Mumbai: Innovative deal structures are expected to be the cornerstone of mergers and acquisitions (M&A) activity in India. At the same time, some of these transactions may also test regulatory boundaries, evident in some recently announced deals in the financial services sector.
Sourav Mallik, joint managing director, Kotak Investment Banking, who also heads the mergers and acquisitions advisory practice, shares his thoughts on what goes into making deal structures viable. Edited excerpts from an interview:
M&A activity has been on the rise, with several large transactions announced in the past one year. What is driving this ?
There are several factors driving this.
First and foremost, there is strong intent among the parties to do the transactions in several sectors where consolidation is the overarching theme.
Secondly, the transactions are being done to create intrinsic value, in many cases to reduce negative overhang.
Of course, there are regulatory challenges, among other things, but overall, I think there is growing optimism which is translating into deal activity.
Also, strictly from a private equity perspective, many investments are close to their maturity cycle and we will see more investors tapping the public markets or secondary deals.
There is a perception that regulatory boundaries are being tested while structuring deals of late, especially in the financial services sector. Do you agree with this?
We do interact with regulators and find them to be quite proactive.
For example, if there is a transaction of commercial substance and there are certain regulatory hurdles which are coming in the way, they are quite forthcoming in terms of trying to help you to resolve the issue in some shape or size.
At the same time, they are cautious about not letting anything pass through which can be misused by someone else in situations they are not comfortable (with).
Therefore, it’s okay to try and test boundaries, but in our view, it will not be easy getting past convention or boundaries of the same.
We have approached the regulators on two or three occasions apprising them of a particular situation, and once convinced the case is legitimate, they actually came up with suggestions around alternative structures about how it can be done.
Do you expect more such situations arising in future?
My answer is yes. I think it is good for the development of securities market that your newer concepts are being tested. But in some cases, regulators felt that setting a precedent could potentially be misused in some other situation.
I believe that each case will be evaluated on its merit and more innovative structures will be explored.
How important a role will deal structures play in sectors where consolidation is expected?
Sectoral caps have gone down in the last 15 years, with increase in sectoral threshold for foreign investors.
We are down to a handful of sectors where regulatory caps exist. Insurance and retail, for example, are among the last remaining.
The point here is that where there are ownership restrictions, structures come into play. Over a period of time, I believe these caps will be eased too.
However, having said that, there will be exceptional complex transactions.
What kind of inbound interest are you seeing?
In terms of inbound interest in India, there is a broad common theme that anything which leads to domestic consumption is an attractive opportunity. Beyond this, investors have a bottom-up approach.
A large chunk of assets that are coming up for sale are in the stressed segment which could be, in theory, be across all sectors but currently is concentrated on the capex-heavy side of industries.
There is interest from Japan in the infra space. There are discussions around technology side of things with American buyers, while from Europe, it is mainly around industrial and consumer segments.