This article is written by Yash Mukadam, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from lawsikho.com.

Introduction

India Inc. has been a small but ever-growing force in the international market. Several Indian companies have looked beyond borders for accelerating their growth with outbound cross border mergers gaining popularity among them. In the UK, there are over more than 65,000 Indian diaspora-owned companies. Out of which the 654 companies have a combined turnover of more than £36.84 billion.^[i] 

One of the main motivations for companies to acquire foreign companies is access and entry into new markets such as the case of Bharti Airtel’s acquisition of Zain Africa to get access to its presence in the African telecom market. Secondly, companies are also attracted to the advancement in technology by foreign companies. Indian companies traditionally don’t spend as much on research and development, acquisition of foreign companies gives them access to the latest technologies. Other motivators for Indian companies to show interest in foreign companies are – conducive regulatory environment, access to natural resources, product and market diversification, realization of the importance of vertical integration, etc.

One of the most attractive markets for Indian companies looking for outbound acquisitions is the United Kingdom. The UK is ranked 8th in terms of ease of doing business by the World Bank^[ii].  Indian legal system is based on the UK’s system, making it an obvious attraction. India also shares strong linkages with the UK because of its colonial history. Some of the noteworthy acquisitions of UK based companies by Indian entities are – Tata group’s acquisition of Tetley, Corus, Jaguar and Land Rover; HCL Technology’s acquisition of Axon and ONGC’s acquisition of Imperial Energy Corp.

• Takeover code

While taking over companies listed on stock exchanges, one needs to take into consideration the law prevailing such takeovers. Under the takeover code (Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011) applicable in India, an acquisition that entitles the acquirer to exercise 25% or more of the voting rights in the company that is being acquired triggers a requirement for the acquirer to make an open offer of at least 26% of the total shares allowing public shareholders to exit the company.  The threshold prescribed in the take over code applicable in the UK (The City Code on Takeovers and Mergers)^[iii] is set higher at 30%. Thus, when an acquirer acquires an interest in shares which carry 30% or more of the voting rights of a company, the acquirer is required to make a cash offer to all other shareholders at the highest price paid in the 12 months before the offer was announced. 

The Indian take over code also provides for a provision wherein an acquirer while already being entitled to exercise 25% or more voting rights, acquirers additional 5% or more such rights, in a financial year, is also required to make an open offer. This essentially means that acquirers can acquire up to 5% of the total voting rights/shares in a financial year without having to undertake an open offer process. On the other hand, in the UK, an acquirer who already holds an interest in the company of 30% to 50%, any additional acquisition will trigger a requirement for an open offer. An acquirer can also choose to voluntarily undertake an open offer in both jurisdictions.

• Competition law

The provisions of competition law also need to be taken care of, when acquiring based companies. In the UK, the Enterprise Act, 2002 is the legislation that governs anti-trust issues in merger situations and is enforced by the Office of Fair Trading (“OFT”). If OFT is of the opinion that an arrangement would result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services, then it makes a reference to the Competition Commission. The threshold for this provision coming into force is when turnover in the United Kingdom of the enterprise being taken over exceeds £70 million i.e. around INR 6882192244 while in relation to the supply of goods and services, at least one-quarter of all the goods/services of that description which are supplied in the United Kingdom are supply by one and the same person, or supply for one and the same person. The Competition Commission conducts an investigation after a transaction has been referred to it by the OFT. Acquirers hence need to ensure that their acquisition does not violate any of the provisions of Enterprise Act, 2002 as once a case is referred to the commission, the parties to a transaction will have to adhere to its recommendations. The parties may even be required to unwind their transaction. It is also worth noting that since UK is still subject to EU law^[iv], the European Union Merger Regulations may also apply in certain cases. For example, Tata Motors’ takeover of Jaguar and Land Rover from US carmaker Ford required antitrust approval from the European Commission. The Competition Act 2002, as applicable in India, will also come into play so the acquirer needs to be mindful of that as well.

• Tax implications

Tax implications are also extremely important considerations. It is therefore important to structure the resulting entity in a way that has the least tax burden. Taxation will depend on the type of entity remaining after the takeover. If the acquired company retains its existence as an independent UK based company, then it will be taxed at the rate of 19%^[v]  which is presently applicable to companies with profits over £300,000. Under the UK group and consortium relief rules, it is possible to transfer losses and specific expenses and allowances between companies qualifying as a group or consortium. Ordinarily, dividends received from UK sources are not subject to any withholding tax. The legislation governing taxation for UK based companies is known as Corporation Tax Act 2010. As per the DTAA^[vi] signed between UK and India, dividends receivable by the Indian entity that has acquired the UK based company will be taxed in India.

• Labour laws

They are often very contentious and hence it is important to take into consideration how an acquisition will impact the employees of the acquiree. The Transfer of Undertakings (Protection of Employment) Regulations 2006^[vii] is the most important piece of legislation in this regard. Even though most of its obligations fall on the acquirer company, the acquirer must ensure that those obligations are fulfilled to avoid any litigation in the future. Another peculiar piece of legislation that cannot be taken lightly is the Bribery Act 2010 which prohibits the corrupt practice of bribery. This legislation is important because it has a very wide scope of application and can even have an extra-territorial reach and may not be limited to acts conducted in the UK. There is a provision which may result in an organization being held liable for their failure to prevent bribery. Thus, Indian companies might need to check their businesses at home as well.

• Laws applicable to Overseas Direct Investment 

Indian companies wishing to acquire companies abroad need to take into account the law applicable to Overseas Direct Investment. Some of the legislations that become effective in these cases are – Section 6(3)(a) of FEMA, 1999 read with FEM(Permissible Capital Account Transactions), Regulations, 2000; FEM (Transfer or Issue of any Foreign Security) Regulations, 2000 popularly referred as (FEMA 120); AP(DIR Series) Circulars issued by RBI from time to time; FAQ on Overseas Direct Investment released by RBI (as updated from time to time); Liberalized Remittance Scheme of February 4, 2004, amended from time to time and FAQ on Liberalized Remittance Scheme – Applicable for resident Individuals. Generally speaking, eligible Indian parties are free to acquire either a partial stake (JV) or the entire stake (WOS) in an already existing entity overseas, provided that where the investment is more than $5 million, share valuation of the company has to be done by a Category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the UK and in all other cases by a Chartered Accountant/ Certified Public Accountant. In case of investment by way of the share swap, regardless of the amount involved, the valuation will have to be done by a Category I Merchant Banker registered with SEBI or an Investment Banker/ Merchant Banker outside India registered with the appropriate regulatory authority in the host country. However, Indian parties require without the prior approval of the Reserve Bank from investing in companies engaged in real estate (buying and selling) and banking services.

Conclusion

Indian Companies are increasingly becoming more open to outbound acquisitions. While this provides them with limitless growth opportunities, the acquisition itself can be very tricky after all it would be exploring uncharted territories for the companies. Doing extensive due diligence and making sure that the acquisition makes commercial sense can certainly help. The UK as a destination is now more desirable than ever. The UK‘s relationship with India is stable and the similarity in legal systems makes things easier. Once Brexit comes through, the UK will be outside the purview of the convoluted EU laws. It’ll also go out of its way to establish mutually beneficial relationships with other countries. This can turn out to be a huge opportunity and Indian companies are surely going to be big-time beneficiaries of it.

References

• “The Takeover Code” The Panel on Takeovers and Mergers, www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf?v=7Nov2019.
• Customs, HM Revenue “Rates and Allowances for Corporation Tax.” GOV.UK, GOV.UK, 19 Mar. 2020, www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax.
• The Transfer of Undertakings (Protection of Employment) Regulations 2006, UK Statutory Instruments 2006 No. 246.

^[i] http://ficci.in/spdocument/23175/uk-Diaspora-report.pdf

^[ii] https://data.worldbank.org/indicator/IC.BUS.EASE.XQ

^[iii] “The Takeover Code .” The Panel on Takeovers and Mergers, www.thetakeoverpanel.org.uk/wp-content/uploads/2008/11/code.pdf?v=7Nov2019.

^[iv] As on the date of writing this article

^[v]Customs, HM Revenue “Rates and Allowances for Corporation Tax.” GOV.UK, GOV.UK, 19 Mar. 2020, www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax.

^[vi] Agreement for avoidance of double taxation and prevention of fiscal evasion with United Kingdom of Great Britain and northern Ireland

^[vii] The Transfer of Undertakings (Protection of Employment) Regulations 2006, UK Statutory Instruments 2006 No. 246.

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