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Leveraged Buyouts, also referred to as LBOs, are returning to the Indian economic market with greater vigour, thanks to the increased momentum of mergers and acquisitions in the Indian market.
Over the previous few years, we have seen positive and unexpected growth in various sectors of the economy, which was unfortunately tolled by the COVID-19 crisis. Mergers and Acquisitions have played an important part in making India a leader amongst world economies.
In this article, we will discuss the concept of Leveraged Buyouts and its significance in the Indian market.
The concept of Leveraged Buyouts refers to a form of acquisition where the acquiring company buys the shares of the other company through borrowed funds. To explain more simply, a leveraged buyout is when one company raises funds for acquiring the other company through debt. In turn, the repayment of such a debt is made by using the cash flow of the acquired company.
IMPORTANCE TO INDIA
India is a growing economic market. Since the global rift with China overspread of COVID-19, the world leader in manufacture and export is expected to lose lots of their business to India. Investment in India is likely to rise and thus, India would need to relax its regulations to accommodate the welcoming change.
Leveraged buyouts can be a viable mode to inject investment in the Indian economy, helping it accelerate to greater heights. Though not much capital is infused, which is the greatest motive behind this concept, however, it may be able to enhance foreign institutional investment in India and to help revitalize the sick and currently invalid companies. The stressed asset market has been a significant issue for the Indian economy since time immemorial and despite adequate changes over the years, the government and authorities have failed to resolve the issue to a larger extent. However, the LBO model may be a ray of hope for sinking sectors to revive their growth and consequentially, accelerate the growth of the economy as a whole.
India has been seen as a viable market for Mergers and Acquisitions and according to Bain & Company (in collaboration with CII), there has been a bumper 70% growth in Mergers and Acquisitions in 2018. This rise has continued even in 2019 however, there has been a slight significant decline in 2020, due to the coronavirus pandemic.
However, leveraged buyouts may help the economy revive, especially in the area of Mergers and Acquisitions. According to one report, foreign currency syndicated leveraged buyouts in India has seen a jump in 2019, with $891 million across four deals. This is contrary to the single transaction recorded in 2018, which amounted to $150 million.
This rise is significant in contradiction to the 2016 data when India’s LBO market accounted for 9% of the total funds invested and 3% of the total number of deals. Though in other markets like North America and European countries, this share hikes up to 80% of the total transactions but India is also picking its pace.
RULES AND REGULATIONS
Debt has an important role to play when discussing the concept of leveraged buyouts. India’s corporate debt market has been there since independence and has grown tremendously. State-owned public sector undertakings are reported to account for about 80% of the primary market for debt issuance, which is surely a whooping amount.
Despite a well-established debt market in India, the regulations imposed by the Reserve Bank of India have acted as a hindrance to the growth of the LBO sub-sect of the Mergers and Acquisitions. Additionally, the Companies Act 2013 prohibits a public company to provide security for the acquisition of its shares, thus restricting a typical leveraged buyout.
However, the issue of rising numbers of non-performing assets isn’t unknown to the authorities. Since LBOs may contribute constructively to revive such sick companies, the RBI gave the system thought and came up with a discussion paper in 2013. The discussion paper titled “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy” introduced the idea of regulated leveraged buyouts in India. This move gave hope to the market and resulted in the above mention statistics of 2019. This provision was made only for stressed enterprises. Earlier, RBI had prohibited banks and financial institutions from lending money for acquisition of shares in the Indian economy. The Foreign Investment Promotion Board also talked on similar lines.
The India Venture Capital Association works for promoting and increasing the flow of venture capital in India however, it hasn’t been able to perform a tremendous job.
The current situation is that shares in only sick companies can be bought using borrowed funds and this regulated LBO regime is hindering any development that might be possible in the Indian economy, concerning venture capital and private equity. However, according to the authorities, these restrictions are important, considering the interest of the Indian economy and the domestic market.
Since the status-quo has remained somewhat unchanged in terms of regulations but the market has seen positive results. Hopefully, in the COVID-19 era, the government and the RBI would make efforts to further liberalize LBOs in India to ensure maximum benefit for the Indian players.
 Smit Suman and Amit Sachan, Nature and Drivers of Buyout Transactions in India, AEBM 237, 237 (2016).
 N. Chokshi, Challenges in Executing Leveraged Buyouts in India, The Evolution of the Growth Buyout, Glucksman Institute of Research in Securities Markets, NYU Stern School of Business, 80 (2017).
 Companies Act § 77(2) (2013).
 Reserve Bank of India, Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy, Reserve Bank of India, 11 (2014).
ABOUT THE AUTHOR(S)
Anjali Tripathi is a 4th-year law student at Amity Law School, Delhi (GGSIPU, Delhi, India).
Nikunj Bhatnagar is a 4th-year law student at Amity Law School, Delhi (GGSIPU, Delhi, India).
In Content Picture Credit: Veristrat Inc.