Multinational Enterprises and M&a in India - Patterns and Implications

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RIS DP# 5-2000

Multinational Enterprises and M&As in India:

Patterns and Implications

Nagesh Kumar

Version: 1.1

June 2000

Published in

Economic and Political Weekly, 35, 5 August 2000: 2851-8

Research and Information System for Non-aligned and other Developing Countries,

Zone 4B, Fourth Floor, India Habitat Centre, Lodi Road, New Delhi-11003, India

Phone: 468 2175; Fax: 468 2173;

email: nagesh@del6.vsnl.net.in

This paper is a part of a larger ongoing work on investment and competition policy at

the Research and Information System for Developing Countries, New Delhi. An

earlier version was presented at the Workshop on Cross-border M&As and Sustained

Competitiveness in Asia organized by UNCTAD in Bangkok on 9-10 March 2000. I

have benefited from discussions with Dr V.R. Panchamukhi and from the comments

of participants. Dr. P.L. Beena helped in preparation of the dataset for this paper. The

usual disclaimer applies.

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Multinational Enterprises and M&As in India:

Patterns and Implications

1. Introduction

Mergers and acquisitions (M&As) have become increasingly important channels of

cross-border industrial restructuring and foreign direct investment all over the world.

In India, the policy liberalization in the 1990s has facilitated M&As including crossborder

M&As. As a result, the M&A activity has boomed over the past few years. In

contrast to nearly all of FDI inflows destined to India taking the form of greenfield

projects until early 1990s, a substantial proportion of current FDI inflows takes place

in the form of acquisition of existing enterprises in the country. The developmental

implications of this trend need to be examined and analyzed.

This paper makes an exploratory attempt to map out the recent M&A activity in the

Indian corporate sector associated with foreign MNEs and their Indian affiliates. That

is attempted with the help of an exclusive database built-up by us that covers most of

the deals associated with MNEs in India for the period April 1993 - mid-February

2000. This database helps to examine the industrial composition of the deals as well

as their motives. The structure of the paper is as follows. Section 2 briefly summarizes

the policy framework governing M&A activity. Section 3 examines the emerging

patterns and motives of MNE related M&As in India. Section 4 discusses implications

of the MNE related M&As for various parameters of development. Section 5

concludes the paper with some remarks for policies.

2. Policy Framework

The policy and regulatory framework governing the M&As has gradually evolved in

the 1990s. Before 1990, an open offer was mandatory for acquiring 25 percent stake

in a company. In 1990, this threshold was reduced to 10 percent of a company's

capital. However, in case of MNE related acquisitions, provisions of the Foreign

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Exchange Regulation (FERA) Act, 1973, also applied which imposed a general limit

on foreign ownership at 40 percent. In addition, Monopolies and Restrictive Trade

Practices Act (MRTPA), 1969, gave powers to the Union government to prevent an

acquisition if it was considered to lead to 'concentration of economic power to the

common detriment'. In 1992, the government created the Securities and Exchange

Board of India (SEBI) with powers vested in it to regulate the Indian capital market

and to protect investors' interests. SEBI also took over the functions of the Office of

Capital Issues Controller. Besides as a part of the package of reforms and policy

liberalization, the government announced a New Industrial Policy (NIP) in July 1991.

NIP accords a much more liberal attitude to FDI inflows. Furthermore, the FERA

restrictions on foreign ownership in Indian companies were abolished and

requirement of prior government approval on M&As was removed (see Kumar 1998,

for more details). In November 1994, SEBI issued Guidelines for Substantial

Acquisition of Shares and Takeovers, widely referred to as Takeover Code 1994.

However, the experience demonstrated that the Code had lacunas and loopholes to

deal with the complexity of the situation. Hence, a Committee chaired by Justice P.N.

Bhagwati was appointed in November 1995 to review the 1994 Takeover Code. The

Committee's Report of 1996 formed the basis of a revised Take Over Code adopted by

SEBI in February 1997. The new Code provides for the acquirer to make a public

offer for a minimum of 20 percent of the capital as soon as 10