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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: [email protected]
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.
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 companys
capital. However, in case of MNE related acquisitions, provisions of the Foreign
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
Committees 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