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Dhaka Tribune

OP-ED: Mergers and acquisitions

Analyzing an Indian experience from a Bangladeshi standpoint
Update : 26 Dec 2021, 11:54 AM

In the 21st century, the concept of mergers and acquisitions (M&A) is now considered a tactical growth strategy for the companies to stay in the contest with others and enlarge their market share, margins, and domination.

However, in this global village, the size and significance of cross-border M&A play a crucial character in producing competition between countries to attract investments.

Many economists think that, without proper economic liberalization, an economy could not be capable of being attractive for investment and no doubt that the result will be awful also in the matter of cross-border M&A.

If we study the Indian context on the matter of economic liberalisation and M&A, then it would be a perfect example for us.

To understand the Indian development, we should remember two particular dimensions: considerable modifications in the policy and better access to the financial markets.

India’s modification in the policy regime would be a salient point to start the discussion. For better perception, we could divide it into two perceptible phases of the policy regime.

The first phase, pre-1990, could be portrayed as a restrictive period entirely.

It is true that, in India, a significant number of M&A happened near the beginning of the post-independence era.

However, the strict government policies and rules in the 1960s and 1970s acutely discouraged M&A.

Please note that discouragement does not signify that M&A were totally rare during that restricted period.

Foreign investments by the Indian companies were achievable merely in the way of minority-owned joint ventures.

A fascinating fact is that according to the rule, no cash remittances were permissible for overseas investment.

Consequently, the only choice was for the firms to capitalise exports for equity.

Nevertheless, this process was not an easy option as it was absolutely fixed that 50% of the firms' actual dividends should be sent back to India.

Furthermore, every offer had to be approved by an inter-ministerial committee on joint ventures. Monopolies and Restrictive Trade Practices Act, 1969 played a crucial role in terms of activating restrictive approaches in this period.

The second phase, post-1990, can be described as liberal and breakthrough for the Indian economy.

In this period, the Indian economy observed a slow but steady economic liberalisation. The government may have realised their wrong approach, and many regulations on the growth of M&A were reduced.

The corporate enterprises took their chances to grow and expand in the course of the M&A strategy. Plenty of multinational companies have used cross-border M&A to penetrate the Indian market and reinforce their existence.

Thus, approximately 40% foreign direct investment (FDI) happened for the duration of the early phase of economic reforms that came into India through cross-border M&A.

In terms of foreign investment by the Indian companies, the government removed the minority ownership restriction and started to allow cash remittances in 1992.

Another dimension

As I said earlier, another dimension was there to work with the liberalization of the policy regime; better access to financial markets for Indian companies.

In the early 1990s, the Indian government began their pace towards financial deregulation in the domestic capital market.

Moreover, Indian firms captured the opportunity as well as established extensively enlarged access to domestic capital markets by the early 2000s.

Their access to international financial markets was also gradually liberalised in the early 2000s.

Nevertheless, to boost the Indian firms in the international arena, permission was given to use special-purpose vehicles in international capital markets to finance acquisitions outside India.

This is why Indian companies have acquired foreign companies through cash; not the conventional way of equity swaps that most international M&A use.

This huge route is primarily supported by a blend of domestic borrowings and in-house resources.

If we scrutinize the inbound deals that happened, then it would be an interesting case as on cross-border acquisitions, the firms who are cash-rich were targeted more often in India.

However, this is not a surprising fact since this happened in other industrialised countries such as China.

We need to keep in mind that India is an economy of rapid and massive growth.

They have an enormous advantage in terms of using their vast resources and population.

The positive side is that the firms were ready to utilise those advantages and achieved swift growth in the cross-border acquisition market.

Not only that, those firms are consistently doing better and attaining new highs in recent times.

Capital markets leading

As far as the Indian outbound deals are concerned, most deals go to economically developed capital markets.

Let's take China as an example to see the distinctions.

It is visible that China has invested a lot in the promising economies in Asia, Africa, Central Asia, and Latin America.

Because China thinks that to maintain the growth momentum in the future, they need to secure the supply of natural resources.

On the other hand, the strategy of most Indian firms for their foreign expansion is furthermore idiosyncratic.

Since Indian firms are comparatively tiny by the standards of proper multinational companies, it is quite clear that their cross-border acquisitions also tend to be small.

Though, the companies of India tend to make strategically targeted acquisitions to achieve a broader globalization drive.

Furthermore, as an example, we can observe the strategy of Tata, in which they are trying to reinforce particular parts of their value chain and build up integrated offerings globally.

A good study of the locations of the acquisitions will demonstrate the strategies taken by Indian firms in the aspect of acquisitions.

No doubt that Indians are attracted to the higher value offerings and well-established markets of developed countries.

Bangladeshi context

In recent years, the economy of Bangladesh has been in an enhanced situation where we can confidently express that the commercial sectors have achieved momentum.

We all know that in a free-market economy, only the fittest will survive.

Furthermore, to survive in this competitive world market, Bangladeshi companies need to adopt strategic decisions like M&A.

As we have discussed earlier, two particular dimensions: ‘considerable modifications in the policy’ and ‘better access to the financial markets’ played a fundamental role in the development of M&A in India.

Therefore, Bangladesh should concentrate more on those aspects.

There is no doubt that Bangladesh has enough regulations and policies to govern M&A, but those regulations or laws are scattered.

We usually urge guidance concerning M&A by the government of Bangladesh.

Nevertheless, it is quite a complicated job for any government to guide with scattered laws and regulations. Modification in the regulations is imperative, and potential reforms could include enacting a single codified law.

This unified or single law would be a significant step to mitigate the confusion of the corporate world. As we mentioned earlier, the policy and regulation reform boosted Indian corporate enterprise for M&A.

In recent years, we saw some notable inbound M&A transactions in Bangladesh. However, outbound M&A by Bangladeshi investors are pretty rare.

The reason behind this is the conservative stance of regulators and the financial market until 2015 regarding outbound investment.

This standpoint signifies that Bangladesh needs to start working to diminish these issues with more liberal stances.

Bangladesh would get another advantage if it could establish itself as a competent international commercial arbitration seat in the South Asian region.

 

The author is a SAF scholar and a student of LLM, Unesco Madanjeet Singh South Asian Institute of Advanced Legal and Human Rights Studies (UMSAILS)

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