On November 15, 2018, Jerome Merchant + Partners (JMP), in association with the City of London Corporation (COLC), the Confederation of Indian Industry (CII) and PWC convened a roundtable event on “M&As in India”. The event was by invitation only to a select audience from corporates based in London.
The roundtable kicked off with JMP Partner Sameer Sibal, welcoming the audience to the iconic Guildhall and providing them with a background to the record level of investment activity in India. India has seen an increase of deals in 2018 – both in value as well as the number of deals – and these transactions have already surpassed the number for the entire year of 2017.
The theme of the session was to discuss the legal, policy, tax and regulatory amendments which have facilitated the increase in investment activity in India, including through the introduction of the Insolvency Code in India or by way liberalization of certain FDI sectors.
Manish Singh, the Minister (Economic Affairs) of the High Commission of India to the United Kingdom, spoke on the policy initiatives taken by the Government of India to facilitate and enhance trade and investment between the UK and India. Manish Singh referred to the push provided by the Indian government to digitalization and the impact it could have on the growth in the market in India. He highlighted the introduction of India’s new insolvency law and an integrated goods and services tax regime as game changers which will bear fruit in the mid to long term. Manish Singh also said that he would be open to taking back the outcomes of the roundtable to the appropriate policy makers.
The historic bilateral investment ties between the India and UK (popularly known as the India-UK corridor) formed the theme of the Head of the CII (London) Lakshmi Kaul’s address to the audience. Ms. Kaul informed the audience that the UK remains India’s largest G-20 FDI investor and trade ties between the two countries ensures employment for over a million people in India
and the UK. The CII’s London chapter has been instrumental in handholding Indian investors into the UK and promoting government and industry interactions across all regions of the United Kingdom.
The roundtable was structured to ensure maximum audience participation after each of the topics was introduced by a lead speaker. The other key outcomes or takeaways from the discussions are set out in this document.
Regulatory Changes and Challenges – Vishnu Jerome, Partner, JMP:
- Further liberalization in key growth sectors such as retail trading, financial services, defence and pharma have ensured reasonable amount of FDI in such sectors.
- Efforts to diversify the capital pool from, and instruments by which investment into India can be made were welcomed. However, challenges for Indian companies to access such capital pools and for investors to be reasonably certain of returns on such instruments remain on account of Indian exchange control regulations, which place restrictions on pricing, valuation and exit norms. Absent such regulatory changes, hybrid equity like instruments that are prevalent in the market do not provide absolute enforceability certainty to investors and hence is an obstacle to investments into India.
- A constraint faced by many strategic and financial investors into India is the regulatory bar on acquisition financing by Indian banks. Access to debt for funding M&A activity in India would again enhance the level of M&A in India.
The Insolvency Code; Judicial Reform –Murtaza Somjee, Partner, JMP:
- The Indian Insolvency and Bankruptcy Code, 2016 (“IBC”) has spurred M&A activity in the distress space over the last 12 – 15 months. The IBC process provides an opportunityfor Indian founders, with distress companies but remunerative assets, to undertake US Chapter XI type restructuring with strategic third parties, pre-packs and cross border re- structuring.
- Given that the IBC is still relatively nascent in India, further collaboration with experts on UK insolvency laws were mooted, given the depth of experience that such UK practitioners have had in this area.
- Increased effectiveness by courts in India in enforcing contracts and foreign arbitral awards, the introduction of the Commercial Courts Act, 2016, amendments to the Arbitration and Conciliation Act, 1996 along with the Government’s initiative to encourage institutional arbitration were welcomed as incremental first steps in judicial reforms.
- The institution of commercial courts in almost all states in India means that disputes of a commercial nature may be completed on an expedited basis and by judges who are more well versed in commercial matters. The amendments to the Arbitration Act in respect of timelines for completion of arbitrations will require to be tested to assess its practical effectiveness.
Taxation Regime – Harshal Kamdar, Partner, PWC:
- The taxation regime in India, remains opaque as regards interpretation and implementation of tax laws by officers at the department and is therefore still subject to signification litigation risk.
- The Government’s revised bilateral investment treaty (“BIT”) which seeks to remove taxation related disputes from being arbitrable under the BIT, unless all judicial remedies have been exhausted has caused a significant degree of concern amongst foreign investors.
- Sub-classification and multiple distinctions between financial investors as a class lead to further subjectivity in interpretation and hence litigation risk for foreign investors in the Indian M&A market.
Doing Business in India – Othman Shaukat, Managing Director, Salonica:
- Differing laws in various states, such as in matters related to property, stamp duties, entertainment and employment was highlighted as a key constraint for investors in evaluating the Indian market.
- The need to invest resources and time in undertaking all forms of diligence is essential for all investments into India.
- Liaising with government in certain sectors is important as it allows one to understand the perspective or view of the government and hence if possible modify aspects of the business accordingly.
City of London – Role and Initiatives on Insolvency – Amar Mistry, City of London Corporation
Amar Mistry highlighted the role of COLC, which represents the UK financial services sector and is active in the UK – India channel. One key piece of work that the COLC undertakes is showcasing UK legal expertise and supporting the Indian regulators with framework development. In this regard, as the new Insolvency and Bankruptcy Code is based on the English model, COLC has been actively engaging with the IBBI – the Indian insolvency regulator. The COLC has built a consortia of legal firms that are keen to share their expertise with the IBC and help the team shape the Indian Insolvency regime as it evolves, has been very valuable for them. COLC’s next step is to engage with firms that are willing to put together and present case studies directly to the IBBI, on the following topics:
• Enforcing the Law of Contract
• Resolution of cross border insolvencies especially in light of EC Insolvency Regulation. • Treatment of contingent proofs of claim in insolvency proceedings.
• Liability of group companies acting as guarantors in any restructuring of the insolvency entity.
• Treatment of ‘ipso facto’ clauses in insolvency proceedings.
• Resolving insolvency of a group simultaneously through one process rather than multiple parallel process/RPs/CoCs
• Restructuring a company which has many disparate verticals – by doing a piecemeal sale/ resolution rather than a composite sale to a single buyer; which is allowed under UKIA but not under IBC and leads to companies like Lanco, which had significant interest for discrete portions/verticals on a going concern basis but no interest for the composite company, and so will likely go into liquidation
• Resolving conflicts between RP’s and the Committee of Creditors (CoC) – as the CoC appoints the RP in current and future mandates, the RP can be under a lot of pressure from the CoC whereas he is required to act in the interests of all stakeholders