Status as on- 08/02/2023
With an annual GDP growth rate of 7.3% in the first quarter of 2018, the Indian economy has emerged as the one with the quickest growth. Due to a robust capital market and regulatory reforms that are both competitive and supportive of the market. In 2018, India reported her highest-ever half-yearly Mergers and Amalgamations (hereafter M&A’s) figure of USD75 billion from 638 transactions, which included ten agreements of $1 billion and 52 deals worth more than $100 million apiece, which combined represented 93% of the total deal value.
With 235 M&A deals totaling USD65.5 billion in 2018, coupled with the greatest cross-border M&A deal value since 2011 of USD25 million, which is a staggering growth of 5.8 times the total value of the same in 2017, there have been 235 M&A transactions.
The Legal Framework in India for Cross-Border Insolvency
Sections 234 and 235 of the Code deal with cross-border insolvency perfunctorily, empowering the government to make treaties and empowering the Adjudicating Authority under the IBC, to issue a letter of request to a court in a foreign country, which has signed an agreement, to deal with the assets in a specified manner.
Countries who are signatories to the UNCITRAL Model Law are mandated to provide for the recognition, cooperation, assistance and appropriate relief in insolvency proceedings commenced in India, except in cases where the country has otherwise required reciprocity. As of June 2018, nations have adopted the UNCITRAL Model Law, including the United States, the United Kingdom, and Singapore. However, certain countries that have adopted it may have made reservations, and it calls for reciprocity.
Insolvency and Bankruptcy Code (IBC), 2016 and Its Impact on Cross-Border Mergers and Acquisitions in India
There is a significant increase in cross-border M&A activity in India. The IBC 2016 creates a conducive environment for healthy companies to look for inorganic growth opportunities in entities undergoing insolvency resolution. The acquisition of these entities with attractive concessions and exemptions from the tedious open-offer requirements by SEBI has made cross-border M&A lucrative.
Almost all relevant corporate regulations in India have been restructured in the last few years, like the takeover rules, anti-monopoly laws, delisting, and accounting guidelines, etc. Most recently, the FEMA (Transfer or Issue of Securities to Persons Resident Outside India) Regulations– the principal law governing foreign investment in India – was replaced by a simpler and streamlined successor. The enactment of the Goods and Service Tax is another significant step towards a simpler tax regime. On the policy level, many sectors like single-brand retail, manufacturing, and aviation have been brought under the automatic route over the last year. There is also a growing overture for the simplification and unification of industrial and labor laws. The idea is to condense the laws into four broad codes on wages, social security, safety regulations, and trade unions. Another area on a similar path is the direct tax regime.
Even though the cross-border M&A regulatory and policy framework in India is evolving, some challenges remain. One, such instance is SEBI’s low threshold of 100 listed companies for making open offers under the takeover regime. Acquirers are reluctant as significant costs, and expenses are involved. Further, delisting a company from the stock exchanges after the merger is troublesome. Another issue is the varying stamp duty rates across different states, which have in the past made inter-state cross-border M&As unattractive. Moreover, procedural bottlenecks like a long compliance list and multiple approvals from courts and sectoral regulators pose a problem.
The MCA’s notification of the proposed chapter on cross-border insolvency is a step in the right direction because it sets the way for India to join the UNCITRAL Model Law, rather than entering into many bilateral arrangements with other jurisdictions.
In India, the application for the recognition of foreign proceedings is required to be made to the NCLT by the foreign representatives under the Model Law. To prevent any abuse of the powers broad parameters and guidelines for the use of discretionary powers of the tribunal while granting moratorium in case of foreign non-main proceedings need to be laid down. The adoption of the Model Law will help in the ease of doing business and significantly increase the inflow of FDI into India by way of cross-border mergers and acquisitions. Finally, the Model Law should be adopted to achieve harmonization of insolvency laws, through international cooperation and coordination. All of this legal consolidation and harmonization will favorably impact the cross-border mergers and acquisitions scenario in India.
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