The M&A industry has been robust particularly the in-bound pipeline, says VK Bansal, chairman & head of investment banking, Morgan Stanley India. He tells Ankit Doshi of FE that the new Companies Act gives a lot more flexibility for cross-border M&As. Furthermore, i-banks have to balance their role towards corporates and investors and the norms introduced by the Sebi do not impact merchant bankers. Excerpts:
Your thoughts about India’s capital market and M&A industry. How did we perform last year?
It may not have been a very good year from an equity capital markets perspective but M&A activity, particularly in-bound M&A was quite strong last year. There were landmark deals like Mylan acquiring Agila Specialties from Strides Arcolab, Diageo acquiring major stake in United Spirits and Unilever increasing its stake in HUL. Among others are the Jet-Etihad deal and the Qataris investing in Bharti. One aspect for a very strong inbound activity is that Indian promoters are becoming much more flexible and less emotional about the ownership of their businesses. If they have to sell the business and if they get the right price, they will do so. We have seen this in many cases. Another example is Arun Kumar, he sold his injectable business to Mylan. Also Atul Nishar, he sold his stake in Hexaware to Baring Private Equity Asia.
Even private equity investors have come to a situation where they are looking at strategic exit options. In Hexaware, there were two other major investors—General Atlantic and Chrys Capital. Both have exited. Carlyle recently announced their exit from Tirumala Milk.
We have also seen some outbound deals happening in select sectors. An outbound transaction will happen to secure the supply of raw material. For instance, a company may acquire an overseas company if the country does not have enough resources. In that direction, one of the main acquisitions that just got closed involves Oil India and ONGC Videsh, where they acquired Videocon’s 10% stake in the gas fields in
Mozambique. OVL separately announced the acquisition of an additional 10% stake from Anadarko Petroleum Corp in the same gas field. This ves a combined valuation of about $5 billion for a 20% stake. This is a very large acquisition by OIL and OVL. For India to invest $5 billion in a single asset in a single country is a big thing. It is a huge investment decision taken by the government because Mozambique is a small country.
Where does Morgan Stanley feature in the Indian M&A space?
Overall, Morgan Stanley did very well last year. Morgan Stanley advised on quite a large number of M&A deals last year and we have been among the top banks in M&A in India for the last three years. Some of the major deals executed by us include Cipla-Cipla Medpro, OVL, Oil India–Mozambique asset and Mylan-Agila. While Morgan Stanley does all kinds of M&A transactions—in-bound, out-bound and domestic—our focus is more on cross-border M&A. We also have a minimum fee criteria for accepting M&A mandates. Morgan Stanley has been highly successful in executing M&A transactions efficiently due to the firm’s global relationships and skilled human resource with excellent product and industry
You mentioned that you are not very keen on domestic issues, especially those that do not yield or generate good fees. Just Dial was one very successful issue you did.
Some of the domestic M&A transactions we have done include Future Capital where Morgan Stanley was representing Kishore Biyani, and helped sell stake to Warburg Pincus. On the capital markets side, if you see, last year from the IPO markets perspective, there has not been many major IPO transactions. Just Dial IPO was the only major IPO that happened last year where Morgan Stanley was one of the two book runners along with Citigroup. We did a lot of OFS transactions last year. Morgan Stanley was also involved in the Crisil open offer where the parent company wanted to increase its stake to 75%. So we have been involved in all categories of capital market transactions.
Your thoughts on government disinvestments? There have been a lot of hurdles with respect to IOC and Coal India. How successful will the government be in achieving its target?
This is not the first time the the government is facing issues with disinvestment. Similar issues have been there in the past also. The answer to disinvestment target amounting to R54,000 crore is Coal India, Hindustan Zinc and Axis Bank, along with other ones like IOC, Hindustan Aeronautics and special dividend from NMDC. As far as Hind Zinc is concerned, we feel, the government has a mechanism in place, which is transparent from the price discovery perspective. Through price discovery and a transparent method of valuations and pricing, the government can disinvest its stake in the company.
What is your opinion on the new Companies Act?
The new rules will have a lot of bearing on Indian companies. Some provisions have been made effective while others are yet to be made. The new Companies Act gives a lot more flexibility for cross-border M&As. Merging an Indian entity with a foreign one or vice versa has been enabled under the new rules. This is a welcome move from an M&A perspective.
Also, if promoters of a company reach 90% holding in the company, now there is a provision in the new Companies Act where it says that if this 90% has been achieved through the scheme of merger or court approval, then through a registered valuer, the company can decide the valuation at which the remaining shareholders will be required to put in the shares, to achieve de-listing. This was not the case earlier. The new Act also talks about short-form mergers between a company and its wholly-owned subsidiary and two or more small companies based on certain criteria. Of course, you have to follow certain rules and get approvals, but these are simple. You would end up avoiding all the judicial related procedures.
If you read the provisions relating to auditors and independent directors, it has been made more stringent. Private companies above a certain threshold also now has to follow stricter compliance. Regulators are making it much more in line with global practices.
Do you see it conflicting with Sebi regulations by any means? Also Sebi has introduced tougher norms for merchant bankers as far as disclosure of track record is concerned. Has that impacted the functioning of merchant bankers?
I do not see any contradictions between the Sebi and the Companies Act. If we have the Act in place, and if there are inconsistencies, Sebi is likely to take corrective action. The Sebi has brought in more stringent norms relating to due diligence work for merchant bankers. If we have to understand Sebi’s concern, it is if a company is coming with an issue then retail investors should not be the losers. As long as the company prices the issue at the right level, and over a period of six months or one year, retail investors make money and their objective is met. Investment banks have to balance their role towards corporates and investors. That is what the Sebi is asking for. So I do not think merchant bankers are impacted.