M&A deals do not need FIPB okay

BANGALORE: The timing couldn’t have been better. Just when foreign companies are queuing up to buy into businesses in India, mostly in the information technology and engineering space, norms have been eased to pave their entry.

According to a recent Reserve Bank of India (RBI) circular, any transaction where foreign multinationals buy into Indian companies or where fresh issue of shares is made to a foreign company, approvals from the Foreign Investment Promotion Board (FIPB) and the apex bank need not be sought by the foreign entities.

This is, of course, subject to the foreign direct investment (FDI) sectoral caps.

To start with, at least $100-200 million worth IT deals currently pending with the regulators will automatically be cleared swelling the actual inflows of foreign exchange into the country.

What’s more, valuations of mergers and acquisition (M&A) deals, which used to be under the strict lens of RBI will no more pose an issue to investment bankers.

Explaining the impact of this move, Sharad Vaid, Delhi-based legal consultant on foreign investments and FIPB said now M&A deals will happen more vigorously since procedural delays used to be a real bottleneck hindering transactions.

“Investors used to take a minimum 45 days for a FIPB approval while another 15 days for RBI clearance for a share transfer deal.

Now foreign companies can transfer shares or subscribe to fresh issue of shares without any clearances as long as it does not breach the FDI ceiling prescribed for each sector. Apart from these bottlenecks, foreign companies used to hire consultants to handle these issues which used to be additional expenditure,’’ he said.

A city-based investment banker, commenting on this development stated that information technology sector will be the biggest beneficiary as there are several deals awaiting FIPB clearances.

“In fact, there has not been any sanction by FIPB for as long as four months in the recent past due to which several deals could not be concluded,� he said.

“We have even come across a few IT biggies based in the Valley refusing to consider domestic buy-out proposals due to these stringent norms,’’ he added.

“By eliminating procedural hassles, this move will certainly help speed up the pace of mergers and acquisitions.� said Mr Ravi Ramu, chief financial officer, MphasiS BFL.

Mr Lakshmi Narayanan, president and CEO of Cognizant said that the move corrects the existing anomaly which allows Indian IT companies to invest 100% overseas for M&A, but requires a foreign firm to seek permission prior to buying companies in India.

“Removing this bureaucratic hurdle will make M&A activity appear more favorable.� he said. He expects some amount of M&A activity in the SME segment to get a fillip due to this development.

With oustsourcing becoming mainstream, foreign companies are looking at India both at the tactical and strategic levels. Investment in India is no longer considered as a short term strategy needing periodic reviews.

Foreign companies are looking at India from a long term perspective, which is why there is a spurt of M&A deals, he said.

Over 25 M&A deals have been reported in past twelve months, while in the BPO segment alone over $300-350 million worth deals have been reported.