The new M&A horizon

Last week saw the arrival of the latest product of the current spree of legislative reform directed at India Inc – the Companies Bill 2011 (‘the new Bill'). Aiming to consolidate over 50 years of practical and legislative history is no easy task, and while it is evident that the new Bill has attempted to balance out the needs of the Indian corporate sector on one hand, the rights of the minority shareholder, greater discloser and greater accountability are also obvious keystones desired to be addressed by the legislature.

CROSS-BORDER MERGERS

Leading the charge of iconic changes attempted by the new Bill are the provisions governing cross-border mergers and amalgamations between Indian and foreign companies. At first, this appears a bold and progressive move with the legislation finally opening up India's borders to previously outlawed outbound mergers.

However, like the great impressionist paintings of Renoir and Van Gogh, a closer inspection reveals a far fuzzier picture. While the provisions do allow inbound and outbound cross-border mergers, such cross-border mergers will only be allowed with companies situated in jurisdictions notified by the Central Government.

Given that the provisions governing cross-border mergers apply to both inbound and outbound mergers, this qualification could actually result in a metaphorical step back as under the existing laws, inbound mergers are not only permissible, but are permissible with foreign companies from any jurisdiction. The provisions could therefore result in India Inc finding their hands tied as they would be only able to merge with companies in specific countries instead of being able to play in the entire global market as they do now.

PRIOR APPROVAL

Another potentially unwished-for-change is the requirement of seeking prior RBI approval for any and all cross-border M&A activity. The inherent paperwork and lengthy timelines surrounding regulatory approval could prove practically onerous for Indian corporates, should such a process be required for each and every cross-border transaction.

However, qualifications such as Government notification and mandatory prior RBI approval might significantly reduce the potential benefits for India Inc. In recent times, the government's focus on disclosure and transparency when dealing with the corporate sector has come to the forefront with high profile cases highlighting the regulatory authorities' determination to question corporate structures and transactions that seem to have been put in place solely to take advantage of loopholes in the existing laws.

In line with this spirit, the new Bill provides that going forward, pure investment holding companies may only make investments through a maximum of two layers. However, this could prove rather unfriendly for India Inc as existing multiple investment layers have most often been put in place to allow efficient tax planning, greater investment and capital infusion flexibility and alternative holding structures that are compliant with existing laws but still allow a promoter/majority shareholder to retain control – directly or indirectly.

Under the provisions of the new Bill, holding treasury stock i.e. stock held in the name of the issuing company itself, is no longer permissible, in or out of a trust structure.

Treasury stock has historically been held as an instrument that could provide access to liquidity should the company require it in the future, while still allowing the promoters/majority shareholders to retain a controlling stake over the company.

The loss of such an option could require many Indian corporate houses to look for alternative funding and retention of control options.

BALANCING NEEDS

The new Bill's desire to balance out the needs of all its stakeholders is evident in its attempt to provide procedural simplicity and clarity in situations that were only dealt with in practical jurisprudence until now. A testament to this desire is the new Bill's provisions with regard to mergers and/or amalgamations between small companies and those between parent companies and their subsidiaries.

Instead of the entire regulatory process involving the courts, mergers involving such companies have been given the option of a simpler process involving only the relevant Registrar and the Official Liquidator. For mergers between wholly-owned subsidiaries and their parent companies, the logic of a simpler process was upheld by the courts in cases such as Mahaamba Investments Ltd vs. IDI Limited and the codification of this principle by the new Bill will provide welcome certainty to companies who until now were sure of successfully applying this principle in selected courts only.

Amidst the heated debate on FDI limits and the glamorous morality of the Lokpal Bill, the Companies Bill is a perhaps a quiet giant but a giant nonetheless, on whose shoulders has fallen the task of bringing Indian's corporate laws into the 21st century. How well it manages its responsibilities, only time will tell.

(The author is a Bangalore-based freelance aviation consultant and writer.)

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