Frenzied activity in the Indian M&A market: Vultures are gathering to oust defaulting promoters from their perch

It is mergers and acquisition (M&A) time again in India with 2018 already witnessing deals worth $104.5 billion trouncing the previous annual record with almost four months left in the year. The tally may surpass $100 billion again in 2019 .

The last round of M&A frenzy was in a pre-Insolvency and Bankruptcy Code 2016 (IBC) milieu, involving friendly and hostile takeovers often at the risk of inviting winner’s curse which is inevitable when the acquirer overpays in his keenness to acquire, come what may. The Indian patois junoon – local language for obsession, described this tendency most aptly.

Kingfisher Airlines’ acquisition of Deccan Airways is still fresh in everyone’s mind—its promoter Vijay Mallya sowed seeds of his own destruction by paying a mindless price of about Rs 150 per share for the losing Deccan Airways. But what is happening now in the fresh wave of acquisitions is entirely different. Vultures, both Indian and foreign, are gathering and hovering over the IBC resolution process, smelling opportunities to make a killing—buying stressed assets of defaulting companies through the acquisition of controlling interest for a song, inflicting in the process huge haircuts on the harried banks nursing mindboggling non-performing assets (NPAs). In other words, this time round, it is the buyers’ market in the M&A scenario.

And unlike in the earlier rounds where the existing promoters made money in truckloads, in the present IBC milieu, promoters are shaking in their boots at the imminent prospect of being elbowed out from what they all along thought as their comfortable perch. The bar on promoters who are presiding over the ruination of their companies, bidding for the self-same companies, has heightened their tale of woes.

A sweetener has also been added for the ones taking over the controlling interest of such companies—exemption from the rigor of Section 79 of the Income Tax Act which says that if a closely-held company wants to set off its accumulated losses, 51 percent of the shares carrying voting rights must have been in the same hands on the last day of the financial year in which such loss was incurred as well as on the last day of the financial year in which the set-off is claimed. This is a guarantee and bulwark against payment of tax so soon in the day after the acquisition. For the acquirer, this is the icing on the cake—after acquiring controlling interest for a song, he doesn’t have to bother about Income Tax for a few years. Losses are indeed attractive though this may sound a tad oxymoronic.

The combination of a new bankruptcy law, a race for dominance in the e-commerce industry and a record war chest at Asia-focused private equity funds has created what some are calling an unprecedented opportunity for deal-making in the world’s fastest-growing major economy. The burst of activity is not only good news for investment bankers, it’s also helping to rid the Indian financial system of bad debt and modernise a retail sector that serves 1.3 billion people, according to a report in Bloomberg.

One is apt to take the optimism about cleansing the Indian financial system of bad debt with a handful of salt. For banks the haircuts of close to 50 percent borders on the tonsure. Yes, it is good to cash in the receivables at discount rather than sit tight on them in perpetuity with no hopes of recovery but Indian promoters should not be lulled into smugness, secure in the knowledge that worse come worse they would lose control of their companies. We haven’t sent a single bungling company promoter to jail so far nor have we so far seen a disgorgement order on marauding promoters. The problem with the IBC-driven M&A frenzy is that while it has made a life for the acquirers, it has made banks fatalistic—lend, but steel yourself for haircuts. That is not something reassuring for banks. Be that as it may.

M&A indeed is a ruthless market in carrying out shake-outs where there are too many players as well as in shaking up the smug promoters out of their slumber and cocoon. But in the IBC-led M&A, bankers are bound to rethink their business model.

(The author is a senior columnist and tweets @smurlidharan)