Blockbuster 2018: US$129bn M&As
Merger and Acquisition (M&A) activity levels have been steady with domestic consolidations and continued activity in distressed M&A leading the way.
2018 was a blockbuster year for Indian M&A, with the value of announced M&A involving Indian companies exceeding US$129 billion.
However, 2019 has started on a more cautious note, with investors during the first quarter being mindful of the Indian general elections in May 2019, according to a quarterly report by London-based Freshfields Bruckhaus Deringer, one of the leading international law firms with strong Asian foothold.
(This is the first edition of India in the Spotlight report by Freshfields Bruckhaus Deringeer. The objective is to give international companies a quarterly update on the latest developments and upcoming opportunities in India. For further information, please speak to your usual relationship contacts.)
What are the new developments in the Indian market?
Distressed M&A – What is it?
There is an increased focus on distressed M&A as a result of the new Insolvency and Bankruptcy Code (IBC) which came into force in 2016. The main objectives of the IBC were to create a single insolvency and bankruptcy framework and reduce overall timelines.
Several significant Indian businesses have been brought under the regime, including Reliance Communications, Bhushan Steel, Amtek Auto and Essar Steel and the market continues to watch whether the troubled airline, Jet Airways, will join this club.
What are the challenges?
Extended delays in the process along with protracted litigation, objections from controlling shareholders and frequent changes in the rules have been key challenges. There is a lack of clarity and precedent around the interpretation of the IBC although the Indian Courts have on various occasions clarified certain aspects.
We expect this process of judicial interpretation to continue as the IBC continues to evolve. In April 2019, the Indian Supreme Court struck down a circular issued by the Indian central bank last year which, amongst other things, imposed stringent timelines on banks to initiate bankruptcy proceedings within 180 days if payment defaults were not resolved. It remains to be seen whether, as a result of this decision, the IBC process timelines are likely to be extended even further or whether the additional time might allow for more flexibility in resolving stressed assets.
Are any changes expected?
The Indian Government is considering introducing the possibility of pre-packaged resolutions between creditors and debtors in the event of an impending bankruptcy. Already available in the UK and the US, this would allow the relevant stakeholders to arrive at a pre-arranged agreement before filing for bankruptcy in a bid to reduce time and cost spent on litigation.
Is it working?
Creditors are getting record recoveries as compared to prior years. For example, in 2017-18 creditors recovered on average approximately 41% of the amounts claimed under the framework of the IBC, as compared to approximately 12% in 2017-18 and 14% in 2016-17 under the earlier framework. Due in part to the new insolvency regime, India has moved up 23 spots on the World Bank’s ‘Ease of Doing Business’ index for 2019 and was among the top 10 most improved economies in its 2019 report.
However, these recovery figures are not yet comparable to global levels and the key question is whether these recoveries can be improved upon. The success of the IBC will depend, to a large extent, on how the teething problems are addressed.
What are the opportunities for international companies?
There are a number of assets that could potentially come under the IBC process soon, which could be an ideal opportunity for international companies looking to increase their global footprint. International companies ought to monitor developments in this space and their sectors of interest and consider whether teaming up with a local strategic partner might be helpful in certain circumstances.
New anti-corruption laws – What is it?
India’s anti-corruption regime was significantly changed in 2018 through amendments to the Indian Prevention of Corruption Act, 1988. These amendments are aimed at conforming the Indian regime to current international practices.
What are the changes? The key changes made include:
criminalisation of bribe-giving (which, unusually, was not a direct offence earlier) in addition to bribe- receiving;
introduction of corporate liability for corruption, including in respect of companies or partnerships incorporated or formed outside India but carrying on business in India;
introduction of the ‘adequate procedures’ defence which – similar to the regime under the UK Bribery Act – allows companies to assert a legal defence where ‘adequate procedures’ are in place; and
personal liability for corporate officers, including directors, managers and secretaries, for offences found to have been committed with their consent or connivance.
What does this mean?
While the majority of the changes are long overdue and bring the anti-corruption regime in line with international standards, there are areas of concern, more so because non-compliance in several cases attracts criminal penalties.
The legislation only captures bribery of public servants. However, the term ‘public servant’ continues to be defined broadly and Indian Courts have interpreted it widely in the past to include, for instance, employees of government-owned companies and banks (including private banks), which is a broader reading than typically seen in similar legislation internationally.
Key aspects of certain sections describing the offences have not been defined or are ambiguously worded. For example, whether foreign companies could be held liable for offences by their Indian subsidiaries is not clear.
Consequently, clarifications from the Indian Government would be welcome to minimise the risk of these amendments being potentially misused. While these amendments are a welcome development, their success and impact on global businesses will depend on how they are enforced and interpreted.
What do international companies need to do?
Global compliance teams should familiarise themselves with the changes to minimise the risk of inadvertent violations or non-compliances.
Support for arbitration from the Courts – What is it?
Earlier this year, the Delhi High Court refused an application to restrain a foreign seated arbitration brought under the India-Mauritius bilateral investment treaty by a Mauritius-based entity.
The Indian Government sought an injunction from the Delhi High Court to prevent the arbitration from continuing on the basis that the bilateral investment treaty is meant for adjudication of disputes between a Mauritius investor and India and contended that the beneficiary of the Mauritius entity bringing the arbitration in this case was an Indian citizen (i.e. not a ‘genuine’ Mauritius investor).
The Delhi High Court ultimately refused to interfere, stating that the question as to whether the shareholder is a genuine ‘investor’ based out of Mauritius is a question to be determined by the arbitral tribunal. The Delhi High Court recognised that bilateral investment treaties are intended to promote investor protection and interference with the treaty dispute resolution mechanism in the case of a genuine investor dispute could lead to erosion of investor confidence.
What does this mean?
This is the second time in less than a year that the Delhi High Court has refused such an injunction application – it had also refused to restrain an investment treaty arbitration in March 2018. Over the past few years Indian Courts have become more swift in enforcing foreign awards.
This trend is good news for foreign investors since it lends certainty to the sanctity of the arbitration process and underscores the importance of agreeing to seats of arbitration outside India so as to minimise the risk of Indian Court intervention. It is also good news for those with bilateral investment treaty claims involving India since it indicates that the Indian Courts are prepared to support the functioning of investment treaty arbitration.
What do international companies need to do?
It is a good reminder for international companies to check whether their investments have been structured in India so as to benefit from a robust bilateral investment treaty. Even after an investment is made, it is possible, before a dispute has occurred, to restructure the investment to take advantage of an appropriate bilateral investment treaty. We have a leading global bilateral investment treaty practice. fiinews.com
