August 19, 2013

Passage of Companies Bill Should Accelerate the Pace of M&A

Early last week India’s Parliament passed the much anticipated Companies Bill. This legislation replaces the 50 year old Companies Act which had provided the regulatory framework for much of India’s corporate & securities laws. This new modern bill is much better suited to bring India’s corporate sector into the 21st Century.

The new legislation addresses a wide array of topics. Most often cited are the “small investor” protections which enable more transparency in terms of independent board requirements and express rules allowing for Class Action suits which had previously not been available. In addition to these provisions, the new Bill also requires firms with a market cap in excess of 5 Billion Rupees ($80 million USD) to spend 2% of their profits on Corporate Social Responsibility (CSR). CSR expenditures include charity and social work among other types of benefits to help the 300 million people that live below the poverty line in India. We are unaware of any other requirements of this type around the world and thus, this provision has received a lot of attention.

The most interesting piece of the legislation from our vantage point is those provisions which we believe will have a direct impact on M&A volumes. The new law enables various shareholder contract provisions, which had previously been unenforceable, contractually enforceable. Such items as drag along rights and tag along rights under the new law will now be enforceable enabling some PE investors who had struggled in the past to exercise their rights to now legally pursue those courses of action. In addition, historically, a publicly listed Indian company could not merge with a foreign business. Under the new Bill this is now permissible which should make cross border M&A much easier to effect. Many of the Indian public companies were somewhat insulated from potential foreign acquirors. Thus, they may have been less active in enhancing shareholder value or using their once highly valued equity to effect their own M&A to strengthen their competitive position. Now that the global marketplace is a more realistic peer group, we expect to see markedly higher levels of M&A activity with Indian firms acting as both the acquirer as well as the acquiree.

We believe the passage of the new Companies Bill will be a positive force in not only building companies and creating a more level global playing field, but in adding to India’s overall economic growth and strength as CSR requirements, greater transparency and small investor protections will expand the market.