This article has been written by Anuska Mahapatra, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) and edited by Shashwat Kaushik. This article explores the crucial role of finance law in facilitating successful M&A transactions in India and highlights key factors that contribute to their success.
It has been published by Rachit Garg.
Table of Contents
Mergers and acquisitions (M&A) have become increasingly prevalent in the Indian business landscape, driven by the need for growth, market consolidation, and increased competitiveness. However, M&A transactions are complex undertakings that require careful consideration of legal and regulatory frameworks, particularly finance law. In India, M&A transactions are governed by a comprehensive legal and regulatory framework, including the Companies Act, 2013, the Competition Act, 2002, and various guidelines issued by regulatory authorities such as the Securities and Exchange Board of India (SEBI). Finance law plays a pivotal role in ensuring compliance with these regulations and providing a structured framework for conducting M&A transactions. One key factor for successful M&A transactions in India is compliance with regulatory requirements. Finance law mandates adherence to various regulations, including those related to competition, securities, taxation, and foreign investment. Companies engaging in M&A activities must navigate through these complex laws to ensure compliance and avoid legal repercussions. This necessitates thorough due diligence to identify potential legal risks and liabilities associated with the target company.
Definition and scope of finance law in M&A
Finance law in the context of mergers and acquisitions (M&A) refers to the legal framework that governs the financial aspects of such transactions. The scope of finance law in M&A transactions in India is extensive and crucial to ensure compliance, protect stakeholders’ interests, and facilitate smooth and transparent transactions. It encompasses various key areas, including:
The Companies Act, 2013, is the primary legislation that governs the formation, management, and regulation of companies in India. In the context of M&A transactions, the Act sets out legal requirements and procedures that companies must adhere to. These include obtaining shareholder approvals for significant decisions, such as mergers, acquisitions, or amalgamations. The Act also outlines the necessary filing of documents with regulatory authorities and ensures compliance with corporate governance norms.
The Securities and Exchange Board of India (SEBI) regulates the securities market in India. It plays a vital role in M&A transactions by overseeing disclosure requirements, insider trading regulations, and takeover codes to ensure transparency and fairness for investors. One important aspect of securities regulations in M&A transactions is the requirement for adequate disclosure. SEBI mandates that companies involved in M&A activities disclose all material information to the public in a timely manner. This includes information related to the transaction, such as the rationale, financial details, risks, and impact on shareholders’ interests. The objective is to ensure that investors have access to accurate and comprehensive information to make informed investment decisions. SEBI also regulates insider trading in M&A transactions. It imposes restrictions on individuals with access to non-public information about the transaction from trading in securities. Additionally, SEBI has formulated takeover regulations, commonly known as the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, to govern the acquisition of shares and change of control in listed companies. These regulations provide guidelines for the acquisition process, pricing, mandatory open offers, and disclosure requirements, aiming to ensure fairness and the protection of minority shareholders during M&A transactions.
The Competition Act, 2002, aims to prevent anti-competitive practises and regulate combinations that may have an adverse impact on competition. The Competition Commission of India (CCI) reviews and approves M&A transactions to ensure they do not result in unfair market dominance or restrict competition. The CCI examines M&A transactions to assess their potential impact on competition in the relevant market. The primary concern is to prevent the creation of market structures that could lead to a significant reduction in competition or abuse of a dominant position. To comply with the Competition Act, parties to an M&A transaction meeting certain thresholds are required to notify the CCI and obtain its approval before proceeding with the deal. The CCI conducts a comprehensive assessment to determine whether the transaction could have an appreciable adverse effect on competition in the market. If concerns are identified, the CCI may impose conditions or even prohibit the transaction to safeguard competition and protect the interests of consumers.
Tax considerations are integral to M&A transactions. Finance law encompasses various tax provisions, including those related to capital gains, transfer pricing, and stamp duty, which impact the structuring, valuation, and financial aspects of M&A deals. Recently, the budget aimed at boosting economic growth through increased healthcare and infrastructure spending in response to the Covid-19 pandemic. Proposed reforms in the Finance Bill, 2021, including changes to the Income-Tax Act, 1961, could have a substantial impact on M&A transactions in India, potentially altering the conventional approach and necessitating careful evaluation by stakeholders before entering into such deals.
Due diligence and risk assessment
By conducting comprehensive due diligence, parties can uncover potential legal, financial, and regulatory stumbling blocks that may impact the viability or value of the transaction. The process typically includes the following steps:
The acquiring company, with the assistance of legal and financial advisors, collects relevant information about the target company. This may include financial statements, contracts, legal documents, intellectual property rights, employee information, and regulatory filings.
Financial, legal and operational
Financial experts assess the company’s financial health, profitability, debt obligations, and potential risks. This analysis helps identify any financial red flags or potential liabilities that could impact the transaction. Legal experts review the target company’s legal documents, contracts, licences, permits, litigation history, and compliance with applicable laws and regulations. Operations specialists evaluate the target company’s operational capabilities, assess the efficiency and scalability of the company’s operations and identify any operational risks or bottlenecks.
Based on the findings from the due diligence process, the acquiring company and its advisors conducted a comprehensive risk assessment. They identify and evaluate potential risks, including financial, legal, operational, market, and regulatory risks. This assessment helps quantify and prioritise risks, enabling the parties to develop strategies to mitigate or manage them.
Reporting and decision-making
The findings from due diligence and risk assessment are documented in a report, which summarises the identified risks, their potential impact, and possible mitigation measures. The report serves as a basis for informed decision-making by the acquiring company’s management and stakeholders.
Post-merger integration and legal compliance
Post-merger integration and legal compliance are crucial aspects of M&A transactions in India. Once a merger or acquisition is completed, the merging entities must navigate the process of integrating their operations while ensuring compliance with legal and regulatory requirements. The following points elaborate on post-merger integration and legal compliance in M&A in India:
Harmonisation of financial statements
Post-merger, the merging entities need to align their financial reporting systems and practises. They must consolidate their financial statements in accordance with accounting standards and regulatory guidelines. This harmonisation ensures accurate financial reporting and transparency in the merged entity’s operations.
Tax planning and compliance
Tax considerations play a significant role in post-merger integration. The merged entity must evaluate its tax obligations and undertake tax planning strategies to optimise its tax position. This involves compliance with tax laws, claiming tax benefits, and ensuring appropriate tax filings in accordance with applicable regulations.
The merged entity must comply with various regulatory requirements specific to its industry. This may include obtaining necessary licences and permits, complying with sector-specific regulations, and adhering to reporting obligations to regulatory authorities such as the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), or other sector-specific regulators.
Employee integration and labour law compliance
Post-merger, integrating the workforce of the merged entities is critical. This includes managing employee contracts, benefits, and policies to ensure compliance with labour laws. Employers must consider employee rights, obligations, and any required notifications to employee representative bodies or labour authorities.
Contractual obligations and legal agreements
The merged entity must review and assess the contractual obligations of both merging entities. This includes reviewing existing agreements, contracts, leases, and licences to ensure compliance with legal requirements and a smooth transition. Any necessary amendments or renegotiations should be undertaken to align with the post-merger strategy.
Corporate governance and compliance
The merged entity must establish effective corporate governance practises, including board structures, decision-making processes, and compliance mechanisms. This ensures adherence to corporate governance regulations, ethical standards, and accountability to stakeholders.
Intellectual property rights
Post-merger, the merged entity must evaluate and consolidate its intellectual property (IP) portfolio. This includes identifying, protecting, and managing the IP assets of both entities to ensure compliance with IP laws and safeguard the merged entity’s IP rights.
Ongoing compliance monitoring
The merged entity must implement a robust compliance monitoring system to ensure ongoing adherence to legal and regulatory requirements. This includes periodic audits, internal controls, and compliance reporting to regulatory authorities as necessary.
Understanding the role of finance law in M&A transactions is imperative for successful deals. It enables stakeholders to navigate the complex legal and financial landscape, ensuring compliance with pertinent regulations throughout the process. From compliance and regulatory frameworks to post-merger integration, finance law provides the framework for achieving favourable outcomes.
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