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Sandeep Mehta
J. Sagar Associates, Mumbai
sandeep.mehta@jsalaw.com

 

As India moves cautiously towards flattening the curve of Covid-19, entering phase five of the lockdown, the Indian government and state governments are working in tandem to open up the Indian economy and fuel its recovery.

The Covid-19 pandemic and the nationwide lockdown, being one of the longest in the world, has had a colossal impact on the Indian economy. In an attempt to tide over the losses and revive the Indian economy, the Indian government is rolling out various measures, including a special economic package to the tune of Rs20 lakh crore ($266bn) to promote an ‘Atma Nirbhar Bharat’ (a Self-Reliant India).^[1]

The implementation of this package is primarily aimed at strengthening the Make in India Movement and attracting foreign investment in the manufacturing sector.

The Self-Reliant India movement

In his address to the nation announcing the Self-Reliant India measures, the Prime Minister said that a self-reliant India will stand on five pillars:

• the economy;

• infrastructure;

• system;

• vibrant demography; and

• demand.^[2]

The Finance Minister subsequently announced the details of the economic package in five tranches, intended to provide relief to the stressed economy while simultaneously giving the required stimulus by introducing measures, including:

• inter alia measures for equity infusion in micro, small and medium-sized enterprises (MSMEs);

• relief and credit support to small and medium-sized businesses;

• measures to mitigate the burden of debt servicing, such as:

– a moratorium of three months on payment of loan instalments and payment of interest on working capital facilities in respect of all term loans;

– easing working capital financing;

– loans to commercial real estate projects;

– a special liquidity facility for mutual funds;

– a liquidity injection for power distribution companies to pay their dues to power transmission and power generation companies;

– a special liquidity scheme for non-banking financial corporations (NBFCs), housing finance companies (HFCs) and microfinance institutions (MFIs).

The government has also made it easier to do business by relaxing the timelines for corporate, employment, tax and securities laws compliance for both listed and unlisted companies. The 2019–2020 financial year ended during the first phase of the lockdown.

The Self-Reliant India movement provides special impetus to MSMEs in the form of collateral-free loans, equity infusion through the MSME fund, and most importantly by revising the definition of MSME companies, to inter alia increase the limit of investment required to classify a company as a MSME. This will give an enormous boost to various enterprises and entities, which will now also have improved access to funding from banks and financial institutions. This sector has been encouraged by the government to upgrade its technology and to seek foreign investment.

The Self-Reliant India Movement also provides relief to the agricultural sector and its associated industries. These measures are aimed at strengthening infrastructure logistics, capacity building, and governance and administrative reforms for agriculture, fisheries and food processing sectors. It formalises micro-food enterprises, provides funding for agri-infrastructure projects, beekeeping, fishery, animal husbandry and herbal cultivation and amends the Essential Commodities legislation to empower improved price realisation for farmers.^[3]

Liberalisation of certain sectors for foreign investment

The impact of the Covid-19 outbreak on the global economy and equity markets, with listed equity values falling in a descending spiral, has hit the flow of foreign direct investment (FDI) into India hard.

In the backdrop of weak FDI sentiments, the Self-Reliant India economic stimulus focuses on structural reforms across eight key sectors including coal, minerals, defence production, civil aviation, power distribution and atomic energy. It is also backed by policy simplification across these sectors and is expected to:

• benefit investors in realising the potential of the sector;

• invite a broader spectrum of participation;

• generate employment; and

• boost overall growth.

The Finance Minister has outlined that there will be fast-tracking of investment clearance through an empowered group of secretaries and a project development cell constituted in each Ministry. These will prepare investible projects and coordinate with investors, the Indian government and state governments.^[4]

Some of the major policy reforms introduced include:

• the introduction of commercial mining in the coal sector;

• policy reforms in the coal sector;

• enhancing private investment in the mineral sector;

• enhancing self-reliance in defence production;

• efficient air space management for civil aviation;

• developing more airports through public-private partnership;

• establishment of hubs across India for aircraft maintenance, repair and overhaul;

• power sector tariff policy reforms;

• Privatisation of power distribution in certain territories in India;

• boosting private sector investment in social infrastructure;  

• private participation in space activities; and

• atomic energy related reforms.

The Indian government has stressed the need for India to be self-sufficient in certain specific avenues such as defence production. To this end, ‘Make in India’ will be encouraged by placing an import ban on  weapons/platforms for a certain number of years. The FDI limit in defence equipment manufacturing companies in India will be raised from 49 per cent to 74 per cent under the Automatic Route.^[5] This will take a load off of the import bill; specified weapons will be purchased from Indian manufacturers whose products meet the standards set for the Indian Armed Forces and securities agencies. The gates to private sector investment in defence manufacturing have been opened wider, encouraging global defence equipment manufacturers to set up production hubs in India. This will not only create opportunities for employment but will also help India realise its potential for defence equipment production, including the export of defence equipment.

The government has also announced the production-linked incentive scheme to stimulate the pharmaceutical sector and promote the domestic manufacturing of important drug intermediaries and bulk drugs in India. The scheme will be open for a period of four months from 2 June 2020 and will allow investors to submit proposals for the establishment of greenfield facilities for any of the 53 key drug intermediates and bulk drugs that are currently not manufactured in India on a large scale. This list includes ingredients utilised in the manufacture of commonly prescribed medicines like paracetamol, metformin, aspirin and so on.^[6]

The government is set to announce a new Public Sector Enterprise Policy, whereby certain public sectors will be opened to private investment. This policy will provide a notified list of strategic sectors requiring the presence of public sector enterprises in the public interest. In these strategic sectors, at least one enterprise will remain in the public sector, but private sector investments will also be allowed. In other sectors, the public sector enterprises will be privatised. To minimise administrative costs and expenses, the number of enterprises in strategic sectors will ordinarily be between one and four: others will be privatised, merged or brought under holding companies.^[7]

Finally, the government has been making changes in its industrial and sectoral policy, developing a land pool to the tune of 461,589 hectares,^[8] and pushing forward labour, land and tax reforms that have been stalling investment.

Company valuation and distressed M&A opportunities

The Covid19 pandemic and the cascading nationwide lockdown on all non-essential activities and businesses has unfortunately also resulted in businesses struggling to stay afloat, with most being driven to losses, and some having to wind up operations altogether.

While employers continued to pay wages, rent and interest and other fixed costs, the general ambiguity in the global financial setting, near-total shortage of revenue and rapid halt in demand has made it very difficult for businesses to keep their wheels turning. There are several technology-based start-up entities adversely affected due to the Covid-19 pandemic. Such entities present very good opportunities as acquisition targets for integration and absorbing complimentary technology by the existing bigger businesses. The technocrat promoters of these technology-based start-up entities are also engaged and absorbed by the existing bigger businesses.

The poor economic climate has resulted in increased losses and lowered valuations of businesses. Promoters seeking to exit, looking for joint venture partners or raising of funds by partial sale of ownership interests in businesses have to consider this loss of valuation. However, these adversaries also provide great opportunities to the investors for entry, acquisitions, consolidation, and joint ventures.

Financially distressed businesses are often forced to sell their ownership interests to pay off their debts and end up having to sell at low prices. Some distressed businesses might conclude that they would be in a better position if they merged with a stronger partner. In the current economic crisis – despite the government introducing reforms, providing liquidity and maintaining the flow of credit to businesses – some businesses might still not be able to sustain these adversities, resulting in a significant rise in distressed M&A activity.

Movement of investments into India

In the wake of Covid-19, some countries are reconsidering reliance on manufacturing and supply bases located in a single country. Due the global supply shock caused by the Covid-19 pandemic and resulting lockdown, several countries are taking an initiative to move manufacturing and supply chain bases and diversifying production from a single country into other countries. The Japanese government has earmarked money to help companies shift manufacturing plants out of China and a number of US companies are considering moving out of China as well.^[9]

India, being one of the largest economies in the world with a young labour force, is contending to be a worthy alternative for businesses intending to move their investments. The stage is set for India to draw resource-seeking and market-seeking FDI; the government is working towards attracting companies and businesses moving out of China, creating incentives for them to move to India.

Certain Indian states like Maharashtra have identified 40,000 acres of land to offer global investors and are looking to introduce single-window mega-clearances for non-polluting industries.^[10] The state of Karnataka has constituted a special investment task force to attract investments,^[11] while the state of Uttar Pradesh, has identified a land bank of approximately 115,000 acres for industries, of which approximately 25,000 acres is available and ready for investment.^[12]

Restriction on opportunistic M&A

In order to prevent opportunistic acquisition of Indian companies during this crisis, the government has sought to regulate FDI from countries which share a land border with India. It has revised its FDI policy so that investors from these countries will now have to seek government approval before investing in an Indian company.^[13]

Deal making in the backdrop of Covid-19

The Covid-19 pandemic has forced businesses to lock down, given rise to scepticism and uncertainties and resulted in corporates and investors revisiting pipeline deals or even renegotiating concluded deals.

Parties and advisers are expected to focus more on material adverse effects (MAEs), force majeure clauses, watertight warranties and corresponding indemnities and break fees. These M&A deal concepts have come into the forefront while drafting transaction documents. With business valuations being more uncertain, earn-outs, follow-on investment obligations and acquisition of balance shareholding are all expected to be fiercely negotiated to cover all possibilities. While promoters are expected to keep multiple investment avenues open for the future, investors are also expected to remain non-committal towards further funding requirements and to insist on easy exits in case of lower valuations in both concluded deals and pipeline deals.

Due consideration will have to be given to opportunities to acquire suppliers to ensure assured, long-term supplies and integration of supply chains. There are several restructuring transaction opportunities arising due to the Covid-19 pandemic for: (1) conversion of companies from public to private; (2) workforce reduction and redundancy due to lack of demand; (3) spin-offs of businesses for raising capital or non-core disposals; and (4) all-shares merger proposals for consolidation.

Relaxation of employment laws

State governments in India are trying to bring in labour market flexibility and relax certain employment laws in order to help kick-start the economy. This relaxation of employment laws is setting the cornerstone for inviting investment.

Several states have exempted factories registered under the factories laws from the applicability of working hours of the employees until a certain specified date. As per the conditions specified in state government notifications, daily and weekly working hours have been increased, albeit with provisions for overtime wages and rest intervals for the workers. The states are easing the process of seeking approvals, speeding up factory registrations, fast-tracking investment clearances and exempting units from penalties if certain employment laws are broken. The need to generate employment in India is even more pressing now and a surge in investment will serve that purpose.

Conclusion

The end of the Covid-19 era will be the beginning of a new wave of opportunity in India for M&A transactions. The measures taken by the government promise a tremendous boost to several sectors such as defence, pharmaceuticals, healthcare, manufacturing, infrastructure, agriculture, technology and more.

These measures will lead the way for India to become a major investment destination and hub for manufacturing and supply on a global platform. India has become a strong contender in light of the shift in investments due to the outbreak of the Covid-19 pandemic: global investors must pay special attention to India to establish businesses for which mergers, acquisitions and joint ventures in India are gateways.