Hostile Takeovers in India: New Prospects, Challenges, and Regulatory Opportunities

Abstract

Merger and acquisition (“M&A”) activity in India is booming. The Indian economy grew by 9.2% in 2006, but M&A deal volumes grew much faster, up 54% to $28.2 billion in 2006. From senior politicians to ordinary citizens, Indians have joined the business community in celebrating the recent M&A boom, confident that it is yet another indicator of India’s recent and rapid economic ascent. India’s recent M&A boom has consisted exclusively of friendly deals, and since its economic liberalization in 1991, India has experienced only a handful of hostile takeover attempts. The tide, however, may be turning. Many bankers and lawyers I met in India dismissed the potential for hostile takeovers in India as almost wholly implausible. Hostile takeovers by foreign enterprises will not occur, they say, because of (i) the prevalence of founding families (“promoters”) with dominant shareholding positions in most Indian corporations and the substantial shareholding of Indian financial institutions that generally side with promoters, (ii) the necessity of obtaining onerous government approvals for foreign acquisitions that would make hostile takeovers impossible, and (iii) provisions in the Indian Takeover Code that favor promoters. This paper challenges these contentions. Hostile takeovers have been rare and will likely continue to be rare in the immediate future, but not for the reasons typically proffered. My analysis of the shareholding composition, legal impediments and regulatory restrictions facing the BSE 100 companies in India suggests that at least 15% of Indian companies, including some of India’s most prominent, face the prospect of being taken over by foreign acquirers without the consent of their respective promoters. Indian financial institutions, it turns out, constitute a minuscule portion of shareholding in modern Indian companies, and hence have minimal influence on these takeover battles. On the regulatory side, the Indian Takeover Code does not erect any insurmountable obstacles to hostile acquisitions, and recent liberalizations by the Government of India make foreign acquisitions of Indian companies in most industrial sectors possible without material government approvals. Hostile takeovers of Indian companies are now a real possibility. And these Indian companies, unlike their counterparts in the United States, are particularly susceptible to hostile acquisitions, as Indian law prevents them from utilizing takeover defenses such as the poison pill and staggered board; indeed, aside from attempting to increase the already large stake of existing promoters, Indian companies today have few viable means with which to fend off hostile suitors. This Article suggests that SEBI, India’s securities regulator adopt a principles-based standard in the Takeover Code governing the actions that a takeover target would be permitted to undertake in response to a hostile bid. This standard should attempt to strike a balance between nurturing India’s newly emerging global corporations and promoting efficient and value-creating investment into India.