CROSS BORDER MERGERS & ACQUISITIONS The Legal Landscape Madhurendra Nath Jha

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 .


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 ($32.37billion)

Inbound: 108 ($15.61 billion)


Increase in M& A

0

100

200

300

400

500

600

700

2006 2007

No. of DealsAmount (USD million)


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


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


Graphical representation of Indian

outbound deals since 2000. Source:

IBEF


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


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


Destination India

• Liberal FDI Policy Framework

• FDI allowed in most sectors

• Entry Routes for Investment in India– Approval– Automatic


FDI and Portfolio Flows to India

Source: RBI


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


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


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.


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


India entry-JV

• The Following are exempted from the restriction of entering into JV in the same field:

1) Information Technology sector

2) Investments made by multinational financial institutions

3) mining sector for the same area/mineral


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


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


Sectors Attracting Highest FDI Equity Flows

0

500

1000

1500

2000

2500

3000

2004-05 2005-06 2006-07 2007-08

Computer Software &Hardware

Construction Activities

Automobile Industry

Housing & Real Estate

Power

Drugs and Pharmaceuticals

Mettalurgic Industries

All Figures in US $(Million)


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;


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.


India’s Direct Investment Abroad

Source: RBI


Data on Overseas Direct InvestmentsS.no. Country Outflow 2006-2007

(In US$ Million)

1. US 313.379

2 Canada 397.772

3 China 3.176

4 Netherlands 1005.518

5 Czech Republic 26.008

6 Italy 7.104

7 Germany 22.858

8 France 0.693

9 Portugal 0

10 Poland 0.454

11 Hungary 0


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


Regulatory Framework

• Applicable Indian Laws- Companies Act - Competition Act- Income Tax Act- Indian Stamp Act- SEBI Takeover

Code- FEMA


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


Competition Law, 2002

• Salient Features:– Anti-competitive agreements;– Prohibition of abuse of dominant position – Regulation of Combinations including

mergers– Unfair Trade Practices


India : Merger Law

• Monopolies and Restrictive Trade Practices Act, 1969 – Inadequate– Obsolete

• Still Prevailing


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


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


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


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


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)


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

mailto:[email protected]

mailto:[email protected]


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

Documents

CROSS BORDER MERGERS & ACQUISITIONS The Legal Landscape Madhurendra Nath Jha