Bharti Airtel and MTN have extended their negotiations for a cross-border M&A transaction, a first in India’s telecom industry. Even as the two sides thrash out terms, the Indian government is considering making two-way cross-border mergers and amalgamations a reality.
Till now, cross border M&A has been seen in the form of cash acquisitions. That is, an Indian company would pay cash to acquire a foreign company and vice versa. They have rarely used their equity as a direct currency as seen in a conventional merger of Indian companies (Kingfisher Airlines with Deccan Aviation). Indirectly, they would issue equity in the form of ADRs or GDRs and then use this money to fund an acquisition. Or they would float an overseas SPV that will raise money locally or issue shares as part of the transaction. This may change if the proposed legislation passes.
The government has introduced the Companies Bill, 2009 in parliament. On July 31, the government said in parliament, that cross border mergers or amalgamations may be possible once the bill is passed. It said that as per the proposed Companies Bill, 2009, Indian companies and companies registered in certain specified countries, may merge or amalgamate.
This specific clause will allow Indian companies to merge with a foreign company and vice versa. The Companies Bill is expected to be introduced in the current session of parliament. If this bill gets passed, then mergers like the Bharti-MTN will become possible with no cash exchanging hands. In the Bharti Airtel-MTN case, for example, Bharti is planning to issue GDRs as part of the transaction. But if a share swap were made possible, there would be no need for this.
The fine print may have a lot of devils. One is already evident: only companies registered in specific countries will be allowed. Chances are jurisdictions that allow companies to be opaque, the tax havens, will not be on this list. The rules and regulations that are framed will play a big role in determining if companies grab this opportunity.
Unlisted companies will find cross-border mergers and amalgamation an attractive proposition. For listed companies, it is a different ballgame. It would be appropriate for Sebi to be the sole rule-setter for listed companies. It is too early to speculate on the problems that may arise in cross border mergers; think of Indian shareholders being offered a foreign company’s shares instead of cash in an open offer. That should ring alarm bells.
In an open offer, shareholders have the right to refuse, but in a scheme of arrangement, minority shareholders have little say in the proceedings. Promoters usually have enough voting power to push through the scheme, and all shareholders will have to accept it. And, the government is also proposing to do away with the current court proceedings to fast track M&A. Minority shareholders have a right to object in court, a right that companies claim is often misused. The government is proposing to ensure an obstacle-free course for corporate M&A. That may be a good thing for corporate India but if minority shareholders get trampled over in the process, it will be a shame.