India's Sweeping Regulatory and Policy Changes: Heralding a New Era in Investor Protection in M&A Transactions?

Abstract

Strategic and financial investors often look to grow their asset-base by investing in jurisdictions having the best potential for economic development. In most instances they prefer countries that offer adequate protection for their investments and, certainty and clarity in relation thereto. Investors look for legal transparency and precision, and require the existence of mechanisms in a country’s commercial law that safeguard their interests, regardless of the size of such investor’s holding in a company.A significant number of India’s most successful companies today continue to be closely held and controlled by a select few of India’s most powerful business families. While such companies do invite foreign stakeholders to invest as minority shareholders, the companies expect the day-to-day management to be left with their Indian controllers. Historically, poorly drafted and disjointed Indian corporate and securities law has been one of the major causes of scarce foreign investment into India. In the aftermath of the global economic slowdown caused by the financial crisis of 2008, both the cross-border and domestic mergers and acquisitions (‘M&A’) spaces in India have witnessed relatively lean periods. However, after a somewhat dormant phase, recent times have seen a slew of policy and regulatory changes brought about by the Indian Government with myriad objectives and goals. Several of these modifications in the law suggest an overarching theme of improving the protection afforded to foreign investors in India and the creation of an M&A transactional atmosphere that is, in general, more conducive to augmenting inward fund flow and assisting in India’s inorganic growth. This article bases itself on a contemporary understanding of the expectations of foreign strategic and financial investor protection in India. It selects some of the most far reaching alterations in this area of Indian commercial law, brought about by the Indian Parliament, the Reserve Bank of India (RBI), the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). Constraints of space do not permit all of the changes introduced in recent times to be captured and analysed comprehensively. However, an attempt has been made to choose certain interrelated themes most favoured by foreign investors, and, according to the author, are likely to have the greatest impact on foreign investor protection in the coming years. The article tries to offer a critical analysis of whether or not the selected initiatives are likely to be noteworthy catalysts in boosting investor confidence and bolstering M&A in India.The article focuses on two perspectives: (a) expectations in corporate governance and (b) the law relating to the need of securities regulation. Under the corporate governance perspective, the author begins with an analysis of optionality clauses and entrenchment in investor agreements, before taking a deeper look at India’s recently amended law on related party transactions. The analysis here will evaluate specifically whether the manner in which the laws are framed in these areas truly translate into enhanced protection for foreign investors. Next, the article moves on to a broader perspective of securities regulation law, where it discusses significant and wide-ranging proposals for change in India’s insider trading law and the utility attached to the newly permitted foreign listings for Indian companies. Here the author also investigates changes in Indian securities law in the context of taking listed Indian companies private. Ultimately, using these two perspectives, the article tries to make a critical evaluation of the legal implications of each of the selected investor protection reform efforts, to weigh their apparent successes and failures. The article’s thesis is that several recent changes have significant positive potential, but require thoughtful reconsideration in parts in order actually to impact investor comfort. With this in mind, it concludes by offering a normative outlook on foreign investor protection in India’s evolving corporate legal space.