Approaching Cross-Border M&A’s: The India way

A significant rise in Cross-Border M&A transactions is a testament to the fact that the foreign companies have realized that economies of scale can be achieved effectively in India

In recent times, there has been a surge in international trade with big corporate giants establishing their operations in multiple countries for increased market coverage and growth opportunities that are up for grabs in the global economy of today.

It is an undisputed fact that currently, the most effective way to expand a business and to achieve economies of scale while ensuring a global reach is through Cross-Border Mergers and Acquisitions. While Cross-Border M&As can facilitate increased growth and technological advancements through mutual co-operation as well as shared expertise, there are several issues which might hinder this process.

This article shall identify some of these issues and suggest some effective solutions specifically in the Indian context, which is slowly becoming a global powerhouse.

What is a Cross-Border M&A?

In simple terms, a Cross-Border Merger or Acquisition refers to an acquisition made by any Company registered or incorporated in one country of a company based out of or registered in another company for the purposes of greater reach. Such an exercise is expected to lead to increase in growth opportunities, innovation and securing a competitive advantage.

Cross-Border M&As can take place between two firms located in different economies, or within one economy between two firms belonging to two different economies. There can be two types of Cross-Border Mergers namely, inbound and outbound mergers.

From the Indian context, when the resultant company from the merger is an Indian Company, it is an inbound merger whereas in case of an outbound merger, the resultant company is a foreign company having its registered office outside India and the Indian Company is merged into that foreign company.

In India, both inbound and outbound Cross-Border Mergers and Acquisitions have been highly promoted in recent times through business-friendly laws, establishment of Special Economic Zones which shall be discussed in the later sections.

Issues in Cross-Border M&As

While Cross-Border transactions tend to create a flowery image for the businesses enhancing growth opportunities, there are several complexities at the same time which directly affect such transactions. Some of these issues are as follows:

a) Different Legal Frameworks

One of the major issues which arises in case of Cross-Border M&A is the variance in legal and regulatory frameworks of different countries to which the contracting parties belong. There might be certain ambiguities and lack of clarity thereby making it extremely difficult for the companies to ensure all compliances.

For example, the tax policies in India are completely different from that of UK. As a result, in case of Cross-Border merger, the companies would need to comply with the policies of both India as well as UK.

b) Cultural Differences

There are differences in the working style, language as well as cultures in different countries, the effects of which certainly seep in case of a Cross-Border Merger. Pre-Merger formalities might be hindered due to language barriers, cultural differences, etc. Further, after the merger or acquisition is complete, the resultant Company might need to develop different methods to cater to the varying customers and to compete in market conditions that might be totally different from the one in their country of incorporation. The methods of selling, promotion as well as overall marketing would be required to be changed from region to region.

c) Possibility of Corporate Frauds

In cases of Cross-Border M&As, the possibility / apprehension of corporate frauds increases manifold as it becomes tougher to regulate the transactions because of the different locations of the corporations and the lack of uniform laws for control and supervision. This can create several loopholes due to non-uniformity of laws which can be taken an undue advantage of. This defeats the very purpose of mutual benefit for which the parties had engaged in the M&A transaction. There are several instances of White-Collar Crimes that have taken place in the International Transactions and Cross-Border M&As; thus such transactions can be a direct breeding ground for the same.

Ways to address

Addressing the issues highlighted in previous section is the need of the hour and here are some of the measures that can be adopted:

a) The first and foremost thing which both the entities located in the different countries must carry out is appropriate background checks and the necessary due diligence which should involve going through their financial statements, determining frequent transacting parties, track record of previous mergers and acquisitions, etc before entering into any merger or acquisition agreement.

b) The entities must ensure adequate consultation and support from reputed Law Firms, Accountants or even Banks located in the country where the other Company is operating with whom the merger or the acquisition agreement is to be entered into. This will ensure that all requirements are being complied with and at the same time will facilitate familiarization with the municipal laws and regulations of that country.

c) There must an effective communication of terms between the contracting parties and the language barrier shall not hinder the same. This can be ensured through a system of proper checks and balances. Additionally, the agreement shall be sent in both English (preferred language in many countries for international transactions) as well as the local language so that the terms are not lost in translation.

d) The objectives and strategies should be well defined which will facilitate the entire process of negotiation if required. The contracting parties should decide their BATNA (Best Alternative to a Negotiated Agreement) beforehand and take assistance of qualified negotiators who are well versed with the positionalities of both companies for ensuring a smooth negotiation process.

e) Lastly, the Companies rather than thinking solely about their own benefit shall primarily focus on value creation and creation of synergies. This will eventually increase overall benefits for both the companies in the form of increased technological levels, greater production at lower costs i.e., economies of scale as well as greater market reach.

These are only a few ways through which Cross-Border M&A agreements can be effectively implemented and the issues can be tactfully addressed thereby benefitting the contracting parties and considering the bigger picture overall economic scenarios.

M&A Scenario in India

The laws regulating Mergers and Acquisitions in India have been constantly redrawn for facilitating the growth of businesses in India and infusion of funds in the economy. Traditionally, the laws governing Mergers and Acquisitions have been dealt under the Companies Act, 2013 as well as the SEBI Act and regulations issued thereunder. At the same time, the Reserve Bank of India is involved in regulating the funding and other finance related aspects of such transactions.

Sections 230 to 234 of the Companies Act, 2013 deal with merger and acquisition agreements. These sections lay down the scheme of arrangements between the governments, shareholders and the creditors in India. While Section 233 of the Act covers fast track mergers, section 234 of the Act specifically deals with Cross-Border Mergers in India. The conditions for Cross-Border Mergers have been laid down and these can be carried out only with the prior approval of the Reserve Bank of India (RBI).

All the companies listed on the stock exchange are regulated by the SEBI Act, 1992. The SEBI Takeover Code, 2011 primarily focuses on the acquisition of shares, voting rights and control in listed companies. The new delisting threshold under these regulations has been set at 90 percent, thereby prioritizing the overall investor interest by doing away with the complexities and contradictions in the existing process. Further, the SEBI Listing Regulations, 2015 also complement the same by laying down the procedure for approval from the NCLT in cases of merger or acquisition.

The crux of all these statutes is to protect the investor’s interests and ensure a smooth procedure for inbound mergers. Additionally, the ecosystem for doing business in India has become really conducive. Over the years, Governments have taken a number of initiatives for inviting companies to establish their businesses in India namely:

a) Special Economic Zones (SEZs) have been established in various States wherein any company within the first five years of its establishment will be exempted from paying taxes and power will also be provided at subsidized rates. No import licenses are also required.

b) The Ministry of Corporate Affairs has come up with a single window scheme under which there is a single forum established under law for the purpose of approving the scheme of arrangement of the M&A. The concept of deemed approval has also been provided in case the regulators don’t intimate their decisions within a specific time period.

c) Cross-Border Mergers and Acquisitions have been focused upon through a co-ordinated approach and in lieu of the same, best International Practices laid down by UNCITRAL as well the WTO have been accommodated under the Indian Companies Act as well as the SEBI Act and Regulations.

Conclusion

India in the recent times has become a thriving centre for businesses and an attractive breeding ground for several startups and other entities. A significant rise in Cross-Border M&A transactions is a testament to the fact that the foreign companies have realized that economies of scale can be achieved effectively in India. Yet, there are certain issues that might arise in Cross-Border M&As addressing which is of paramount importance.

Considering the importance of addressing these challenges, several amendments have been made in the existing Company and Securities Laws by the Government. Now it remains to be seen how these changes pan out in terms of facilitating a much more streamlined and sophisticated process.