The Emerging Market for Corporate Control in India: Assessing (and Devising) Shark Repellants for India's Regulatory Environment

Abstract

Inbound and domestic hostile takeover activity in India have failed to make a dent in the corporate vocabulary, for historical, cultural and regulatory reasons. Conversely, the scale of negotiated “friendly” deals in India has been on the rise. At the regulatory level, Indian promoters are permitted to hold large stakes in their corporations, and are warned in advance when potentially hostile acquirers gain toeholds in their corporations, enabling them to consequently consolidate their holdings. Severe restrictions imposed by India’s central bank on financing acquisitions tend to multiply these difficulties. Historically, the loyalty of domestic institutional investors to established promoter houses, made it difficult to unseat the interests of entrenched Indian promoters. Culturally, “nationalist sentiment” has formed an “invisible barrier” to hostile takeover activity in India, as regulators continue to side with India’s “national champions”. Restrictive foreign investment regulations have long precluded the agility of the inbound raider. However, in recent times the regulatory and historical landscape in India has metamorphosed dramatically. Shareholding patterns in Indian corporations have undergone significant change with the inflow of foreign strategic and institutional investors, even as foreign investment restrictions have been relaxed. Further, the market for corporate control in India has seen interesting movement in the past few years. This paper addresses two questions. As its first and primary question, this paper analyzes whether there is a legitimate possibility that the market for corporate control will gain a greater foothold in India, and whether “invisible barriers” still preclude hostile acquisitions in India. Second, assuming that the answer to the first question is in the affirmative, this paper seeks to address the question of whether the most widely known conventional “shark repellant” deal defense mechanism, viz. the poison pill, is possible under the Indian regulatory regime, although it has been ruled out in previous academic writings.