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Overseas Acquisitions/Investments By Indian Companies

Written by: Adv. Bhuvana Veeraragavan - Lawyer, Mumbai
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Sterlite’s $2.6 billion buy”[1]
“TOI acquires Virgin Radio in UK for Rs.445 crores”[2]
“India's Reliance eyes world-scale buys”.[3]
“Mahindra & Mahindra takes over 90% stake in Schonewiss”.

Headlines such as these are a reflection of the emerging trend of overseas acquisitions by Indian companies. With the growth of the Indian economy at an average rate of 8.8 per cent every year, it may just prove to be an additional reason which triggers the growth in overseas investments. The data provided by the Reserve Bank of India for the year 2006 for the total value of Indian direct investments abroad was USD 9.7 billion. The latest World Bank report pegs India as the tenth largest economy in the world and the Goldman Sachs reports that India’s GDP will top $ 1 trillion by 2011, treble by 2025 and be $ 27 trillion by 2025, taking its economy to third place after the US and China.

The trend began haltingly a few years ago. In 2000, Tata Tea took over a global company twice its size, Tetley Tea, the second biggest tea company in the world. This was followed by Essel Packaging, owned by Subhash Chandra, took over Propack of Switzerland to form Essel Propack. The merger created the biggest producer in the world of laminated tubes, and an Indian MNC became global number one. But these takeovers remained exceptional events till 2003. Only in that year did the pace of Indian takeovers accelerate so much as to constitute a new trend. More than 40 foreign companies were taken over by Indians in 2003. Among the Indian companies on a takeover spree were Tata Motors, Ranbaxy, Wockhardt, Hindalco, etc. The trend of acquiring foreign companies was not limited to large size companies.

Many middle-sized companies have also become a part of this new trend. Sundaram Fasteners has acquired Dana Spicer Europe, the British arm of a global multinational. Amtek Auto, another auto ancillary has acquired the GWK group in the UK, which is twice its size are some of the few middle sized companies which have joined the bandwagon. The trend continued with Indian companies shelling out $1.7 billion in the first eight months of 2005 for acquiring overseas companies. The biggest of the takeovers till date being the Tata Steel's $12.1 billion deal for Corus, the British steel company.

The increased number in overseas acquisitions by Indian companies is attributable to the growing realization that the future growth of Indian companies will be influenced by the share that they can garner in the world market. This is not only by producing in the country and exporting, but also by acquiring overseas assets, including intangibles like brands and goodwill, to establish overseas presence and to upgrade their competitive strength in the overseas markets, which has resulted in cross-border acquisitions.

The policy regime in respect of outward capital flows has also evolved in spirit with the above trend. In line with the calibrated approach to capital account, greater freedom is now available to companies to make remittances overseas for their overseas expansion. This is reflected in the increasing global operations of Indian companies in search of global synergies and domain knowledge. Phased liberalization in the policy of overseas investments has enabled Indian firms to establish presence in overseas markets on an unprecedented scale redefining the global outreach of Indian entities.

An acquisition, also known as a takeover, is the buying of one company (the ‘target’) by another. An acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target's board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover.[4]

Section 395 of the Companies Act, 1956 provides the basic guidelines for acquiring an Indian company by another Indian company. While overseas acquisitions would be governed by the Takeover regulations applicable in the country where the target company is situate.

Emerging Trend And Its Effect
The overseas acquisitions, which started of on a small scale, have reached to globally visible levels with big ticket acquisitions being announced by large corporates regularly. Tata group, Bharat Forge, Infosys, Wipro, ONGC, Ranbaxy and such Indian companies are venturing overseas and expanding at breakneck speed. The effect of this trend on the Indian economy has been rightly summarised by the Financial Minister Mr.P.Chidambaram - "Indian industry today has the confidence to bid for business abroad, raise resources, purchase and manage enterprises."

Liberalization of Overseas Investment Policy

The liberalisation of investment policies has made large outward remittances for overseas acquisitions possible. Such policies have in particular expanded after the introduction of the Foreign Exchange Management Act, in June 2000. In March 2003, the Automatic Route was significantly liberalised to enable Indian parties to fund to the extent of 100% of their net worth, which limit was later enhanced to 200%. As per a recent Federation if Indian Chambers of Commerce and Industry (FICCI) study, while India Inc's international acquisitions were rising gradually till 2004, the liberalization in the policy regime for outward investment in 2005, which allowed Indian firms to invest in entities abroad up to 200% of their net worth in a year, triggered a sharp rise in cross-border acquisitions with the number of acquisitions rising from 46 in 2004 to a whopping 130 in 2005.[5]

During 2007-08 (April-December), 1,595 proposals were approved for investments abroad in JVs and WOSs by the Reserve Bank of India, which were higher by 25.8 per cent than approval during the corresponding period of the previous year. All these factors have provided the necessary thrust for the increase in the overseas investments and acquisitions.

Legal Framework
Indian companies wanting to acquire companies abroad have to comply with various aspects of The Companies Act of 1956, the Foreign Exchange Management Act of 1999, The Securities Exchange Board of India Act of 1992, and the various regulations imposed by the Reserve Bank of India. Also, the Take Over regulations applicable to the target company would need to be adhered to.

The Indian companies may invest overseas either through the automatic route or with the approval of the RBI. The present legal framework provides for investment overseas by Indian companies up to 200 per cent of their net worth as per the last audited balance sheet, in any bonafide business activity are permitted by Authorised Dealers (AD). Also no prior approval of RBI is required for opening offices abroad. For initial expenses, AD banks have been permitted to allow remittance up to 15 per cent of the average annual sales/income or turnover during last two financial years or up to 25 per cent of the net worth, whichever is higher.

For recurring expenses, remittance up to 10 per cent of the average annual sales/income or turnover during last two financial years is allowed. Within these limits, ADs can allow remittance by a company even to acquire immovable property outside India for its business and for residential purpose of its staff. The Indian investors would also have to file forms ODG/ODI depending on their method of investment in an overseas firm. The detailed guidelines have been provided under Notification FEMA 120/RB-2004 dated July 7, 2004, which is amended time to time.

Overseas acquisitions are being funded through a variety of sources such as drawal foreign exchange in India, capitalization of exports, balances held in Exchange Earner’s Foreign Currency accounts (EEFC), share swaps through ADR/GDR, External Commercial Borrowings/Foreign Currency Convertible Bonds, ADRs/GDRs, etc.

A substantial portion of investments takes place through special purpose vehicles (SPVs) set up for the purpose abroad. Existing Wholly Owned Subsidiaries (WOS) / Joint Venture (JV) or the SPVs are being used to fund acquisitions through Leveraged buy-out (LBO) route. In fact the Tata – Corus deal was made possible by the scheme of leveraged buy-out.

The major investment destinations appear to be the US and European markets. Tax havens like Mauritius and Cayman Islands also feature significantly in the Indian acquisitions or setting up of new WOS/JVs. In recent times, sustained growth in corporate earnings has boosted the profitability and strengthened the balance sheets of Indian companies. This has, in turn, strengthened their credit ratings and ability to raise funds overseas.

Unlike most international M&A transactions that typically feature stock swaps in the financing arithmetic, Indian acquirers have for the most part paid cash for their targets, helped by a combination of internal resources and borrowings. Share swaps have not yet emerged as a favoured payment option in India, except in a couple of large transactions in the software industry.

Finance By Indian Banks

In view of the expertise in certain areas developed by Indian corporates over the years and the importance attached to leveraging of such expertise for enhancing the international presence of Indian corporate, with effect from June 7, 2005, banks have been allowed to extend financial assistance to Indian companies for acquisition of equity in overseas joint ventures/wholly owned subsidiaries or in other overseas companies, new or existing, as strategic investment, in terms of a Board approved policy, duly incorporated in the loan policy of the bank. Such policy should include overall limit on such financing, terms and conditions of eligibility of borrowers, security, margin, etc. While the Board may frame its own guidelines and safeguards for such lending, such acquisition(s) should be beneficial to the company and the country. The finance would be subject to compliance with the statutory requirements under Section 19(2) of the Banking Regulation Act, 1949.

In April 2003 banks were permitted to extend credit/non-credit facilities to Indian Joint Ventures (JVs) (where the holding by the Indian company is more than 51%) / Wholly Owned Subsidiaries (WOS) abroad up to the extent of 10 per cent of their unimpaired capital funds subject to certain terms and conditions. On November 6, 2006, in order to facilitate the expansion of Indian corporate’s business abroad, it was decided to enhance the prudential limit on credit and non-credit facilities extended by banks to Indian Joint Ventures (where the holding by the Indian company is more than 51%) /Wholly Owned Subsidiaries abroad from the existing limit of 10 per cent to 20 per cent of their unimpaired capital funds.[6]

[1] Times of India, June 1, 2008, Pg 8
[2] Times of India, June 1, 2008, Pg1
[3] Thu Dec 06 07:58:39 UTC 2007, Google news
[5] Key note address by Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India, Overseas Investments by Indian companies - Evolution of Policy and Trends, on the Internet and World Wide Web
[6] Key note address by Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India, Overseas Investments by Indian companies - Evolution of Policy and Trends, on the Internet and World Wide Web

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