INDIA Law and Practice Contributed by: Anuja Tiwari, Mallika Anand, Pranjal Bhattacharya and Antra Shourya, AZB & Partners
funds (through their Indian arm) have financed new companies in the energy and infrastructure sectors. Debt capital is also a critical source of funding, espe- cially, for companies formed to execute energy and infrastructure projects. Most concession agreements prescribe a debt-to-equity ratio of 70:30 and project financing is commonly availed by such companies to Although investors usually leave all options open for an exit (including through IPOs), the form of exit tradi- tionally preferred in the energy and infrastructure sec- tors has been through secondary sales. This decision is guided by certain key factors – value optimisation of the business, macro-market conditions, investor sen- timents vis-à-vis the economic factors, etc. Neverthe- less, the cyclical nature of the business has been a key determinant for the choice of exit through secondary sales. In recent times, however, government-backed renewable energy companies have been seeking to raise capital through the public markets. Transaction Structures A typical transaction structure for the sale of a private- ly held energy and infrastructure company that has private equity or institutional investors may include: • a sale of the entire company or controlling interest; fulfil this requirement. 2.2 Liquidity Events Preferred Mode • a partial exit for the founders/promoters; or • the founders/promoters continuing to hold a reduced stake in the company along with being involved in the operations of the company. Form of Consideration Most M&A transactions in the Indian market are gen- erally structured as pure cash deals, especially in transactions involving financial buyers. However, the specific structure can vary based on factors such as the business of the company, industry considerations, and the strategic goals of the acquisition. A combi- nation of cash and stock ‒ albeit not prevalent in the Indian market – may be opted for rather than the sale of the entire company for cash or a stock-for-stock transaction, as this combination allows the sellers to receive immediate liquidity through cash while also
retaining an interest in the company through buying shares in the buying entity. Key Considerations For founders and investors, the decision to sell the entire stake or a controlling interest is typically linked to various factors, including return on investment, the fund’s life cycle, ownership structure in the company, and available exit option (eg, an IPO listing or similar liquidity events). Specifically for founders or promot- ers, it also important to carefully negotiate the liability allocation and determine the form of consideration. Founders are typically expected to provide broad representations, warranties and indemnities covering tax, litigation, employee and environmental matters, whereas investors generally limit their obligations to title and authority over their shares. The use of repre- sentations and warranties insurance, while still rela- tively new in India, is gradually emerging in larger or sponsor-led deals to mitigate risk. Spin-offs are becoming increasingly customary in India’s energy and infrastructure sector. In the past year, a few companies have demerged their energy business into a separate legal entity – for example, Siemens Limited, Sterlite Power Transmission Limited, GE India Industrial Private Limited and INOX Green Energy Service Limited. In India, spin-offs can be undertaken either by way of a demerger through a scheme of arrangement approved by the competent authorities and/or the tribunal or through a contractual arrangement in the form of a business transfer or asset transfer. Companies engaged in the business of energy and infrastructure often pursue spin-offs to: • enhance value creation since independent entities attract more focused investment; • improve operational efficiency; • mitigate risk by managing the overall corporate risk; and 3. Spin-Offs 3.1 Trends: Spin-Offs
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