets– Turnover
• Notice Requirement– Mandatory– Within 30 days of
• Approval of proposal by BOD• Execution of agreement/ document
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Competition proposals
• Mandatory waiting Period for Approval– 210 Days
• Extra Territorial Jurisdiction of CCI – CCI has power to inquire about combinations
taking place outside India
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Intent of National Security Legislations
– Right to Intervene in case of perceived threat to National Security
– Discretionary powers to prevent certain foreign companies from doing business in the country
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Foreign Investments & National Security Legislations
• United States- Foreign Investment & National Security Act, 2007 (Exon-Florio Provision)
• China- Anti Monopoly Law
• European Union- Members are free to regulate International Mergers (Articles 81-85 EC Treaty regulates Competition)
© Paras Kuhad & Associates, Advocates
security
• United Kingdom- Enterprises Act 2002
• India- National Security Exception Bill yet to be passed by the Parliament
THANK YOU
Should you have any questions on issues reported here or on other areas of law, you may contact Paras Kuhad and Associates at the following co-
ordinates:Mr. M.N. JHA
Paras Kuhad and Associates, AdvocatesA-238, Lower Ground Floor,
Defence Colony, New Delhi- 110 024, India
Tel: +91 (0) 11 46562525, 46562727 Fax: +91 (0) 11 46562000Mob: +91/0-9811319922
Email : [email protected], [email protected]
Delhi Mumbai Kolkata Chennai Jaipur Pune Jodhpur
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Disclaimer
The contents of this document are intended for informational purposes only and are not in the nature of a legal opinion or
advice. They may not encompass all possible regulations and circumstances applicable to the subject matter and readers are encouraged to seek legal counsel prior to acting upon any of the
information provided herein.
This Note is the exclusive copyright of Paras Kuhad and Associates, Advocates and may not be circulated, reproduced or
otherwise used by the intended recipient without the prior permission of its originator.
© Paras Kuhad and Associates, Advocates 2008