It was a buzzing year for control deals in India. Year 2022 saw 93 control deals in the listed space, implemented through the tender offer route under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Regulations)[1]. This marks the highest number of tender offers in the last five years.
The overall size of such deals (including underlying transactions) was ₹1,180 billion in 2022, 45% higher than the overall size of deals announced in 2021, which was at ₹812 billion. However, the aggregate value of the tender offers (minus the underlying deal size) was comparable to 2021. In line with the 2021 trend, strategic players took centerstage in driving deal activity even in 2022, making 87 out of 93 tender offers.
Despite the challenging global environment this year, with rising geopolitical tensions, supply chain disruptions, rising energy prices, increasing interest rates and increased input costs, the Indian economy and stock markets were quite resilient and reached all-time highs. Companies with strong financials and cash balances or with the ability to avail debt cheaply grabbed inorganic growth opportunities to increase their market share, integrate supply chains or enter new market segments. One such instance was the Adani Group’s entry into the cement sector via its acquisition of Ambuja Cement Limited and ACC Limited from Holcim Group, which were also the biggest tender offers in 2022. The manufacturing sector too benefitted from companies looking to diversify their supply chains and saw the highest number of control deals involving tender offers (15 in all) this year.
The IT sector on the other hand witnessed a high volume of deals this year. The start-ups space especially saw a lot of M&A activity. This space is now in a consolidation phase. This year was also rather unique since it saw quite a few mergers/ share swap deals such as the acquisition of Blinkit by Zomato through a share swap and the merger of L&T Infotech and Mindtree to create India’s fifth largest IT company by market capitalisation. This marks a move away from all cash deals.
The financial services space also saw some critical deals involving significant consolidation and some notable exits, viz. HDFC Bank’s proposal to merge with its parent company Housing Development Finance Corporation; Citibank’s exit and sale of its consumer business in India to Axis Bank and L&T’s sale of its mutual funds business to HSBC.
The Government of India (GOI), as part of its disinvestment agenda, has put IDBI Bank up for sale, which we expect will see fruition in 2023. Going ahead, the government is likely to go full throttle on the disinvestment programme. For smooth implementation of such proposals, the government and the regulators have started amending certain crucial aspects of the legal regime. Certain amendments are already in effect and more will come through soon.
We expect the overall deal activity to remain high even in 2023.
In this blog, we have focused on the key highlights of 2022 and compared the deal activities in 2022 with 2021.
Analysis of sector-wise activity
In value terms, the cement sector saw the highest aggregate value of tender offers at ₹31,139.55 crore, followed by the pharmaceuticals and chemicals sectors aggregating at ₹3,603.49 crore. In number terms, the manufacturing sector saw the highest number of tender offers (15 in all), followed by (i) IT sector (10); (ii) non-banking financial companies (NBFCs) (10); and (iii) trading companies (10).
In 2022, the five biggest tender offers by value were for companies operating in the cement space (Ambuja Cements Limited and ACC Limited), pharmaceuticals (Suven Pharmaceuticals Limited); metals (Lloyds Metals and Energy Limited) and IT sector (R Systems International Limited). These five tender offers comprised approximately 88.21% of the aggregate value of all tender offers in 2022.
The following graph shows in number and value terms the tender offers in major sectors in calendar year 2022:
2022 versus 2021
| Calendar year | 2022 | 2021 |
| Number of tender offers | 93 | 81 |
| Completed tender offers (tender offers that were launched and completed in the same calendar year) | 70 | 50 |
| Number of direct tender offers | 84 | 76 |
| Number of indirect tender offers | 7 | 2 |
| Number of tender offers made due to breach of 5% creeping acquisition limit | 6 | 4 |
| Total value of tender offers | ₹423.63 Billion | ₹436.02 Billion |
| Number of tender offers for NBFCs | 10 | 15 |
| Number of tender offers where underlying transaction was closed (whole or in part) before closure of the tender offer | 26 | 17 |
Other significant trends and highlights of 2022
- Size of tender offers: The largest tender offer by value was for Ambuja Cements Limited at ₹19,880 crore (appx.) and the smallest tender offer was for Shree Vijay Industries Limited at ₹2.90 lakh. Other large tender offers were for ACC Limited (₹11,260 crore, appx.), Suven Pharmaceuticals Limited (aggregating ₹3,276 crore, appx.); Lloyds Metals and Energy Limited (₹1,545 crore, appx.) and R Systems International Limited (₹1,406 crore, appx.)[2].
- Busiest and slowest quarters: The first and second quarters (Q1 and Q2) of 2022 were the busiest with as many as 27 tender offers each. The fourth quarter (Q4) was the quietest with 18 tender offer announcements. The second quarter (Q2) had the highest aggregate value of tender offers at ₹32,866 crore, while the third quarter (Q3) witnessed the lowest aggregate value of tender offers at ₹1,051 crore. In comparison to calendar year 2021, (i) in number terms, tender offers made in each quarter of 2022 exceeded the tender offers announced in the corresponding quarters of 2021; and (ii) in value terms, each quarter of 2022 saw lower value of tender offers, except Q2.
- Foreign vs. Indian acquirers: Non-residents made 11 tender offers in 2022. The aggregate value of such tender offers was ₹38,160 crore, which constitutes 90% of the aggregate value of all tender offers in 2022. The year 2022 saw higher number of tender offers by both residents and non-residents as compared to 2021. The aggregate value of tender offers made by non-residents in 2022 was higher than in 2021 (by 12%).
- Time taken by SEBI to clear DLOF: On an average, SEBI took 47 days to issue observations on the draft letters of offer (DLOFs), with the longest being 107 days (in Lloyds Metals and Energy Limited, operating in the Metals sector) and the shortest being 13 days (in Amani Trading and Exports Limited, operating in the Textile sector). On an average, SEBI took longer to clear tender offers in 2022 than in 2021.
Consistent with its past practice, SEBI took longer to issue observation letters for NBFC takeovers (on an average 71 days), with the longest being 98 days (in Visco Trade Associates Limited) and the shortest being 45 days (in Indergiri Finance Limited). - Offers by financial investors: Strategic players (both resident and non-resident) were at the helm of nearly all (87 out of 93) takeovers/ tender offers in 2022. Certain financial investors too made tender offers in 2022, viz. Advent International Corporation’s offer for Suven Pharmaceuticals Limited (Pharmaceuticals sector), Blackstone’s composite offer for R Systems International Limited (IT sector), Advent International Corporation’s offer for Eureka Forbes Limited (Manufacturing sector), Apollo Global Management’s offer for Federal-Mogul Goetze (India) Limited (Auto Ancillaries sector), Infinity Investment Management’s offer for Jagsonpal Pharmaceuticals Limited (Pharmaceuticals sector) and Red Ribbon Group’s offer for Sharad Fibres & Yarn Processors Limited (Textiles and Yarn sector).
- Delisting through tender offer: Blackstone’s composite offer for R Systems International Limited is the first attempt at delisting a listed Indian company through a composite tender offer (open offer cum delisting offer) since the new Regulation 5A of the Takeover Regulations was introduced in 2021.
- Discharge of funding obligations by depositing securities: In the tender offers for Ritesh Properties and Industries Limited and Shreeshay Engineers Limited, the obligations of the acquirers were secured by depositing frequently traded securities in the regulatory escrow account. Previously, SEBI was reluctant to allow funding of the escrow by deposit of listed securities, though it was allowed under Takeover Regulations. In the transactions named above, we have observed a positive shift in regulatory thinking. SEBI seems to now allow such discharge of obligation to fund the escrow account for tender offer if the value of securities have a good enough margin. The value of the securities compared to the amount deposited to meet the tender offer obligation was 2.26 times in Ritesh Properties and Industries Limited and 3.17 times in Shreeshay Engineers Limited.
- Payment of interest for delay: Illustrations of direct tender offers where interest was paid to shareholders for delays are listed below:
a. a delay in receipt of the RBI approval for change of control impacted tender offers for the NBFC – Indergiri Finance Limited – by 88 days; and
b. past breach of the Takeover Regulations led to The Baroda Rayon Corporation Limited’s offer price being increased (2,156 days delay).
In indirect tender offers, namely for Federal Mogul Goetze (India) Limited (delay of 275 days) and Automotive Axles Limited (delay of 235 days), interest was paid to shareholders as part of the open offer price. - Voluntary tender offers: Promoters of Sicagen India Limited announced a voluntary tender offer to consolidate their shareholding in the company.
- Trend in penalty for Open Offer violations: In 2022, in cases involving failure or delay in making an open offer, SEBI typically imposed penalties in the range of ₹10,00,000 to ₹15,00,000 per violation. If the violations are repetitive, then the penalties tend to be higher.
- Trend in penalty for disclosure violations: While reviewing the draft letters of offer, SEBI also analyses past compliance with disclosures required to be made under the Takeover Regulations. Like in the past, in 2022, too, SEBI imposed penalties in the range of ₹1,00,000 to ₹3,00,000 per violation. Needless to say, if the violations are repetitive, the penalties tend to be higher.
Year 2023
Like in 2022, we expect the IT sector to remain a favourite, irrespective of how listed companies’ stocks have performed, as technology and innovation continue to drive every aspect of our lives.
Green energy space, healthcare (both pharma and hospitals), and infrastructure will see a lot of interest from both PE and strategic players (local and global). Local interest in these sectors was always present, but we are seeing increased traction from overseas players. In 2023, we will see foreign players closing more control deals in the healthcare sector.
Resolution of stressed assets outside of the IBC will gain more popularity as it is less time consuming. With appropriate amendments to Regulation 164A of the SEBI (Issue of Capital and Disclosure Requirements) Regulation, 2018, we will see more bailout deals soon. We will deal with the required amendments in our report (that will be published shortly).
In 2023, we expect to see many profitable companies returning capital to their shareholders through share buybacks or dividends, a trend which has already started in the latter half of 2022.
Banks and financial services sector will also see both consolidation and M&A deals. Foreign players will actively bid in GOI’s public sector bank divestments. We think that large corporates might also be interested in acquiring banks, but they are more likely to push for new bank licences from the RBI so that they start afresh without historic baggage.
* The Authors were assisted by Arnav Shah, Principal Associate and Siddharth Rana, Associate
[1] As per the data available on the website of the Securities and Exchange Board of India as on December 31, 2022.
[2] The offer for R Systems International Limited is a composite offer (i.e. open cum delisting offer).
