Acquisition finance in India: overview

A Q&A guide to acquisition finance in India.

This Q&A is part of the global guide to acquisition finance. Areas covered include market overview and methods of acquisition, structure and procedure, acquisition vehicles, equity finance, debt finance, restrictions, lender liability, debt buy-backs, post-acquisition restructurings and proposals for reform.

To compare answers across multiple jurisdictions, visit the acquisition finance Country Q&A tool. For a full list of jurisdictional Q&As visit

Cyril Shroff, Dhananjay Kumar and Ramgovind Kuruppath, Cyril Amarchand Mangaldas

Market overview and methods of acquisition

Acquisition finance market

1. What parties are involved in acquisition finance?

Over the past two decades, liberalisation has transformed India from an inward looking state-based economy to a globalised market-based economy which is now considered to be one of the most attractive destinations for investment. While restrictions on debt financing of acquisitions still exist, India has seen an increase in the use of innovative financial instruments to fund such acquisitions, some of which are attributable to exposure to private equity players.

2015 saw Indian private equity and venture capital activity at an all-time peak, contributing more than 60% (across around 1,000 investments) of overall deal volume and 35% (US$16 billion) of overall deal values (source: Grant Thornton's 11th Annual Dealtracker).

The technology sector continued to dominate the deal volume with 33 deals (with a total disclosed value of US$557 million) during the first quarter of 2016. The infrastructure sector followed with 32 deals valued at US$746 million. Real estate companies, telecom companies, pharmaceutical companies, e-commerce companies and large scale manufacturing companies are other typical targets in India.

Acquisitions are typically classified into two categories:

  • Investments into India, which includes domestic investments as well as foreign direct investments.

  • Investments from India abroad, which includes overseas direct investment.

In addition to private equity players, other significant players in the acquisition finance market include:

  • Foreign venture capital investors.

  • Foreign portfolio investors (formally foreign institutional investors).

  • Non-bank financial companies (NBFCs) (which are funded by Indian entities and private equity investors).

  • Entities such as debt funds and mutual funds who subscribe to non-convertible debentures issued by an acquiring company incorporated in India.

While debt remains a large source of funding acquisition transactions, owing to various restrictions imposed by the Reserve Bank of India (RBI) (that is, the central bank of India) on banks, purchasers prefer equity or mezzanine debt financing. However, in the recent years the foreign portfolio investment route for subscribing to corporate bonds has been a large source of acquisition financing.

Methods of acquisition

2. What are the main methods used for acquiring business entities in your jurisdiction?

The purchase and sale of a business including the purchase of a division or a subsidiary can be structured as a share purchase, merger or as asset purchase.

Asset acquisition

The decision to structure a transaction as an asset purchase primarily revolves around commercial and tax considerations. One of the most important advantages of an asset purchase is that the buyer can select (cherry pick) the assets and not assume the liabilities associated with the business that is being acquired. However, the issues that should be borne in mind in an asset purchase are:

  • The necessity for multiple ancillary documents.

  • Stamp duty implications (which are higher in case of asset transfers that would be construed as a conveyance).

  • Direct and indirect tax implications.

  • Whether the asset being acquired include immovable property.

  • Whether the purchaser is resident/non-resident.

In addition to the above, individual approvals from creditors, regulatory authorities and third parties are also required for the transfer of the undertaking, licences and other business-related agreements, which can be a time consuming process.

A company can also "hive-off" its assets to a separate new company under its control, which allows the buyer to acquire the new company (minus the aspects that are not for sale or are not wanted) by means of a share sale.

Share acquisition

Shares (or instruments convertible into shares) of an existing company can be acquired by way of a:

  • Preferential allotment of newly issued shares made by the company.

  • Secondary sale of existing shares from a shareholder of the company.

In both cases above, the acquisition must comply with the provisions of the Companies Act 2013 (Companies Act).

If a company is listed on a stock exchange, the existing (listed) shares can also be acquired through an open market purchase on the stock exchange in certain cases.

Further, the allotment of shares to a non-resident entity will be subject to the pricing guidelines as required by the Reserve Bank of India (RBI) (among other things). The RBI has also allowed optionality clauses in equity instruments being issued to non-residents under the foreign direct investment scheme, subject to certain conditions (such as minimum lock-in period and so on).


Mergers and other forms of restructuring in India are court-driven, and must be carried out in accordance with the Companies Act 1956 (Old Companies Act). The motive behind a merger can be (among other things):

  • Better economies of scale.

  • Corporate synergy.

  • Consolidation of business.

The circumstances and reasons for every merger are different and these circumstances affect the way the deal is dealt, approached, managed and executed.

Acquisition financing is typically not used in cases of mergers, as mergers usually occur on an all-shares basis.


Structure and procedure


3. What procedures are typically used for gaining acquisition finance in your jurisdiction?

Applicable laws

The governing law of acquisition financing documents depend on the location of parties involved in the transaction. If both the purchaser and the seller are located in India, the documents will be governed by Indian law. However, if one party is located offshore, the parties can mutually agree to a jurisdiction offshore or can resort to arbitration in London, Singapore or The Hague. Typically, non-convertible debenture documentation is governed by Indian law.

For an acquisition finance transaction involving a non-resident party, the most important legal rules are the:

  • Foreign Exchange Management Act 1999 and its related rules and regulations.

  • Foreign investment policy of the Government of India, notified through various press notes.

For listed companies, the applicable laws are the:

  • Securities and Exchange Board of India Act 1992 (SEBI Act) and its related rules, regulations and guidelines.

  • SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code).

  • SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Regulations).

  • SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations).

  • Indian Contract Act 1872.

For acquisitions financed through debt, the applicable laws include the:

  • Transfer of Property Act 1882.

  • Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act 2002 (SARFAESI Act).

  • Recovery of Debts due to Banks and Financial Institutions Act 1993.

  • Old Companies Act.

  • Income Tax Act 1961.


The nature of documentation varies with every transaction. Typically, the transaction documents comprise the following:

  • Loan agreement.

  • Inter-creditor agreement.

  • Security agreement.

  • Non-disposal undertaking and power of attorney (in case of "lock box" arrangements).

  • Subscription agreement (in case of equity-linked transactions).

The transaction documents are usually drafted and executed in English.

There are no standard forms of acquisition financing documents. The documents for an acquisition financing usually include the debenture trust deeds and facility agreements in case of debt financing and other subscription and purchase agreements for equity financing. Some banks may have their own format of facility agreement. Further, the Companies Act and its related rules prescribe the format of the debenture trust deed and are governed by regulations from the Securities and Exchange Board of India (SEBI) if listed on a stock exchange.

In addition, the information memorandum or the offering memorandum for the non-convertible debentures must be in a format as prescribed by Companies Act and the various regulations issued by the SEBI.

Seller financing is not common in India and acquisition financings are typically arranged by the purchaser. It is usual to see a funding commitment from the acquirer (which can take the form of a support or commitment letter).

Prior to making the public announcement of an open offer for acquiring shares, the acquirer must ensure that firm financial arrangements have been made to fulfil the payment obligations and that the acquirer is able to implement the open offer (SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011).


4. What vehicles are typically used in acquisition finance?

Many purchasers set up a special purpose vehicle (SPV) or acquisition company in India, which is used to raise money (by debt or equity) for the purposes of financing the acquisition. The financing is raised both by way or debt as well as equity. However, many Indian acquirers choose to not set up SPVs and may consolidate the acquisition through their company group holding structures. Having said that, investments by foreign owned and controlled SPVs is treated in the same way as with direct investment from a foreign investor.


Equity finance

5. What equity financing structures are typically used in acquisition finance?

Typically, straight equity is used for equity financing.

Equity financing is common in India and involves the offer and sale of the purchaser's securities for the purpose of raising the capital to pay the seller. Typically, the purchaser seeks equity from sources such as private equity firms and venture capitalists.

Equity can be brought by purchasing entity or may also include mezzanine debt. In terms of equity, the issuance of compulsorily convertible debentures and compulsorily convertible preference shares is common. However, equity or convertible instruments from private equity players and capital-raising from domestic capital markets are also popular.

Mezzanine financing is a hybrid of debt and equity financing. A mezzanine deal involves a number of structures which incorporates senior and subordinated debt, private-placement transactions and equity investment.


Debt finance

Structures and documentation

6. What debt financing structures are typically used in acquisition finance?

Debt financing structures

Indian foreign exchange management laws do not permit external commercial borrowings (ECBs) or the issuance of pure debt instruments by Indian entities for the purpose of acquiring a company (or part of a company) in India, unless the proceeds of the ECB are to be used for either:

  • Overseas direct investment in joint ventures/wholly owned subsidiaries established by the Indian company abroad, subject to the guidelines on Indian direct investment abroad.

  • The acquisition of shares of public sector undertakings at any stage of disinvestment, under the disinvestment programme of the Government of India.

In relation to acquisition financing by banks in India, the Reserve Bank of India (RBI) guidelines restrict an Indian bank's ability to finance the acquisition of equity shares: a promoter's contribution towards equity cannot be funded by a bank, and banks cannot finance the acquisition of equity shares save for very exceptional cases (as set out below).

Banks can extend loans up to specified limits to corporate against the security of shares held by them to meet the promoter's contribution to the equity of new companies. However, the extension of credit is subject to certain restrictions set out in the Banking Regulation Act 1949 (BR Act) (for example, the bank must ensure that no advances made by a bank are to be used by a borrower to acquire or retain a controlling interest in the company or to facilitate or retain inter-corporate investments). Further, in case any lending is secured through pledge of shares (either of the borrower or its parent entity), banks must conform to BR Act in the event of enforcement of such pledge.

Banks can also finance the acquisition of companies that are engaged in implementing or operating an infrastructure project in India. However, the financing is subject to the following conditions:

  • The financing can only be used for the acquisition of shares of existing companies providing infrastructure facilities. Further, the acquisition of the shares should be in respect of companies where the existing foreign promoters (and/or domestic joint promoters) voluntarily propose to disinvest their majority shares in compliance with the guidelines issued by Securities and Exchange Board of India (SEBI) (where applicable).

  • The companies to which the loans are being extended must have a satisfactory net worth.

  • The company financed and the promoters/directors of such companies must not be a defaulter to the banks/financial institutions.

  • To ensure the borrower has a substantial stake in the infrastructure company, the bank finance must be restricted to 50% of the finance required for acquiring the promoter's stake in the company being acquired.

  • The finance being extended can only be used against the security of the borrower's assets or the assets of the company being acquired and must not be against the borrower's shares or the shares of the company being acquired. The shares of the borrower or company being acquired can be accepted as additional security but not as primary security. The security charged to the banks should be marketable.

  • The duration of the bank loans must not be for longer than seven years. However, the bank's boards of directors can make a specific exemption if necessary for the financial viability of the project.

  • The financing must comply with section 19(2) of the BR Act, according to which banks cannot hold more than 30% equity in any company.

  • The bank's financing acquisition of equity shares by promoters should be within the regulatory ceiling of 40% of their net worth as at March 31 of the previous year for the aggregate exposure of the banks to the capital markets in all forms (both fund based and non-fund based).

  • The proposal for bank finance should have the approval of the bank's board of directors.

Aside from promoter financing (see above), debt financing for equity investment or acquisition is also permitted under the following routes:

  • Foreign portfolio investment. A new class of investors called foreign portfolio investors (previously known as foreign institutional investors) have been permitted by the SEBI under the SEBI (Foreign Portfolio Investors) Regulations 2014. Offshore entities registered as foreign portfolio investors can subscribe to:

    • rupee denominated non-convertible debentures and various other instruments;

    • listed (or due to be listed) shares;

    • mutual funds units; and

    • government securities.

    The power to register foreign portfolio investors has now been delegated to specific depository participants (many international banks have been registered). The regulations do not restrict acquisition finance/ Therefore, foreign portfolio investors can finance companies in India for the purposes of acquisition.

  • Financing by eligible entities. Various domestic entities (such as mutual funds and private equity players) can provide financing by subscribing to non-convertible debentures (NCDs) that are issued by Indian acquiring companies. Since there is no restriction on the end use, the proceeds of NCDs can be used for the purposes of acquisition in India.

  • Financing by non-bank financial companies (NBFCs). An NBFC is a company registered under the Old Companies Act that is engaged in the business of loans and advances or the acquisition of shares/stocks/bonds/debentures/securities issued by government or local authority or other marketable securities. NBFCs can provide financing for acquisition in India. This practice has evolved in recent times and, unlike banks, NBFCs are not heavily regulated and can engage in corporate finance transactions such as promoter financing and acquisition financing.

The restrictions on acquisition finance have led to the establishment of offshore lending mechanisms in which special purpose vehicles (SPVs) are set up outside India to raise funds offshore for making acquisitions in India. This has led to an increased use of hybrid financing products (such as compulsorily convertible instruments, warrants, and so on). These hybrid products are also common for listed companies, since by using these instruments, the financier can gain both:

  • The benefits of a fluctuating capital market by phasing out conversions.

  • Public offer risks related to indirect acquisition of substantial shares or voting rights in the listed target company.

Back-up financing instruments such as guarantees, stand-by letters of credit, keep-well agreements and so on are usually used where either the:

  • Financier is a group company or a multinational bank catering to the group.

  • Actual interest of the financier is in a parallel transaction.

However, despite the above, it is needless to state that financing an acquisition through equity remains the preferred option, subject to certain commercial and tax considerations.

Restrictions on debt financing

Under Indian foreign exchange laws, the following are not permitted at price that is lower than the prevailing market price, computed according to the guidelines from the RBI:

  • The issuance of equity.

  • The conversion of convertible instruments into equity in favour of non-residents.

  • The transfer of equity from a resident to a non-resident entity.

Further, there are restrictions on the maximum maturity period allowed in case of convertible instruments issued by listed companies. The maximum maturity period for a convertible instrument issued by a listed company is:

  • 18 months in the case of preferential allotment.

  • 60 months in case of qualified institutional placement.

Furthermore, in the case of listed companies, the extent of conversions undertaken can have open-offer implications for the acquirer.

Mezzanine financing

The nature of mezzanine financing in India has recently undergone some changes. Earlier, optionally convertible preference shares and debentures were treated as equity for the purposes of foreign exchange laws, therefore taking them out of the purview of the ECB guidelines. However, under certain clarifications issued in 2007, optionally or partially-convertible preference shares and debentures are now recognised as ECB, and accordingly, in cases where an ECB is not permitted, such instruments are being avoided for providing mezzanine finance. Compulsorily convertible instruments with equity kickers (such as warrants, preference shares, and debentures) have become common for offshore mezzanine financing.

Inter-creditor arrangements

7. What form do inter-creditor arrangements take in your jurisdiction?

Inter-creditor arrangements are fairly common in India. Inter-creditor agreements provide for the rights and arrangements of the various classes creditors as between themselves. Typically, inter-creditor agreements are governed by Indian law and the borrower is not included in such arrangements. However, the borrower signs a confirmation letter agreeing to be bound by its terms. An inter-creditor agreement sets out the ranking and the sharing of proceeds between various lender groups, voting by lenders, waivers and decisions including decisions in relation to defaults.

Contractual subordination

Contractual subordination is possible and common in Indian lending transactions. Contractual subordination occurs when a junior creditor agrees that his debt will rank behind the senior creditor. For this purpose, the parties often execute a subordination agreement or stipulate the terms of subordination in an existing financing document. Under the subordination agreement or terms of subordination, the junior creditor agrees that his debt will not be due and payable until the senior creditor's debt is repaid. Alternatively, creditors can enter into an inter-creditor agreement setting out the ranking of debt. Typically, in Indian lending transactions, shareholder/promoter loans are unsecured and subordinated.

Structural subordination

Under structural subordination, the junior lenders lend to a holding company and senior lenders lend to one or more of the operating subsidiaries of the holding company. Structural subordination is common in leveraged financing. Usually, lenders do not prefer this structure because the lenders want security over the assets of the operating company, before the same are distributed to the holding company. Less commonly, however, in a mezzanine debt financing, subordination does take place in the form of structural subordination. In all other cases, lenders prefer structured subordination coupled with contractual subordination agreements.

Payment of principal

Individual repayment mechanisms are typically not addressed in an inter-creditor arrangement.

Inter-creditor arrangements in India also do not work on the principles of agency or turnover in relation to repayments. If a creditor receives an amount over and above its entitlement under the financing documents, the creditor must turn the amount over to the other creditors on a pro rata basis unless there is a preference or priority.


Inter-creditor agreements do not deal with interest payments. If a creditor or agent receives excess payment of interest it must turn it over to the other creditors in the order of priority set out in the inter-creditor agreement.


Inter-creditor agreements do not deal with the payment of fees. Further, a creditor or agent receiving excess payment of fees must turn it over to the other creditors in the order of priority set out in the inter-creditor agreement.

Sharing arrangements

In an inter-creditor arrangement, all payments made by the borrower are usually shared pro rata among the creditors in proportion to their outstanding credits under the relevant financing documents or as per their ranking of security. Furthermore, all proceeds from security enforcement are usually shared pro rata unless there is a preference or a priority that is contractually agreed between the creditors.

Claw-back arrangements are common in India. In the event a creditor receives payment to which they are not contractually entitled, a turnover or claw-back arrangement ensures that creditors get their distributions in the order of their priority.

Subordination of equity/quasi-equity

Equity and quasi-equity are usually subordinated. Distributions on equity and quasi-equity and repayments are not usually permitted before the senior debt is paid in full to the satisfaction of the senior creditors and these arrangements are typically covered in the accounts agreement.

Secured lending

8. What security and guarantees are generally entered into for an acquisition financing?

Extent of security

An acquirer's ability to acquire shares by leveraging locally within India is restricted due to the following:

  • The rules against financial assistance restrict Indian target companies that are public companies from making its assets available as security for the acquisition of its own shares or shares of its holding company (section 67, Companies Act).

  • The Reserve Bank of India (RBI) imposes minimum requirements on the resources and liquidity of domestic banks and places limits on the amount of their exposure to capital markets.

  • Investing companies with foreign investment or foreign owned operating investing companies are prevented from leveraging funds from the domestic market for making downstream investments in India.

Financing used for the purposes of an acquisition can be secured by the assets of the acquirer. Further, guarantees can be provided by a sponsor of the acquirer subject to compliance with the provisions of the Companies Act. Any pledge of shares of an Indian company in favour of a non-resident entity is not possible without RBI approval. The acquirer/group company can provide security for the non-convertible debentures (NCDs) issued for acquisition.

Further, Indian law does not permit transfer of immovable property in favour of a non-resident entity, except in certain specified circumstances.

Types of security

Shares. Security over shares or other financing instruments is created by way of a pledge. A pledge over shares is created through:

  • A written instrument coupled with a power of attorney in favour of the pledge.

  • Delivery of possession of the pledged shares or other security, with the delivery of share certificates or other documents evidencing that the security has been pledged.

Additionally for dematerialised shares, relevant forms will have to be filed with the concerned depository participant.

Inventory. Security over inventory is created by way of a deed of hypothecation.

Bank accounts. Security over bank accounts is created by way of a deed of hypothecation.

Receivables. The most common forms of security over which claims and receivables are usually granted include:

  • Contractual rights.

  • Insurance proceeds.

  • Rights under clearances and authorisations.

  • Trade receivables.

  • Cash flows.

  • Income-related receivables.

Claims and receivables are secured by way of an assignment, subject to restrictions set out in the underlying contract (the rights under which are being assigned). Assignment of receivables/rights under a contract can be made in favour of an assignee by way of a hypothecation or mortgage.

Intellectual property rights (IPRs). Trade marks, logos, patents, geographical indications, copyrights and designs are the common forms of IPRs over which security is created. Security over IPRs can be created by way of an assignment, hypothecation (movable property mortgage) or charge.

Real property. Real estate includes land, leasehold rights and anything attached to the earth or permanently fastened to anything attached to the earth. It also includes buildings, appurtenances, fixtures, right to way or any other benefit arising out of land. Security over real estate or immovable property is created by way of a mortgage.

Section 58 of the Transfer of Property Act 1882 (TP Act) defines a mortgage as the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. Section 58 of the TP Act provides for various kinds of mortgages (such as simple mortgage, mortgage by conditional sale, usufructuary mortgage, English mortgage, mortgage by deposit of title deeds and anomalous mortgage). However, the two most common types of mortgages used in India are the:

  • English mortgage.

  • Mortgage by way of deposit of title deeds.

Movable assets. Tangible movable property includes all movable assets including but not limited to plant and machinery (not attached to the earth), vehicles, shares, movable furniture, aircraft, vessels and movable fixtures. Tangible movable property can be secured by mortgage, hypothecation, charge, lien or pledge.


Domestic investment. Under section 186 of the Companies Act, no company can (directly or indirectly) make a loan to a body corporate, provide a guarantee or security in connection with a loan made by or to a body corporate, or acquire by way of subscription, purchase or otherwise the securities of any other body corporate, if this will exceed the higher of either:

  • 60% of its paid-up share capital, free reserves and securities premium account.

  • 100% of its free reserves and securities premium account.

In order for a loan, guarantee or investment in excess of these limits to be furnished or made, it must be approved by special resolution of the shareholders in a general meeting. Section 185 of the Companies Act permits a holding company to provide any loan or guarantee or security to its wholly owned subsidiary, subject to its end-use restriction. However, no security (including a guarantee) can be provided with a view to secure the loan assumed by a parent for the purpose of acquiring shares in the company providing the security.

Overseas investment. Subject to the restrictions set out above, an Indian entity can extend any form of guarantee (whether a corporate or personal/primary or collateral/guarantee by the promoter company/guarantee by group company, sister concern or associate company) in India to an overseas entity in relation to an entity in which it has an equity stake, provided all of the following apply to the guarantee (automatic route):

  • All financial commitments (including all guarantees provided by the party) are within 400% of the net worth of the Indian party.

  • The guarantee is not "open ended".

  • Reporting requirements are complied with.

Prior approval from the RBI is required if any of the above conditions are not satisfied. In addition, approval from the RBI would be required for any financial commitment in excess of US$1 billion (or its equivalent) in a financial year even when the total financial commitment of the Indian Party is within the eligible limit under the automatic route (that is, within 400%).

Security trustee

Security trustees are recognised and frequently used in financings.



Thin capitalisation

9. Are there thin capitalisation rules in your jurisdiction? If so, what is their impact on an acquisition finance transaction?

India does not have any specific rules in relation to corporate thin capitalisation. However, the Indian tax authorities have recently woken up to this legal black hole and thin capitalisation rules are therefore expected to be part of a new tax code.

The external commercial borrowing (ECB) guidelines (provided by the Reserve Bank of India (RBI)) act as a check on excessive leveraging of Indian companies by offshore lenders. The ECB guidelines not only provide the permissible quantum of long-term and short-term debt, but also affix the maximum permissible interest rate in relation to such debt.

The Indian government intends to introduce the general anti-avoidance rules (GAAR) with effect from 1 April 2017, which will incorporate the concept of thin capitalisation. However, GAAR does not include any capital gearing ratio, unlike typical thin capitalisation regulations. Instead, GAAR characterises debt as equity and vice versa where the arrangement between the parties:

  • Is not at arm's length.

  • Has less commercial substance.

  • Is not carried out for ordinarily, bona fide purposes.

The lack of capital gearing ratio allows discretion of the authorities while it ascertains whether a given capital structure is an impermissible avoidance arrangement.

The development of multinational trade and commerce has triggered the growth of transfer pricing guidelines in India. The Indian transfer pricing guidelines regulate rate of interest payable in relation to certain foreign transactions involving "associated enterprises". Under these guidelines, Indian tax authorities can reset the interest rate in a loan transaction between two or more associated enterprises if the agreed interest rate is not affixed on arms' length principles. However, it should be noted that these guidelines do not place any restrictions on the quantum of permissible debt, and merely seek to regulate erosion of state revenue by entities reducing their corporate taxable income.

The concept of an advance pricing agreement (APA) has existed in India since 1 July 2012. APA is an arrangement between the taxpayer and the tax authority which covers future inter-company transactions with a view to resolving the potential transfer pricing disputes in a co-operative manner. The APA rules do not prescribe any threshold for the application. This mechanism is unavailable for specified domestic transactions. The biggest advantage of APA is that it provides certainty win relation to the outcome of a covered transaction during the term of the APA, which is five years.

Financial assistance

10. What are the rules (if any) concerning the prohibition of financial assistance?

In addition to the restrictions on creating security over Indian assets (see Question 8, Extent of security), there is also a general prohibition on public companies from giving any financial assistance (whether directly or indirectly) whether by means of loan, guarantee, security or otherwise for the purpose of or in connection with the purchase or subscription of shares in the company or in its holding company.

Regulated and listed targets

11. What industries are regulated in your jurisdiction? How can the fact that a target is a regulated entity affect an acquisition finance transaction?

Under the current foreign investment laws, no foreign investment is allowed in the following sectors:

  • Lottery business.

  • Atomic energy.

  • Gambling and betting.

  • Real estate business (this includes dealing in land and immovable property with a view to earning profit but does not include the development of towns or the construction of residential/commercial premises, roads or bridges).

However, foreign investment in other business sectors is allowed under either the:

  • Automatic route. Under this route, industries can obtain foreign investment without prior approval from the Government of India or the Reserve Bank of India (RBI). This route includes manufacturing and certain specified non-banking financial companies.

  • Approval route. This requires approval from either the Government of India or the RBI. This route includes sectors such as print media and pharmaceuticals.

The rules relating to foreign investment in India have been significantly liberalised and have brought foreign investment into most sectors under the automatic route.

Sectoral guidelines also set out certain caps on investment, such as a cap of up to:

  • 74% foreign investment in the private banking sector.

  • 49% foreign investment in the insurance sector under automatic route.

  • 26% foreign investment in the print media under the approval route.

Further, former highly-regulated sectors such as construction and development have been liberalised and opened up to foreign investment. Several sector-specific conditions such as minimum area, lock-in restriction for transfers between non-residents have been done away with. Similarly, 100% foreign direct investment under the automatic route is now permitted in the e-commerce sector.

In addition to foreign investment laws, sector specific laws and regulations for investment restrictions or aggregation and "look through" principles, such as in the case of banks, and print media must also be complied with

12. How does the fact that a target is listed impact on a transaction?

The primary issue for listed companies is the application of the Takeover Code to the acquisition as well as to the financing.

Under the Takeover Regulations, the acquisition of a substantial number of shares or voting rights in the target triggers the obligation to make a tender offer to the public shareholders of the company in any of the following circumstances:

  • An acquisition by the acquirer (together with persons acting in concert) of 25% or more of the voting rights of the target.

  • When the acquirer (together with persons acting in concert) holds 25% or more but less than 75% of the shares or voting rights of the target acquisition of more than 5% of the voting rights of the target in any financial year ending on March 31 of that year.

  • The acquisition of control over the target, irrespective of whether there has been any acquisition of shares or voting rights. The term "control" is broadly defined, and includes the right to appoint directly or indirectly or by virtue of agreements or in any other manner, the majority of the directors on the board of the target or to control its management or policy decisions.

The Takeover Regulations apply to both direct and indirect acquisitions of shares/voting rights and/or control over a target. A mandatory open offer must be made for at least 26% of the voting shares of the target. Unlike mandatory offers, voluntary offers are not triggered by underlying events. Further, the offer size of a voluntary offer can be as low as 10%.

However, the post-acquisition holding of the acquirer in an open offer should not exceed the maximum permissible non-public shareholding. In light of the strict provisions in relation to the open offer requirements under the Takeover Code and the application of these rules even in the case of an indirect acquisition of shares, voting rights and control, acquirers of shares, voting rights or control in an Indian company or those financing the acquirers should be cautious of these provisions and should structure their acquisition and acquisition financing with the threshold requirements in mind.

However, it should be noted that an acquisition of shares by a bank and public financial institution as pledgee is exempt from the open offer requirements under the Takeover Code.

Further, if a listed company intends to raise funds for the acquisition by way of a preferential allotment or qualified institutional placement of convertible instruments, the provisions of the Takeover Code will be only be triggered on conversion of such instruments into equity shares. The convertible instruments will be subject to the pricing norms contained in the ICDR Regulations.

Pension schemes

13. What is the impact, if any, of pension schemes held by the target or purchaser on the acquisition?

Not applicable.


Lender liability

14. What are potential liabilities of the lender on an acquisition?

Lender liability is generally a matter of contractual arrangement in India. However, in the case of Mardia Chemicals v Union of India (AIR 2004 SC 2371) the Supreme Court of India for the first time expressly recognised that lenders have an implied duty of good faith and fair dealing in relation to borrowers.

The Reserve Bank of India (RBI) has also issued guidelines on lender's liability called RBI Guidelines on Fair Practices Code for Lenders, which relate to:

  • Applications for loans and their processing.

  • Loan appraisal.

  • Disbursement of loans.

  • Post-disbursement supervision.


Debt buy-backs

15. Can a borrower or financial sponsor engage in a debt buy-back?

The shareholders of a company must pass certain resolutions and comply with certain provisions of the Companies Act if they provide any guarantee or security in connection with a loan to any other body corporate or person (Companies Act). This also applies to securities (including debentures) purchased by the company.

If the financial sponsor of the borrower purchases debentures of other forms of loans of the borrowers in the secondary market, and if the buy-back is provided for in the underlying borrowing or other documents, this could be considered to be a guarantee from the sponsor to buy-back the loans or securities on the occurrence of an event or completion of a certain time period. Therefore, the financial sponsor must pass the requisite resolutions and comply with the relevant provisions under the Companies Act.


Post-acquisition restructurings

16. What types of post-acquisition restructurings are common in your jurisdiction?

Post-acquisition restructuring techniques usually depend on the nature and extent of the acquisition being performed.

If the acquisition relates to a business undertaking rather than a share acquisition, the post-acquisition restructuring is typically is based on achieving synergy in business through mergers and combinations, which could assist the acquirer in generating a profit pool for repayment of the financing undertaken for the acquisition. Such mergers are, at times, undertaken with listed entities to achieve access to larger cash flow.

In the case of share acquisitions, acquirers normally wish to consolidate their holdings, which for listed companies could lead to the adoption of minority elimination processes (such buy-back, the issuance of convertible instruments in court-based restructurings, the creation of artificial majority among the minority shareholders for undertaking variation of class rights, undertaking delisting through reverse book building offers and so on).

Debt restructuring in India can be undertaken through either:

  • Court-based mechanisms. This is typically carried out through a creditors' scheme of arrangement under Sections 391 to 394 of the Old Companies Act. The creditors in such a scheme have complete flexibility in proposing a debt restructuring mechanism, subject to the same being approved by at least a majority of the creditors representing 75% in value of the creditors, and shareholders of the company present and voting.

  • Out-of-court mechanisms. These include the strategic debt restructuring (SDR) scheme notified by the Reserve Bank of India (RBI) in 2015. Previously in its circular dated 26 February 2014 on Framework for Revitalising Distressed Assets in the Economy: Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan, the RBI envisaged change of management as a part of restructuring of stressed assets. However, owing to certain operational/managerial inefficiencies, change of ownership through Strategic Debt Restructuring was introduced by the RBI in its guidelines dated 8 June 2015. The RBI now allows banks to undertake SDR of stressed assets by converting loans due into equity shares. The initiation of SDR and the applicable process must be in accordance with the SDR scheme.



17. Are there reforms or impending regulatory changes that are likely to affect acquisition finance transactions in your jurisdiction?

The Insolvency and Bankruptcy Code 2016 (Code) was recently passed by the Indian Parliament and will soon come into force. The Code will impact acquisition financing transactions in India.

The Code is based on a revival model for companies and limited liability partnerships. Therefore, once a corporate debtor defaults in the repayment of debt (with a minimum threshold of US$1,500), a corporate insolvency resolution process can be initiated. Once this commences, a moratorium is declared on the initiation of legal proceedings and enforcement of security and termination of contracts (among other things). At the end of the corporate insolvency resolution process, a resolution plan setting out the scheme of revival of the corporate debtor is presented which must be approved by the committee of creditors and the adjudicating authorities. Once approved, the plan is binding on all stakeholders, debtors and the promoters of the company. As part of the resolution plan, angel investors may be keen on acquiring the stressed company. Further, certain creditors may be keen on rescue financing in order to revive the stressed company. The Code therefore provides more opportunities for acquisition financing in India.

According to a draft circular recently issued by the Reserve Bank of India, foreign portfolio investors can invest in primary issuances of non-convertible debentures (NCDs) provided the issuing company does not use the borrowing proceeds for:

  • Real estate activities.

  • Land purchases.

  • Investing in capital market.

  • On-lending.

Previously, foreign portfolio investors could only invest in unlisted NCDs in the infrastructure sector. This will expand options for acquisition financings and will boost the corporate debt market in India.


Contributor profiles

Cyril Shroff, Managing Partner

Cyril Amarchand Mangaldas

T +009 22 6628400
F +009 22 24963666

Professional qualifications. BA,LLB degree from the Government Law College, Mumbai, India; Solicitor, High Court of Bombay, India

Areas of practice. Corporate law; mergers & acquisitions; securities markets; dispute regulation; arbitration; private clients; banking; infrastructure and financing.

Dhananjay Kumar, Partner

Cyril Amarchand Mangaldas

T +009 22 6628400
F +009 22 24963666

Professional qualifications. BA LLB (Hons), National Law School of India University, Bangalore, India

Areas of practice. Projects and project finance.

Ramgovind Kuruppath, Partner

Cyril Amarchand Mangaldas

T +009 22 6628400
F +009 22 24963666

Professional qualifications. LLB, West Bengal National University of Juridical Sciences, Kolkata, India

Areas of practice. Mergers & acquisitions, general corporate & regulatory.

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