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

Introduction

Narendra Modi took oath as Prime Minister of India in 2014. The election of Modi at Center level had pleased the investor community at large due to its transformation he brought in Gujarat while being the Chief Minister. The investors now hoped to see the same energy, industrial developments, reformative policies, support to the startup ecosystem, etc at a national level. The economic framework during the Modi regime has been more focused on privatization and liberalization of the Indian economy. His government has carried out certain major amendments in the laws, enacted new ones such as IBC, implementation of GST, demonetization, introduction of GAAR etc.

The Modi government has been known for taking quick and bold decisions during its tenure. A lot of it is credited to its unwavering majority in both the legislative houses of the parliament. The earlier governments were formed by alliance as a result it had to please all the parties in order to save their seat in the parliament. However, with a staunch majority, the Modi Government can focus on reformative activities without any threat to the government from the alliance parties. No other single party since the last 2-3 decades has been able to enjoy the same. 

Major decisions in M&A sector

• Banking Sector

The Indian banking sector has been in turmoil since 2010-11 mainly due to large debts given to corporate in between 2000-10. Due to the global recession in 2008 coupled with corporate governance factors at these corporate ends, corporations started defaulting on the large exposure. This resulted in high NPA and write off by the banks, thus eroding its wealth. This also exposed various corruptive practices and collusion between the banks officials and the corporate to facilitate the illegal transfers and money laundering activities to siphon off funds to foreign jurisdictions. To add to this menace, the economic offenders such as Vijay Mallaya, Mehul Choksi flee the country and also brought disgrace and reputational loss to the PSU in specific. The government had to jump in and announce bailout packages for the financial institutions to save them for falling. 

The mounting bad loans paved the way for the mega bank merger scheme by the government to consolidate the banking systems. It was proposed to bring the number of PSU banks down to 6-7 to currently 21 PSU. In Aug 2019, the Finance Minister announced the mega merger of the 10 PSU in 4. As a result of the above, Indian Bank was merged with Allahabad Bank, Oriental Bank of Commerce and United Bank were merged with PNB bank, Andhra Bank and Corporation Bank were merged with Union Bank of India, Syndicate Bank was merged with Canara Bank and lastly Dena Bank and Vijaya Bank were merged into Bank of Baroda. 

The banks were expected to benefit from the above mergers. Some of the benefits of mergers are as follows:

• • The consolidation of banks will result in bringing more synergies among the bank and thus would be able to service them effectively and offer competitive rates to the customers. 
  • In the present scenarios also, the PSU banks hold the majority share in the Indian banking market. This would help them to PSU banks compete with the private sector banks and be recognized on the global scale.
  • The load of inter banking transaction would reduce which would in turn clear the bandwidth of clearing houses to handle further larger transactions.
  • The merger would result in organizational restructuring of the banks. The high paying post at senior level would reduce considerably saving the funds for the banks. There will be optimum utilization of resources and cost efficiency.

However, there are certain downsides of the mergers too. The merger would create a lot of litigation for recovery proceedings for the NPA. There are a number of cases wherein the PSU have funded the same borrowers and have taken opposing stands in the court. This could linger on the litigation process post merger. 

The merger will also lead to closure of many branches due to overconcentration. Since, being PSU banks, the employees cannot be simply laid off, therefore, there are high chances that employees may turn non-productive and leading to financial loss to the company. 

• Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code (IBC) was enacted in 2016 with an aim to consolidate then current bankruptcy law into a single law. Prior to the IBC, winding up route was followed under the Companies Act, wherein there was no effort to revive the company. The previous bankruptcy law aimed at liquidation of the company by selling its assets and paying the creditors. Further, such matters moved at a snail pace due to extensive involvement of courts at each stage.

Contrary to the previous bankruptcy law, the IBC followed a different approach right since its inception and further evolved in the last 4-5 years. Various amendments were introduced keeping in mind various judicial pronouncements and new developments. The main attributes of the IBC are:

• Time bound resolution– The IBC provides strict timelines for completion of various stages of process. The maximum time period for resolution is 9 months (including the grace period of 90 days). Although, the process sometimes exceeds the above timelines but it’s still more effective than the court driven process.
• COC driven process: Under the IBC, a committee of creditors are appointed which have wide powers to approve resolutions and the proceedings are run/managed by the Resolution Professionals. The role of the adjudicating authority is only limited to monitoring the process with the assistance of RP as and when required. 
• Efforts for resolution: In the earlier bankruptcy process, it was not focused on saving the company from going down the path of winding up. As a consequence of the same, the creditor had to take larger hits on their and unsecured creditors were at greater loss. However, in IBC, there is an attempt to revive the company by inviting resolution proposals from industry. These resolution proposals offer a better recovery package to creditors and also save the entity from going into the liquidation process.

The strong and time bound recovery mechanism introduced during the Modi regime helped banks recover/clear certain large default cases such as Bhushan Steel & Binani Cement and also increased the M&A in the sector. 

• FDI Relaxation

The Modi government has been credited for taking behemoth steps to relax the FDI norms and increase the foreign funding in India. It relaxed FDI norm in all the sectors permitting greater participation from foreign investors. This coupled with various start up specific relaxations transformed the entire startup ecosystem. Billions of dollars were invested by the foreign investors in Indian companies and some of them have even obtained unicorn status in a short span of time. All the big names in the start-up such as Paytm, Zomato, Ola, Flipkart, Byju etc. dearly benefited from the relaxed FDI norms during the Modi regime. The FDI inflow has seen a steady increase since Modi took over in 2014. The FDI figures stood at USD 45 billion in 2014 and in 2019-20, it was at USD 65 billion. The massive inflow in the last 6 years has created a stir in M&A activity in the country. 

• General Anti Avoidance Rules (GAAR)

The Modi government has taken an important step by implementation of GAAR to protect the government revenue. GAAR was mainly aimed to prevent BEPS (Base Erosion and Profit Shifting) activities undertaken by various multinationals as a part of their corporate tax planning strategy. Through BEPS they structurally planned transactions in a fashion to shift their profits to lower taxation jurisdiction. Thus, the agenda of the government was clear to prevent tax leakages. The GAAR provisions are having an immense effect on the mergers and acquisitions and how the transactions are structured. The corporate and law firms advising them lay a great emphasis on GAAR provisions and structure transactions to not attract GAAR provision or if attracted sufficient reasons are presented to fall outside “impermissible avoidance agreements”. The Income Tax departments have also proactively acted on whiff of certain corporate transactions and analyzed them from the purview of GAAR. In 2018, NCLT rejected a scheme of amalgamation between company and its shareholders Gab Investment Private Limited on ground of GAAR. The transaction was considered to lack commercial substance as being a deliberate attempt to avoid tax burden. 

Conclusion 

The above were the few major measures by the Modi government to promote M&A activities. The net effect of the changes brought by the Modi government has been positive and the world outlook towards India has changed in the last 6 years of the government. India’s rank has consistently risen from 142 in 2014 to 63 in 2019 in the World Bank’s Ease of Doing Business. One of the factors for upward rise in India’s ranking is due to the implementation of the IBC as per the World Bank report. 

With the current Covid-19 crisis, the economy has slowed down but additional measures announced by the government to get business on track may fuel more investment in the coming months. Reliance has been able to secure such large funding in the current crisis and going debt free is surely going to make way for other business activity and development. The Modi government has been active in dealing with threats posed by Chinese firms during the current crisis and accordingly FDI regulations were modified. Thus, the Modi government is bound to play an active role in M&A activity in the near future (or at least till next elections).

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