June 10, 2020
【Seminar Summary】TKI Global Webinar Interview Series Vol.1
This is a short summary of the first installment of TKI Global Webinar Interview Series. In this interview, we interviewed Zakir Merchant, a M&A partner at Khaitan&co - one of the largest law firms in India.
1. About Khaitan
- Full-service law firm with around 600 lawyers across 4 offices in India. Has an active Japan desk.
- For the past 12 years, Zakir has been exclusively advising Japanese clients: trading houses, financial services, and advising on some of the largest investments from Japan to India.
- Khaitan is the leading counsel for JETRO: which gives them insight into the issues and concerns of Japanese companies.
2. General insights on lockdown and restrictions in India
- Series of lockdown phases from March 24. Because of the sheer size of the population (1.4 billion), there was no option but to impose a strict lockdown.
- The government has been very active, but struggled to keep numbers low due to a fraught healthcare system.
3. Labor issues
- Sudden lockdown affected the migrant and working-class population the most. India struggled to contain the travel of the virus from city to village, caused by migrant workers migrating back home.
- Government orders were passed late March to prevent employers from dismissing employees. However, these orders resulted in confusion by businesses, and are currently being challenged in court. All previous orders have now been cancelled.
- Lay-offs are happening, and companies are reorganizing their workforce. We are seeing an average of 20% pay cut at the top of the ladder. At the lower level, union negotiations are taking place.
4. Effect on on-going transactions and deal work
- Larger investments have continued pouring into India. However, some have been put on the backburner. (e.g.: acquisition of a listed company delayed due to stock market situation.)
- In India, claiming force majeure is difficult and the standard is high. Temporary suspension of a deal does not allow the cancellation or revocation of a contract.
- Most M&A deals have a MAC clause, however, there are trends currently, where deals are also signed without a MAC ensuring there is no walk away from the transaction.
5. Foreign investment restrictions and pricing guidelines
- There are two ways to invest into India: the automatic route and the government route. In most sectors, you can invest via the automatic route: but in some sensitive areas (e.g.: defense), the government route is required.
- With lockdown, investments required to take the government route have slowed down.
- Pricing regulations require Japanese companies to pay no less than the valuation amount when acquiring a company. In general, Japanese companies tend to pay high premium, above the valuation price. The gap between the price paid and the valuation amount becomes a problem when things go bad: because when Japanese companies want to sell their stake in the investment, they need to sell below valuation: creating a gap in the price they can sell their stake, and price they bought it for. Selling is also subject to pricing guidelines.
- If you have a put option for your exit plan, the pricing guidelines apply. Therefore, put options need to be drafted carefully because they often face issues with enforcement.
6. The ‘new normal’ economy. What will happen after COVID-19?
With share prices going down, would that trigger the appetite of investors?
- There are on-going discussions at the government level to relax regulations, relating to minimum public shareholding requirements for listed companies; but only in the case of distressed or defaulted companies. But most companies in India are very stressed currently.
- Japanese companies value physical presence (factory visits, in-person meetings). This will be a challenge for the coming few months for new deals.
7. Promoters of Indian companies negotiate very strongly. Will we see softening?
- Softening will happen if there’s hardening from the Japanese side. Japanese companies are very fair in their negotiation process and offer. They are systematic, and board approval dates are set well in advance. While this is admirable, Indian promoters take advantage of Japanese internal systems and therefore tighten the negotiations to the last minute.
- Japanese companies should ensure they retain Indian lawyers that are experienced in advising Japanese clients, that understand a very high standard of service is required of them. It is best to talk to senior level management directly – results in a much more respectful negotiation, because there is no escape route for lower level to “take it back to management”.