Introduction
Global M&A activity in the financial services sector appears to have slowed, despite a strong start in 2024, in line with general market trends. The Financial Institutions Group (“FIG”) is experiencing a unique phase of consolidation, with deal values increasing despite a significant decline in deal volume. This trend can be seen in a 5% YoY rise in deal value and a 30% drop in volume in the first half of 2024[1], suggesting a shift towards larger, strategic mergers.[2]
However, emerging markets such as India present a contrasting picture. Buoyed by a projected annual growth rate of 6-7%[3], and covering approximately $41 billion in terms of 2023 deal value [4], India’s FIG sector remains a major driver of Indian M&A. This dynamism necessitates a closer look at the regulatory framework governing M&A activity in the FIG space. This paper delves into these frameworks, offering valuable insights for readers navigating this complex landscape.
RBI framework governing M&A deals:
The Reserve Bank of India (“RBI”) regulates M&A activity within the FIG sector. The following RBI Directions are crucial for navigating the legal landscape of FIG M&A:
- ‘Change of Control’ for NBFCs: For Non-Banking Financial Companies (“NBFCs”), the RBI Master Direction (NBFC – Scale Based Regulation) Directions, 2023[5], outlines scenarios requiring prior RBI approval[6]. These scenarios include any takeover or acquisition of control of the NBFC, regardless of whether there is management change. Additionally, acquisitions or transfer of shareholding exceeding 26% (with exceptions for buybacks or court-approved capital reductions) also necessitate RBI approval. Similarly, management changes affecting more than 30% of the directors (excluding independent directors) require prior authorisation. NBFCs must also inform RBI about any director or management level changes, even if they fall outside the mandatory approval thresholds.
- Private Bank M&A: For private sector banks, the Master Direction – Amalgamation of Private Sector Banks, Directions, 2016[7], establishes procedures and compliances required for mergers and amalgamations. Further, in case of voluntary amalgamations between banking companies, the RBI holds discretionary powers to approve such schemes under Section 44A of the Banking Regulation Act, 1949.[8]
- Banks and NBFCs M&A: Voluntary mergers involving an NBFC and a banking company are governed by Sections 232 to 234 of the Companies Act, 2013[9], and require approval from the National Company Law Tribunal in addition to that of the RBI.
- Acquisition of Major Shareholding[10] in Banks: The RBI has recently introduced Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies.[11] The Directions provide that any person/ entity obtaining a major shareholding in a banking company, through the purchase of shares or voting rights, requires prior RBI clearance per Section 12(B) of the Banking Regulation Act. Post in depth due diligence on the applicant, the RBI may accept, reject, or authorise the acquisition of a smaller ownership. The RBI may also place additional requirements on the banking company and the applicant when giving approval. In addition, the Guidelines prescribe criteria for reporting, lock-in times, and shareholding limitations when purchasing shares or voting rights in a banking firm.
Recent deals where major shareholding of banks were acquired are: (i) Life Insurance Corporation of India’s acquisition of a 9.99% stake in HDFC Bank in January 2024[12]; and (ii) HDFC Bank’s acquisition of a 9.5% stake in IndusInd Bank in February 2024[13].
- FDI in Banks and NBFCs: Foreign Direct Investment (“FDI”) refers to an investment through equity instruments by a person resident outside India. FDI in the banking sector is governed by the FDI Policy of India[14], issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry (“FDI Policy”).
Sectoral caps on FDI and approval routes in the FIG sector are summarised below:
| Entity | Sectoral Caps | Entry Route |
| Private Sector Banks | Up to 49% | Automatic |
| 49% to 74% | Government | |
| Public Sector Banks | 20% | Government |
| WOS/ Branch of Foreign Bank | 100% | RBI License |
| NBFCs | 100% | Automatic |
- Overseas Investments: In August 2022, the Foreign Exchange Management (Overseas Investment) Regulations, 2022 (“OI Regulations”), and the Foreign Exchange Management (Overseas Investment) Rules, 2022 (“OI Rules”), were notified, replacing the erstwhile Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (“FEMA 120”), and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property Outside India) Regulations 2015. The OI Regulations and OI Rules were notified to create a more favourable regime for offshore investments and building on overseas opportunities, including M&A transactions. The key aspects of the OI Regulations and the OI Rules are mentioned hereunder:
- OI Regulations: The OI Regulations allow India-established entities to lend or invest in debt instruments issued by entities abroad. The OI Regulations also permit Indian entities: (i) to pledge the equity capital of the foreign entity in which it has made ODI or of its step down subsidiary outside India in favour of Indian or overseas lender for availing fund based or non-fund based facilities; and (ii) provision of guarantees specified to or on behalf of the foreign entity or any of its step down subsidiary in which the Indian entity has acquired control through the foreign entity.
- OI Rules: The OI Rules permit and govern overseas investment an Indian entity via a variety of routes, including merger, demerger or any scheme of arrangement, as per applicable laws in India and those of the foreign jurisdiction.
- Reverse Flipping: ‘Flipping’ implies transferring an India-based entity’s entire ownership to a foreign entity, which includes the transfer of the main assets of the entity, such as the intellectual property, although the India entity would have most of their market, personnel, and founders in India. Reverse flipping is the opposite. Reverse flipping of a foreign entity back to India could be undertaken by following a share swap arrangement or an inbound merger upon due considerations such as capital gains tax in the hands of shareholders in India, compliance with the pricing guidelines, entry routes, sectoral caps and other conditionalities under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI Rules”).
Under reverse flipping, start-ups based in India, especially those in the fintech sector, which had transferred their main headquarters abroad, are now shifting or moving to shift their base back to India. Most recently, major companies such as Pepperfry, PhonePe and Groww have shifted their base to India. Major fintech companies like Pine Labs, Meesho, Flipkart, KreditBee, Zepto and many others are also planning to shift their base (headquarters) to India.[15]
M&A Regulatory Regime: An Anti-trust Law Perspective
The Competition Act, 2002, is one of the fundamental legal frameworks governing high value M&A activity in the FIG space. The recent Competition (Amendment) Act, 2023 (“2023 Amendment Act”)[16], has introduced the Deal Value Threshold (“DVT”) concept, which establishes an independent threshold, dependent on the size of the transaction or consideration. Under the DVT, if the enterprise concerned has “substantial business operations” in India, every transaction of value exceeding INR 2,000 crore (equivalent to $267 million) must be notified to the Competition Commission of India (CCI)[17]. This new threshold framework ensures more thorough regulatory control over potentially impactful M&A deals that could stifle competition. This DVT construct has come into effect from September 10, 2024.
Additionally, there are specific ministry initiatives such as the notification dated August 30, 2017, issued by the Ministry of Corporate Affairs (MCA), vide which M&A involving nationalised banks[18] has been exempted from merger control scrutiny for a period of 10 years, i.e., till 2027.[19] Similar exemptions have also been granted to regional rural banks for five years.[20]
Interestingly, stringent regulations governing the FIG space, coupled with the presence of numerous players and high approval thresholds, have not translated to significant competition concerns. The CCI has not blocked deals in the FIG space. Noteworthy fintech M&A deals which came up for CCI approval include100% acquisition of IndiaIdeas.com by PayU[21]. The CCI, in 2023, has established a specialised unit known as the Digital Markets and Data Unit (DMDU) to specifically focus on competition in the digital payments landscape.[22]
Conclusion:
The NBFC registration and cancellation data published by the RBI, for the period between FY15-16 and FY22-23, indicates that the RBI has issued 723 new NBFC licences and cancelled 3,053 registrations of existing NBFCs, i.e. the cancellations were at least double the number of new licences granted each year, barring FY20-21.[23] This indicates the RBI’s intention to reduce the number of existing NBFCs. Accordingly, chances of getting a new licence would be lower compared to acquiring an existing NBFC as the latter does not involve increasing the total number of NBFCs. In such a scenario, acquisition involving ‘change of control’ approval may be the more preferable route for entering the NBFC sector.
Even when the RBI grants new licences, it is usually to applicants with innovative financial solutions or themes promoted by it, such as financial inclusion, rural inclusion, Micro, Small and Medium Enterprises (MSME), education, low-cost housing, etc., as opposed to conventional products such as consumer loans or unsecured personal loans.
In the recent past, India has witnessed multi-million dollar mergers, such as the merger of Housing Development Finance Corporation (HDFC) with HDFC Bank, IDFC First Bank with IDFC Limited and Slice with North East Small Finance Bank, among many other notable deals, and the data suggests that India’s FIG sector is flourishing with M&A opportunities, particularly in the consolidation and digital innovation space.
[1] Brian Levy, ‘Global M&A Industry Trends’, PwC (Available here)
[2] Anirban Sen and Anousha Sakoui, ‘Dealmakers optimistic on global M&A prospects despite sluggish growth’, Reuters (Available here)
[3] Karan Singh, Vikram Chandrashekhar, Palak Garg, “M&A in India: Continued Optimism Fuels Momentum”, Bain and Company (Available here)
[4] ‘India M&A trends 2024’, Deloitte (Available here)
[5] RBI Master Direction (Non- Banking Financial Company – Scale Based Regulation) Directions, 2023 (Available here)
[6] Chapter VI, Direction 42 of the RBI Master Direction (Non- Banking Financial Company – Scale Based Regulation) Directions, 2023 (Available here)
[7] RBI Master Direction on Amalgamation of Private Sector Banks, 2016 (Available here)
[8] Section 44A, The Banking Regulation Act, 1949 (Available here)
[9] Companies Act, 2013 (Available here)
[10] “Major shareholding” means “aggregate holding” of five per cent or more of the paid-up share capital or voting rights in a banking company by a person.
[11] RBI Guidelines on Acquisition and Holding of Shares or Voting Rights in Banking Companies, 2023 (Available here)
[12] ET Bureau, “LIC gets RBI nod to buy 9.99% stake in HDFC Bank”, THE ECONOMIC TIMES (Available here).
[13] HT News Desk, “RBI approves HDFC Bank’s proposal to acquire 9.5% in IndusInd Bank: Explained”, HINDUSTAN TIMES (Available here)
[14] Foreign Direct Investment Policy of India (Available here)
[15] ETtech, “Startups ‘reverse flip’: Pine Labs, Zepto, Meesho in queue for India return”, THE ECONOMIC TIMES (Available here).
[16] The Competition (Amendment) Act, 2023 (Available here)
[17] Section 6 of Act 9 of 2023, The Competition (Amendment) Act, 2023 (Available here) (w.e.f. 18-5-2023)
[18] Under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
[19] Ministry of Corporate Affairs, Notification dated August 30, 2017 (Available here)
[20] Ministry of Corporate Affairs, Notification dated August 10, 2017 (Available here)
[21] CCI Order dated September 5, 2022 (Available here)
[22] KR Srivats, “CCI keen to undertake ‘capacity building’ of its digital markets unit”, The Hindu Business Line (Available here)
[23] RBI Report on Trend and Progress of Banking in India 2022-2023 (Available here)
