Due Diligence In Telecom Mergers And Acquisitions (M&A) In India

Due Diligence In Telecom Mergers And Acquisitions (M&A) In IndiaWith the announcement of merger and acquisition (M&A) guidelines for telecom sector of India 2014, negotiations and dealings in the telecom sector have significantly increased. While these negotiations and dealings are at the infancy stage yet they have indicated how things would take a shape in the near future.

As on date memorandum of understandings (MOUs) and letter of intents (LOIs) are being signed by various stakeholders. The next stage would be conducting of due diligence exercise for various fields like management, finance, legal, etc that are essential part of any business including telecom business.

The legal due diligence exercise may involve examination of the legal structure of business, contracts, potential regulatory issues and impact on the business, statutory clearances made till date, list of legal cases filed by and against the Company and the current status. Partner agreements, DOT license Agreements, VAS Services, liquidated damages, if any levied by licensor and list of all IPR Audits and IPR regulation issues could also be analysed during the legal due diligence exercise.

The primary regulators governing M&A activity in India are the Securities and Exchange Board of India (“SEBI”), the Reserve Bank of India (“RBI”) the Foreign Investment Promotion Board (“FIPB”) and the Competition Commission of India (“CCI”). The provisions of Indian Companies Act, 2013 (PDF), Income Tax of India, 1961, Foreign Exchange Management Act, 1999 (FEMA), The Competition Act, 2002, etc have to be duly complied with in this regard.  Further, telecom stakeholders exploring the M&A route must also comply with the Internet intermediaries requirements and cyber law due diligence requirements (PDF) as prescribed by the Information Technology Act, 2000 (IT Act 2000).

The Securities and Exchange Board of India (SEBI) has announced that it would release corporate governance rules for the listed entities in India. Further, the Parliament of India passed the Indian Companies Act, 2013 (PDF) to improve the corporate culture in India. Powers of Serious Fraud Investigation Office (SFIO) were also enhanced so that they can effectively deal with corporate frauds and crimes in India.

The Ministry of Corporate Affairs (MCA) has also issued some Rules under Chapter XIV of Indian Companies Act, 2013 pertaining to Inspection, Inquiry and Investigation by Indian Authorities and Serious Frauds Investigation Office (SFIO). The Suggestions Regarding Rules Pertaining to Inspection, Inquiry and Investigation (SFIO) by Perry4Law (PDF) has already been provided by us in this regard.

Taxation issues have been at the core of dispute between big telecom companies and Indian Government. For instance, companies having commercial presence in India were accused of violating the transfer pricing laws of India. Transfer pricing orders have already been issued against Vodafone and Shell India and Nokia has been accused of violating the income tax and transfer pricing laws of India.

There are provisions under the Income Tax Act for avoidance of tax by certain transactions in securities and avoidance of income-tax by transactions resulting in transfer of income to non residents. To further curb income tax avoidance and to check black money accumulation in foreign jurisdictions, Income Tax Overseas Units (ITOUs) of India in foreign countries would also be established.

With the advance in information technology, costs pertaining to sharing and storing of information, details and data of the merging company can be significantly reduced as all information can be stored in a secured online environment known as data rooms. The virtual legal due diligence in India has already taken a shape and many companies are using the same to ensure economy and a timely legal due diligence.

Perry4Law wishes all the best to all the stakeholders who are exploring M&A in telecom sector and contemplating engaging in electronic system design and manufacturing (ESDM) business in India.