Mergers & Acquisitions in India: Legal and Regulatory Challenges

Introduction

Law, a symbol of equality and stability. A law student who is new about the fields and scopes often feel stuck or confused, there comes the platforms like LawBhoomi, Lawctopus and the legal School conduct bootcamps, webinars and courses with different fields law professionals explaining about the field, perks of the field, average salary and the work itself. This gives the student an idea about field itself. Mergers and Acquisitions (M&A) has been one of the law fields that are catching the attention of the young law students, recent graduates even the other professionals. It has become one of the most important tools for corporate growth and restructuring in India. Mergers is the union of two or more than companies into becoming one as a whole. While Acquisition is the purchase of control over an existing company by another. With India’s growing economy, population and resources. M&A activity has become significantly necessary.  

With such a growing economy, India has seen several significant deals including the deal of Housing Development Finance Corporation (HDFC) with HDFC Bank in 2023 which is known to be one of the biggest transitions in India.  Likewise, the international Acquisitions deals are becoming more significant and regular for example, the Walmart purchase of the Flipkart stake in 2018 shows the Indian market is slowly but surely becoming the attraction of the international giants. These deals shows that M&A is not just a business strategy but also an important factor for foreign direct investment (FDI).

However, India’s Regulatory framework for M&A is Complex with Multiple Regulations such as the Competition Commission of India (CCI), the Securities and Exchange Board of India (SEBI), and the National Company Law Tribunal (NCLT). With the various regulations, it ensures transparency and protect public interest but these regulations often lead to delays and overlapping of the jurisdiction.

Legal & Regulatory Framework for M&A in India

The Law and regulation for the M&A in India is complicated compared to the other countries.  It is filled with regulatory bodies and statutes. Each plays their own role in M&A from protection to national interest.

Companies Act, 2013
This is the backbone. Sections 230 to 240 concern mergers, settlements, and consolidations. Any merger proposal is to be submitted to the National Company Law Tribunal (NCLT) for your proposal to be ascertained in relation to credit providers, employees, and minority shareholders.

The Act also facilitated cross-border mergers (with the 2016 amendments) albeit with limited geographies and with prior permission from the RBI. This indicates that India is wishing for international integration but still with controlled entry points.

SEBI Takeover Code, 2011

Whenever a company that is listed is involved, SEBI takes a dose of the company. Takeover code 2011 states that if an acquirer purchases more than 25% of shares, they must extend an open offer to the remaining shareholders.

The principle is straightforward: no major stakeholder is allowed to assume control of a company without the approval of minor shareholders. A good example is the Mindtree company’s acquisition by L&T in 2019, where SEBI reviewed the open offer to ensure the offer was not treated as a commercial secret.

Competition Act, 2002
The Competition Commission of India CCI assesses whether a deal might result in the termination of competition, for instance, if two big players merge and form a monopoly, consumers might be in trouble. Combinations beyond a particular asset and turnover size need CCI approval, for this reason.

The CCI, in the case of the Holcim-Lafarge merger in 2016, was willing to approve the deal only if the companies sold some of their cement plants for the sake of maintaining competition in the market. This illustrates how law and order has to align corporate desire to public concern.

FEMA and RBI
You are right on target with your analysis foreign direct investment as prescribed over FEMA will always accompany the takeover on ac guisition besides the stake sell within the FEMA policy for instance Walmart acquisition of Flipkart she in 2018 was a vanishing line for FEMA regulations as the acquisition was sanctioned with FEMA permission rules for the brand over cross border immogation gemeente.

Tax and Stamp Duty Issues

All these concerns, even when resolved, will still result in taxation being a hurdle. The Income Tax Act, 1961 exempts certain bona fide amalgamations, but not all genuine ones. Most states differ in their stamp duty, thus increasing the cost of the M&A.

Key Regulatory Challenges

Procedural Complexity
The incorporation of NCLT approvals under the Companies Act formalizes the process, but also, makes it lengthier. In delays of hearing and approvals demotivate especially, small businesses from chasing after mergers.

Competition Issues

The CCI is responsible for ensuring that no mergers and acquisitions are made that would have an anti-competitive outcome. These thresholds are often the subject of much controversy. For example, the CCI halted the discussions of the PVR-Cinepolis merger (2022) on the grounds of the possible acquisition of substantial market power in the cinema exhibition market. These defenders of the CCI argue that in some cases, the CCI is not efficient with the efficiencies that come in mergers.

Protection of Minority Shareholders

Other regulations set aside for minority shareholders exist, but in practice these often suffer. Like in the case of the Vedanta-Cairn India merger (2016), the minority shareholders’ situation raised some questions. Thematic questions of the promoters and small investors balance is still the case.

Issues of Tax and Valuation

The Income Tax Act, for a small number of mergers, will not impose tax on them. Clarifying the methods of estimation however and whether a merger is tax exempt is a frequent source of disputes. Valuation controversies also arise in the event of hostile takeover bids where the firm being acquired contests the bids being made.

Problems of Cross Border M&A

Any merger that is cross border and vertical requires an assessment from FEMA, and is subject to automatic approval from the Reserve Bank of India. This tends to make the timeframes uncertain. Further, the matters of sociocultural disparity, and matters of bilateral treaties and exchange control uniformly add to the certainty.

Case Studies: Learning from Experience

• Hindustan Unilever and GlaxoSmithKline Consumer Healthcare Merger (2020);

Though this ₹31,700 crore merger was stalled initially due to competition, tax implications, and clearance, it still showed how primal level consolidations can change industries.

• Vodafone and Idea Merger (2018):

This merger intended to become the largest telecom operator in India, but was burdened by the lack of regulatory approvals along with other debts. This reflects how M&A activity works in the absence of proper organizational strategy.

• Walmart-Flipkart Acquisition (2018):

Though still a significant acquisition, it was cross-border and received a great deal of attention from the CCI as well as the foreign investment regulators. Concerns regarding the dominance of e-commerce, along with FDI policy and e-commerce policy in India, underscored the unpredictable nature of the regulatory environment in the country.

Comparative Perspectives

Unlike India, jurisdictions such as the US and EU have more developed and efficient procedures for competition analysis. The US, for instance, has the Hart-Scott-Rodino Act, which delineates mandatory filing thresholds and procedures, as opposed to India which has more nebulous criteria.

Making regulatory procedures time bound, simplifying the filing process, clarifying the exemptions, and more aggressive due-date regulatory decisions reform would move India closer to these models.

• Restoring NCLT Process Efficiency – NCLT uncertainty can be minimized with the imposition of more aggressive time limits on approval of filings.
• Revision of Competition Law – There can be deeper competition, and therefore increased growth, if certain CCI thresholds are relaxed, and the CCI adopts a more pro-economic growth stance.
• Forthcoming Cross Border Investment – The incorporation of more international standards on the draft FEMA to remove complex cross-border investment, and foreign exchange transactions, would welcome deeper foreign capital participation.
• Tax Predictability – The absence of public controversy and reduced litigation on tax aversion practice by mergers can be achieved through a more accessible tax valuation process.
• Decreased Paperwork – Faster coordination between agencies and lateral filing systems can lessen the time spent on bureaucracy.

Conclusion

Mergers and Acquisitions are more than merely business tactics. They are a reflection of global economy progress and struggle. The scope of M&A in India is profoundly promising but it is accompanied by heavy barriers in the form of regulations.

Regulations are more a matter of control than frame works and in addition usually lack ease and precision. The challenge India faces is a balancing act of two competing demands. Don’t hamper business but provide a tight protection for investors and competition.

The process of global M&A can be streamlined and maximized to provide true value to the shareholders, employees, and the economy of India.

References

1. Companies Act 2013, ss 230–240. 
2. Competition Act 2002, ss 5–6. 
3. Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011. 
4. Foreign Exchange Management Act 1999. 
5. Income Tax Act 1961. 
6. Insolvency and Bankruptcy Code 2016. 
7. Competition Commission of India, Case No C-2022/09/971 (PVR Ltd and Cinepolis India Pvt Ltd). 
8. Vedanta Ltd v SEBI [2016] NCLT Mumbai. 
9. Tata Steel Ltd v Bhushan Steel Ltd [2018] NCLT Delhi. 
10. Hart-Scott-Rodino Antitrust Improvements Act 1976 (US).