What Is Driving Investor Interest In Mergers And Acquisitions Deals In India

The last financial year saw tremendous growth (both in number and in size) of mergers and acquisitions deals in India, both inbound and domestic, with few marquee transactions.

This included examples like:

• The inbound acquisition of the Indian forerunner Flipkart by the global retail giant Walmart
• The outbound acquisition by UPL Limited (through its international subsidiary UPL Corp) of Arysta LifeScience Inc. making UPL Limited a global leader in agricultural solutions
• The domestic National Company Law Tribunal (‘NCLT‘) approved the merger of Vodafone Indian subsidiary and Idea Cellular and becoming the biggest combined telecom entity known as Vodafone Idea Limited
• Oil and Natural Gas Corporation Ltd. acquiring a 51% stake in Hindustan Petroleum Corporation Limited with a view to implementing the disinvestment policy of the Government of India,
• The acquisition of Bhushan Steel by Tata Steel through submission of the resolution plan and getting the same approved by the committee of creditors and the NCLT under the Insolvency and Bankruptcy Code, 2016 (‘IBC, 2016‘)
• The consolidation of Dena Bank, Bank of Baroda and Vijaya Bank in a prompt corrective action plan initiated by the Government of India

Factors Driving Mergers And Acquisitions Deals In India

The reasons for the same can be attributed to a number of factors, including,

• inter-alia, the simplified tax structure by amendments to the Goods and Service Tax Act 2017,
• implementation of the various effective development schemes like disinvestment scheme,
• affordable housing schemes of the Government of India,
• the relaxation of Foreign Direct Investment policy for ease of doing business in India,
• the effective reforms in the IBC, 2016 enabling the Reserve Bank of India to clear its bad debts by the declaration of various non-performing account of big corporates
• Providing the corporates (both in India and globally) to get access to stressed assets and acquire the same through court-approved resolution plans

India’s GDP rate has been steadily growing for the past five years. According to the World Bank’s overview on India’s economic growth study, the country’s GDP is expected to grow about 7% in this financial year of 2019-2020.

The sectors that have seen the most activities in the first quarter of 2019 in relation to mergers and acquisitions are mid-cap IT sectors, FMCG, telecom industry, housing finance corporations, home-grown startups, digital payment services, healthcare and biotech, and the automobile industry.

The much talked about and the ongoing hostile takeover of Mindtree, a mid-cap corporate IT services and technology consulting company, by L&T, and the acquisition of 30% shareholding of NIIT Technologies by Baring Private Equity Asia and other entities, has really shifted the focus of both Indian and foreign investors in mid-cap IT companies and 2019 shall definitely see more of such deals coming through.

Even among the startups, the IT sector has lead the way and big players such as Reliance Industries, in the vision of the young Akash Ambani, are focussing on startups like the artificial intelligence platform Haptik to offer “…greater connectivity and rich communication experiences to over billion Indian consumers“.

Deals In The Pipeline

The pipeline deals, which have been agreed upon but shall become final only in the course of 2019, include

• The scheme of amalgamation of Lakshmi Vilas Bank (LVB) and Indiabulls Housing Finance (IHFL),
• Tech Mahindra’s IT branch intending to acquire the famous K-Vision, a Japan-based mobile network solution firm,
• The French multinational Groupe Lactalis eager to acquire the Indian Prabhat Diary,
• Local organisations like online tutoring startup BYJU’S intending to acquire Osmo (a maker of educational games),
• Paytm’s announcement to acquire the Delhi based hotel-booking platform NightStay
• Payments startup Pine Labs to acquire Amazon-backed Qwikcilver (a gift card technology startup).

General Elections 2019 Impacting M&A Activities

The aforesaid pipeline deals as also the investors both in India and abroad, await the fate of the general elections in India to be announced in May 2019 before infusing fresh/additional amounts into Indian entities.

There is apprehension on whether there be a change in the government or will Bhartiya Janata Party (BJP) be re-elected, especially in view of the fact that early this year the results of the state elections of Rajasthan, Madhya Pradesh and Chhattisgarh were not in favour of BJP.

Also, in case the 2019 general elections in India will not have any majority winner and alliances will have to be formed, then the current manifesto of BJP shall be revised and we may see new changes effecting the investment environment of India.

In fact the current government has been constantly evolving the playing field and is coming out with notifications and circulars (including, inter-alia, the amendments in IBC, 2016, the master direction on ecommerce, the affordable housing scheme, the amendments in GST and the Supreme Court’s order holding RBI circular dated February 12, 2018 on Resolution of Stressed Assets as ultra vires).

We shall have to wait and see what will be the effect of such changes in the regulatory framework on mergers and acquisitions deals in India.

Geopolitical Developments Impacting M&A In 2019

Even as the country’s political situation is unpredictable, the global geopolitical developments, especially the ongoing US-China trade war may benefit India to potentially become a favourable market for inbound investments.

Though the other geopolitical pressures around the world, including the Iran crisis and the ever-increasing oil prices which results in the unstable exchange-rate, the weakening fiscal conditions globally, and the uncertainty over Brexit and its delays till late October this year may pose a threat to the M&A activities in 2019 globally.

Going Forward

Nevertheless, we hope to see an influx of investment opportunities in 2019 in India since the factors leading to the increased investment in the last quarter of 2018 shall continue to play a major impact on the future investments in the country.

Also, the investors are keen to dip their hands in the abundance of stressed assets available in the market ensuing the restructuring of IL&FS, the insolvency of Essar Steel (though it is fairly certain that ArcelorMittal has its eyes on this prize) and the NCLT approving major resolution plans.

Also, the trend of the Indian Judiciary giving foreign investor favourable judgements (notable cases include favourable judgments for Daiichi and Ericson) has eased foreign investors in entering into commercial transactions with Indian entities.

The trend of investment in 2019 will be towards investors aiming to expand their existing horizons and diversify their business opportunities by investing in small enterprises and startups in niche sectors. Also, the shift of investments of the U.S.A from China to India will be lucrative for Indian entities engaged in the manufacturing sector.

The trend will also be different in 2019 in terms of the role of investors in their investment, i.e. investors will now progress from their financial investor status and we will see many strategic investments happening in 2019 and the investors, either through themselves or by outsourcing management professionals, operate the day to day business in their investment entity.

The article has been co-authored by Ashish Parwani, Partner; Gargi Panwar, Senior Associate; and Gitika Makhija, Associate, at Rajani Associates.