New opportunities for M&A deals

Better legal and regulatory environment will boost consolidation-led growth

There has been a strong wave of mergers and acquisitions (M&A) in recent months. Indian companies have been involved in deals worth a record $97.6 billion this year till July. The deal makers look bullish about M&As, especially in the technology, media and telecom sectors, in the days to come. 

Analysis shows that M&As in India have been cyclical in nature and each cycle had its own characteristic drivers. Conventionally, these cycles have been influenced by the various structural realignments in the industries, regulatory policies and measures, innovation, etc. The first wave of M&A in India hit during 1990-1995, in the early years of the post-liberalisation era. A number of multinational companies were drawn towards the country which had opened up policies for easing business in India, triggering consolidation across the board. The next phase during 1995-2000 saw foreign multinationals intensifying acquisition activities to make inroads into the Indian market. However, after 2002, the trend reversed to some extent and Indian corporate players started focussing on foreign acquisitions. 

Based on the intents, M&As can be either growth-oriented or return-oriented. In India, the majority of the mergers in the past have been largely return-oriented as the key focus was on getting tax benefits and financial cohesion and then the trend started towards a growth-oriented approach.

But, the very recent cycle is a blend of growth and consolidation. The strategic policy refinements and reforms further spurred this consolidation-led growth in the M&A space. The advent of the Insolvency and Bankruptcy Code (IBC), 2016, has opened up a new spectrum of opportunities. Companies with strong financial backbone are eyeing companies under the IBC to acquire them and achieve inorganic growth. At the beginning of the year, around 2,500 cases had gone into resolution. A fraction of that number throws up a huge M&A opportunity, indeed! 

In a notification from the Reserve Bank of India (RBI) in February, it was mentioned that the lenders can initiate bankruptcy proceedings within 180 days of the default of a single payment. Hence, the onus will be on the promoters of the defaulting companies to initiate potential M&A activities in the pre-insolvency stage. Which means a spate of consolidation is round the corner.

One positive of demonetisation, which many feel dented the economic growth aspiration, was an increase in liquidity in the banking system and this can give further legroom for the RBI to initiate more policy measures. This along with the increasing appetite among the corporates to reduce the supply chain burden through mergers or acquisitions augur well for the sector.

But one enabler to this growth could be a better legal and regulatory environment for the transactions to expedite closure. Legal hurdles for transactions may be sector specific, but in general closure of transactions suffer from the elaborate time periods for approvals to come through from the respective regulators in our country. The time is ripe to set up consolidated repositories to list out potential encumbrances so as to facilitate expeditious closures.