It may not always be that easy to stay ahead of the curve in a VUCA (Volatility, Uncertainty, Complexity & Ambiguity) world. And considering India’s M&A realm, how is the country’s corporate space contending with the broader and unpredictable forces that may be redefining the domestic and global landscapes? What does it take to adeptly manoeuvre through a whole lot of complexities? And amidst the VUCA, where do the opportunities lie to embrace change as the new constant? How are the interests of various stakeholders in India being balanced while strategic objectives are being met?
According to Ashish Kumar, Chief Legal Counsel & Group Company Secretary at Dixon Technologies India Limited, “When one talks about M&A transactions, there’s always a certain amount of regulatory complexities that one has to always be mindful of in terms of regulation-bred complexities when the deal has started and when one is going through the process. When one signs the deal, there’s a time lag and if one is a listed entity, they have to deal with a lot of regulators. So, there’s a certain level of uncertainty which can have implications in terms of timeline and cost”.
And does it seem like the regulatory regime has evolved?
According to Nitin Sood, Chief Financial Officer at PVR INOX Limited, “A decade ago, while there were regulations in play, one could take a call and get things done with the mindset of convincing the regulator. Right now, it feels like we’re at the other end of the spectrum where every single ‘T’ has to be crossed before one takes a call. The business logic to do an M&A continues to remain, but one has to think about the regulatory hurdles that they have to go through. The thinking amongst the regulators has evolved. One has to be really sure as they structure some of these M&As to bring them to their logical conclusions and not to lose sight of the fact that if one gets stuck in the maze of regulations, the whole rationale for doing a deal falls through. This is because if one can’t achieve what they set out to do in a certain period of time, sometimes, commercial considerations fall apart. So, for organizations, it’s become increasingly imperative to manage complexities and still manage to do a deal within a relevant time frame”.
“Any transaction between two listed companies in India would definitely get scrutinized by almost all the regulators. Companies have to be prepared when they conceptualize that & have to ensure that their structured digital database is updated and that leaks are avoided, because in a listed company merger, the biggest issue is not just insider trading… We’ve also spent time debating the ambiguity around competition regulation, thinking about whether we’re on the right side of the law, whether we’re reading the law right and if the interpretation was taken differently by regulators, what it could mean for the timeline and the impact of the transaction… There are, also, challenges, like how institutional advisors look at a merger, putting together resolutions, related-party transactions, getting proxy advisory firms on board and more”, remarks Sood.
And what about the private equity realm?
According to Pratibha Jain, Head of Strategy & Group General Counsel at Everstone Group, “We have to take relatively midterm calls. The whole business is premised on being able to exit in about 7-10 years. When one looks at regulatory uncertainty, they have to look at what could be an impediment to exit, whether one can pay a fine and move on and whether something could kill the business. There are long-term fights, but in the short term, if it kills valuations, that curbs the ability to provide returns to investors… If there’s a ‘I-don’t-care’ regulatory mindset that certain sectors are a very small part of the investment in India, it’s an attitude that could kill business. There’s a slowdown in the private equity sector and despite India shining, we’re not seeing that reflected in our sector. The reason is the compounding of complexity of regulations over decades… And you’ll hardly see US LPs coming in the Indian market; they might come through large GPs, but not directly into the market”.
Jain declares, “Our ICs (Investment Committees) are aware of the risk and the tougher conversation is happening in terms of returns, which are, in turn, linked somewhere to regulatory risk. The cost of doing business has gone up because the number of deals getting rejected after diligence is higher in the ICs. But, the bigger worry I’m hearing from the fundraising team is one can’t rely on much, when it comes to India… Yet, Indian demographics are great. India can be both a consumer and a producer and its ability to drive future growth for the world is definitely there”.
So, what needs to be changed?
“We’ve already communicated to the Ministry in India that industry folks need to travel and have honest discussions with investors about what’s wrong and what needs to be fixed. And I feel that the abolishment of the FIPB (Foreign Investment Promotion Board) was a big mistake; there needs to be an inter-ministerial body created to look at changes”, comments Jain.
And from a regulatory regime perspective, how is greenfield expansion?
Kumar outlines, “When you deal with greenfield projects, you need to make an initial investment and deal with uncertainty in terms of the market, whereas, with M&A transactions, there is a ready-made market in place and an understanding of the numbers. With greenfield projects, one feels they’re more in control at the outset itself and they’re not dealing with uncertainty; sure, there’s a set of approvals that need to be obtained, but, at the same time, one has absolute control in terms of compliance”.
“So, challenges are there, but personally, in the long run, the preference should be towards greenfield”, quips Kumar.
Watch the entire interaction here:
