The central government, entering its final year before the 2019 elections, faces many unanswered questions with regard to measures towards the easing of doing business in India, especially for foreign investors and Indian entrepreneurs.
An assessment of the seemingly tall promises of the government in terms of easing or simplifying foreign investment policy (FDI), mergers and acquisitions (M&A) and tax laws is overdue, to get a clear sense of the government’s stand on these matters and what has been done. While the government garnered support on the twin planks of reform and “maximum governance, minimum government", the reality may be different today. Foreign investors, Indian entrepreneurs and corporations still find themselves stuck in archaic laws and regulatory red tape. Clarity is lacking and piecemeal amendments made to laws haven’t helped.
It’s true that major legislative reforms have taken place, led by the goods and services tax (GST) and the new insolvency law, but these, too, have struggled to make a difference due to problems in their implementation. That, however, is a separate discussion. What’s critical now is a quantum leap in reform that builds upon the welcome but moderate liberalisation in the Indian FDI policy and the company law. It’s only a start, though. Important concepts for M&A deals remain shrouded in legalese-driven ambiguities. This pushes Indian entrepreneurs and companies back, despite India jumping 30 places last year in the World Bank’s ease of doing business rankings. A controlled and restricted RBI pricing regime for cross-border M&As, coupled with ambiguous views on concepts such as “earn-out" and deferred consideration, have led to bottlenecks for M&A deals. The outcome is that Indian firms are spending unnecessary time and effort to conceptualise creative structures that escape the applicability of laws and thus enable them to remain competitive. A good example is the closing of India-bound deals in overseas jurisdictions to avoid difficult Indian laws.
A major loophole and limitation on structuring an M&A deal is the fact that many well-accepted structures worldwide such as the differential right shares (DVR), non-voting or zero voting right shares, various classes of shares and issue of shares at discount (over face value) are either not permitted or are permitted with onerous conditions. Implementation thus becomes an arduous job. While privately held firms do possess more freedom in structuring deals and globally accepted concepts can be implemented, the limitation of deal-making in public companies is a major restraint on growth.
The concept of control and economic ownership remains unclear. Currently, control and economic ownership go hand in hand. A positive move is the government considering a move to allow Indian firms to raise funds while letting the founder promoters retain control. This can be achieved by the use of condition-free DVRs or with easier and fewer conditions. This will enable financial investors to get economic ownership while leaving the control through voting rights with the founders.
With numerous inter-temporal changes, options like call, put and warrants are somewhat clearer now, but still not free of doubt. A case in point is foreign investors, who exercise call or put options in situations of default, not being allowed to buy or sell shares at a price other than the RBI-mandated market price. This is counter-intuitive, since in default situations, no investor will like to settle at the market price. RBI should, therefore, allow the discount or premium over market price.
In a real-time financial ecosystem, we exist in what could well be the medieval ages. We can’t have a vibrant entrepreneurial ecosystem unless Indian entrepreneurs are given a level-playing field with global players. The time for that is today.
Lalit Kumar is partner with J. Sagar Associates. Views are personal.