INDIA Trends and Developments Contributed by: Anuja Tiwari, Mallika Anand, Pranjal Bhattacharya and Antra Shourya, AZB & Partners
Increased focus on forensics and anti-bribery and corruption India’s energy and infrastructure sectors have attract- ed tremendous inbound investment in recent times from private equity funds, institutional investors, mul- tilaterals and pension funds. With the increase in M&A activity in these sectors, the sophistication of inves- tors and their risk profiles have witnessed a marked shift. Notably, in the context of foreign investors who are within the ambit of the Foreign Corrupt Practices Act 1977 and the Bribery Act 2010, the findings of the forensic and anti-bribery and corruption (ABC) dili- gences have emerged as one of the drivers of invest- ment decisions. ABC risks do not necessarily relate only to the jurisdic- tions in which the parties to the transaction operate themselves but can lead to potential exposure in other jurisdictions. Considering the impact of ABC expo- sure on the valuations of a company and the return on investment, investors are increasingly focusing on the regulatory regime governing the target’s jurisdic- tion with regard to ABC, the best practices in such jurisdiction and the powers of the law enforcement agencies in order to clearly assess the risks of any potential ABC exposure faced by the target. Impact of ESG factors With public policy increasingly shaped by grow- ing concerns about climate, sustainability, diversity, inclusion and equity, ESG factors are redefining the assessment of value and risksin business. Investors are increasingly applying these non-financial factors to assess material risks and growth opportunities while devising their investment strategies and diver- sifying their portfolio. Owing to the nature of energy and infrastructure sec- tors, where each project may have a potential impact on the environment, assessment of environmental compliance has customarily been part of the inves- tor’s checklist. However, ESG presents a more holistic set of parameters, requiring a broader understanding of the risks beyond the immediate financial or regula- tory parameters. Various countries have introduced regulations and reporting frameworks around ESG and sustain-
infrastructure sectors (in particular, new and alternate energies, renewables, climate impact, and roads and highways) have continued to attract large investments from private equity funds. One such example is Brookfield Asset Management’s acquisition of American Tower Corporation’s Indian operations for estimated USD2.5 billion. Along with Brookfield, other global private equity majors such as KKR, Blackstone and Actis have identified India’s energy and infrastructure sectors as a key market for allocation of capital in the next few years. Change in control – structuring consideration Infrastructure projects and utility-scale energy projects in India are developed through PPP mode granted in the form of agreements known as “concessions” − ie, a right conceded to a private partner for the provision of a public asset and service for a designated purpose over a specified period on the basis of market-deter- mined revenue streams that allow a commercial return on investment. Typically, concession agreements con- tain change in control (CIC) restrictions (direct or indi- rect) for a certain specified timeline − usually linked to the commissioning or operational commencement date of the asset − across various subsectors. These restrictions either completely disallow the conces- sionaire (ie, the entity developing the project) from effecting any change in its majority shareholding or its control or else they permit such change only with the prior consent of the relevant authority. Considering the volume of energy and infrastructure M&A transactions in recent times, the CIC restrictions have been a key consideration for transaction struc- turing – in particular, for projects which are under con- struction. The government authorities are usually not amenable to grant their consent to transactions that effect or purport to effect a change in shareholding or control. Therefore, transactions are being structured using a combination of equity and debt instruments to remain in compliance with change in shareholding or control restrictions and to achieve the desired out- come of the transaction once these restrictions come to an end.
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