Public M&A

The webinar “Investing in India – Public M&A” hosted by Khaitan & Co, has been designed to enhance the understanding of key issues relevant to existing and prospective foreign investors doing business in India. The session focuses on public mergers and acquisitions (M&A), specifically the processes involved in acquiring, merging with, or taking a controlling stake in an Indian listed company.

The session served as a comprehensive guide to the procedures, regulatory nuances, and practical realities of executing public M&A transactions in India, including key points for the attention of foreign investors and their advisors.

The session was moderated by Arindam Ghosh, Partner, Corporate and Commercial practice group and led by Abhishek Dadoo, Partner, Public M&A.

Please see below a summary of the key points discussed during the webinar. The views expressed in the webinar are those of the individual panel members and not those of Khaitan & Co, and are subject to the disclaimer set out in the webinar recording.

The recording can be viewed here: (36) Public M&A | Investing in India - YouTube

Unlike private transactions negotiated behind closed doors, primarily among founders, public M&A in India occurs in full view of the market, public shareholders, multiple regulators, and other relevant stakeholders. The Indian public M&A landscape presents a distinct set of rules and practical considerations driven by a multi-layered regulatory architecture, a unique market structure dominated by promoter (family)-led companies, and a strong policy focus on protecting retail investors (as evidenced by the mandatory 25% minimum public float requirement). Due to the interplay of these factors, timelines in public M&A transactions differ significantly from those in other jurisdictions - transactions that might take three to four months elsewhere routinely take six to nine months in India, requiring approvals from regulators including the Securities and Exchange Board of India (SEBI), the Competition Commission of India (CCI), the Reserve Bank of India (RBI), the National Company Law Tribunal (NCLT), and sector-specific regulators, as may be required.

Key Points Discussed

Stakeholder Engagement and Due Diligence

Public M&A is fundamentally about managing and engaging with key stakeholders, including regulators, stock exchanges, the target company’s management, proxy advisors, and public shareholders. The success of a public M&A transaction is often dictated by how efficiently advisors are able to navigate these stakeholder relationships. SEBI, as the primary regulator, rigorously scrutinises deal structures to ensure compliance with applicable regulations and to protect public interest. Advisors have experienced extensive questioning from SEBI, with certain cases involving upwards of 100-pointed questions.

Due diligence for a listed company requires more extensive preparation compared to a private company. It mandates specific board resolutions to enable the sharing of information, confidentiality agreements between the target company and the acquirer/investor, and the maintenance of a structured digital database containing the names and identifiers of all individuals receiving sensitive data. Every entry in such database must be strictly dated and time-stamped before diligence can commence. These requirements must be in place prior to the commencement of due diligence.

Definitive Documentation and Confidentiality

One of the fundamental tenets of public M&A is confidentiality. To prevent market leaks that could artificially inflate the target’s share price, parties typically rely on non-binding term sheets during the negotiation phase. The execution of any binding term sheet (not being a definitive document such as a share acquisition agreement) regarding a substantial stake triggers public disclosure obligations and a mandatory tender offer (MTO). Under Indian regulations, an MTO for at least an additional 26% of the company’s share capital is triggered under three primary scenarios:

• Initial Acquisition:Acquiring 25% or more of the shares or voting rights of the target company.
• Creeping Acquisition:An acquirer already holding over 25% acquiring more than 5% in a single Indian financial year (April to March).
• Acquisition of Control:Acquiring control over the operation and management of the company (e.g., the right to appoint a majority of directors, or the ability to direct decisions on management and operations), irrespective of the actual shareholding percentage acquired.
• Indirect Acquisition: Acquiring control of an Indian listed entity indirectly by way of an offshore M&A transaction i.e., change of control in an offshore entity that controls an Indian listed entity.

Once an MTO is triggered, withdrawal is permitted only under highly restricted circumstances, such as the rejection of a mandatory statutory approval.

Dynamic Pricing and Market Sensitivity

In listed company transactions, unlike private deals where prices can be negotiated and fixed between the parties, the market heavily influences the final transaction price. Regulations mandate a floor price based on the historical volume-weighted average price (VWAP). The speakers highlighted a recent transaction where the target’s share price increased from INR 47 to INR 93 within just 10 days during negotiations, at the time of signing the definitive documents. This movement pushed the regulatory floor price up to INR 70, overriding the parties' commercially agreed price of INR 50. This example underscores the critical need for speed and absolute confidentiality in public M&A transactions.

Deal Timelines and Acquisition of Control

Acquirers in listed transactions typically fall into two categories: (a) those who wish to assume control of the target as soon as definitive documents are executed; and (b) those who opt to acquire control only once all regulatory compliances are completed. While acquirers generally prefer the former approach, where regulatory approvals are required, the law mandates that control cannot be assumed until those approvals are secured. If no regulatory approvals are pending, an acquirer may take control during the ongoing open offer process, provided that 100% of the open offer consideration is deposited into an Indian escrow account to safeguard the interests of public shareholders.

Innovative Structuring: Proportionate Reduction

Historically, acquiring a large stake (e.g., 70%) and completing an MTO (for a minimum of 26%) would breach the mandatory 25% minimum public float (MPS) requirement, forcing the acquirer to sell down shares, often at a loss and resulting in substantial fun leakage. To address this, Indian regulators have recently amended the Indian takeover regulations to enable contracting parties to proportionately reduce both the underlying transaction stake and the open offer size, ensuring that total post-transaction shareholding remains compliant with the MPS requirement. This innovation significantly reduces the acquirer's cash outlay and eliminates sell-down risks.

Regulatory Nuances and Offer Types

• Persons Acting in Concert (PAC):Indian regulations on listed transactions extend not only to the primary acquirer but to any other individual or entity involved in the transaction in various capacities, including by way of funding the transaction or holding inter se rights. Such persons are classified as PAC and share joint and several liability and identical disclosure obligations with the acquirer. Accordingly, one of the key exercises in a public M&A transaction is to analyse and identify any individual or entity that may be treated as a PAC.
• Voluntary vs. Conditional Offers:A voluntary offer is a mechanism for shareholders holding over 25% to consolidate their stake. The offer size in such cases is not subject to thresholds similar to those applicable to an MTO and can be as low as an acquisition of 10% from public shareholders. A conditional offer, on the other hand, allows an acquirer to set a minimum acceptance threshold; if the public does not tender sufficient shares to meet the acquirer's target (e.g., 51%), the acquirer can walk away from the entire transaction. While conditional offers remain under-utilised in India, they can be an effective tool for acquirers to structure their transactions and control the extent of acquisition of Indian listed entities.
• Blackout Periods:Listed entities enter blackout periods (i.e., the trading window is closed) from the end of every quarter until 48 hours after financial results are declared. During this period, designated persons, including promoters and controlling shareholders, are prohibited from selling shares. When consolidated, these blackout periods may span approximately half the year. Accordingly, deal closures must be meticulously timed to avoid share transfers during trading window closures.
• Timelines for Indirect Offers: When an indirect offer is triggered, the initial public announcement is made upon signing the global transaction, but the Indian open offer process is paused until the global transaction is consummated. The key distinction is that if the global transaction fails, the Indian open offer can be automatically withdrawn. This dispensation is not available in cases of a direct MTO, and therefore, an indirect open offer provides a structuring advantage in India.
• Maintaining Minimum Public Shareholding (MPS): MPS maintenance can be structured in two ways: (a) at the time of negotiation of definitive documents, where the obligation to maintain the MPS is shifted from the acquirer to the counter-party by requiring the counter-party to sell down in the event of an MPS breach; or (b) by way of a proportionate reduction, as discussed above. The regulations provide a period of 12 months to achieve compliance with the MPS requirement.

Key Takeaways

• Treat the regulatory framework as a blueprint, not a checklist:Parties should not agree on a commercial deal first and then attempt to force it into the regulatory The Indian regulatory landscape should guide strategy and structuring from the outset.
• Plan for a marathon, not a sprint:Longer timelines should be factored in from the start. Approvals are spread across multiple regulatory bodies, making early preparation essential.
• Trust the predictability of the framework:While the multi-layered regulatory system may appear daunting, it is highly sophisticated and structured. Once the rules regarding triggers, pricing, and offers are understood, the process offers a high degree of predictability with very few regulatory surprises.

Conclusion

Public M&A in India requires careful navigation of stringent regulatory frameworks, proactive stakeholder management, and strategic foresight. By understanding the nuances of MTO triggers, dynamic pricing mechanisms, and innovative structuring tools such as proportionate reduction, foreign investors can successfully execute transactions in this fast-growing market.

The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up, please contact Khaitan & Co at editors@khaitanco.com.