Distressed Mergers & Acquisitions: A Recent Trend in Corporate Sector in India

by Abha Kashyap Managing Patner

Mergers and Acquisitions (M&A) have captivated the business sector all over the globe. India is no exception when it comes to mergers & acquisitions. After the elimination of restrictive policies and liberalization of the Indian economy, the M&A culture in India exploded. M&As are strategic measures used to propel economic growth. This has been accomplished by expanding into low-cost or developing areas, particularly those with a surplus of skilled labor, or by purchasing well-established corporate organizations. M&A culture has been dominant in India since 2015 and has only risen in popularity over the years. Unfortunately, not every M&A transaction is carried out with equal liberty for the parties. Some of the M&A transactions are hit-and-run situations, where there is centralization of power with the acquirer, an easy target, and a profit-making arrangement.

The Insolvency & Bankruptcy Code, 2016 (IBC) had been enacted with the primary goal of reorganization, resurrection, and protecting the interests of shareholders. It has constrained the bounds of the former regime where it was non-existent. The modern Insolvency and Bankruptcy Code, 2016, has replaced outdated legal frameworks regulating the rehabilitation and liquidation of incorporated or unincorporated enterprises. The previous system concentrated on the dissolution of corporate bodies to discharge debts, which did little or no help. The IBC, on the other hand, focuses on the continuation of the company as a going concern. This law concentrates on reviving ailing industries to the best of its ability, the code's primary goal, and liquidating the same if resurrecting is not feasible. In the case of Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court confirmed the legality of the Insolvency and Bankruptcy Code after considerable discussion and debate, this opened up a whole new dimension in the distressed M&A arena has been made available.

By 2018, distressed acquisitions accounted for around 12% of overall M&A activity, totaling USD 14 billion, thanks to the code's insolvency procedure. Since the code's implementation in 2016, a total of $14.3 billion in distressed asset sales have occurred in India. The IBC has also benefited investors and acquirers who may get valuable and high-quality assets at a low cost. Bhushan Steel, Reliance Communications, and Fortis Healthcare were among the famous distressed M&A transactions completed during this timeframe. Some distressed M&A transactions are directly tied to distressed assets, while others are indirect and originate from the bankruptcy of the parent organization, resulting in a sale. In India, the IBC regulation has made it genuinely beneficial to purchase distressed assets that were looked down on by investors. The IBC has played a major role in unclogging banks’ balance sheets and pushing it for reallocation of capital for more efficient use due to the time-bound method in which procedures are completed under the provisions of the code.

Until recently, the majority of distressed asset investors were domestic promoters with a large strategic stake. According to Kroll data, Indian investors account for 90% of distressed deal value and 81% of deal volume. A few international investors have also shown interest in the assets for sale. In addition, financial actors such as private equity companies and pension funds are interested in investing in distressed assets. With banks pressuring loan defaulting corporations to change management, business assets are offered for acquisition at rock-bottom prices. Rapid resolution or liquidation of stressed assets will be important for unclogging bank balance sheets and efficient capital reallocation. Because stressed assets are found in a variety of industries, mergers and acquisitions are likely to occur in a variety of industries.

Distressed M&As are not new to the Indian economy. In a distressed M&A, both investors and sellers have a lot of research, procedure, and due diligence to undertake in a much shorter amount of time. Handling a distressed M&A is nothing short of an art; it needs exceptional abilities as well as an equally exceptional drive. The Insolvency and Bankruptcy Code was enacted to avoid the scourge of non-performing assets in the market and to provide an effective and fast resolution method to deal with it. The IBC regime has aided the growth of the M&A sector by providing a quick corporate insolvency resolution process, and since the timelines for the proceedings that are already under CIRP have been relaxed by a notification from the central government, this will result in a more effective examination process – resulting in more valuable Mergers.

Originally posted on www.kpalegal.com on 15th June 2021