Inbound M&As in India: Issues and Challenges

• DOI: 10.1177/0003603X21997017
• Date: 01 June 2021
• Author: K. S. Chalapati Rao,Biswajit Dhar
• Published date: 01 June 2021

Article

Inbound M&As in India: Issues

and Challenges

K. S. Chalapati Rao* and Biswajit Dhar**

Abstract

The economic reforms of 1991 drastically transformed India’s approach toward foreign direct

investment (FDI). The focus has been on attracting increasingly large amounts of FDI. There were no

regulations on mergers and acquisitions for two decades, and when they were finally introduced in

2011 under the Competition Act, 2002, they were rendered ineffective by setting high thresholds,

providing exemptions, and by narrowly focusing on competition. As a result, major domestic com-

panies as also emerging leaders were taken over. Many foreign companies gained strong hold in the

economy without adding capacities. The domestic private corporate sector lagged far behind in various

respects. Belying the expectations of the policy makers, it invested far too inadequately in research and

development. This article argues that India should not continue its reliance on FDI to achieve the goal

of creating an internationally competitive manufacturing sector. India should do more than establishing

an FDI review mechanism. Cross-border acquisitions must be subjected to strict scrutiny by a spe-

cialized agency. Proactive and coordinated measures must be devised to encourage domestic enter-

prises. Special attention must be given to providing long-term risk capital.

Keywords

FDI, cross-border M&As, competition policy, national security, crowding out, India

I. Introduction

The economic reforms ushered in 1991 drastically transformed India’s approach toward foreign direct

investment (FDI). Besides attracting capital and technology, the liberalized FDI policy was expected to

expose the industrial sector to competition. Dr. Manmohan Singh, then Finance Minister, and who was

credited with leading the reforms, expressed the confidence that “[A]fter four decades of planning for

industrialization, we have now reached a stage of development where we should welcome, rather than

* Institute for Studies in Industrial Development, New Delhi, India

** Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi, India

Corresponding Author:

K. S. Chalapati Rao, Institute for Studies in Industrial Development, 4, Vasant Kunj Institutional Area, Vasant Kunj Phase II,

New Delhi 110070, India.

Email: kschalapatirao@gmail.com

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2021, Vol. 66(2) 158–183

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fear, foreign investment. Our entrepreneurs are second to none.”

1

On its part, the Statement on

Industrial Policy, issued earlier on the same day, expected that the competitive pressure foisted by

the liberalization policies will “induce our industry to invest much more in research and development

than they have been doing in the past.”

2

In the following year’s budget speech, Dr. Singh tried to allay the fears that foreign investment

might hurt India’s industry. He said “[T]hese fears are misplaced ...Indian industry has also come of

age, and is now ready to enter a phase where it can both compete with foreign investment, and also

cooperate with it.”

3

The industrial sector was also to be exposed to competition in a phased manner by

lowering trade barriers. Thus, Indian entrepreneurs were simultaneously exposed to competition from

imports as well as multinational corporations (MNCs) in the domestic market. Apart from drastically

reducing the scope of the industrial licensing system, India voluntarily started moving away from

imposing performance requirements like phased manufacturing program even before such measures

were prohibited under the World Trade Organization (WTO) four years later. Yet another important

measure introduced by the new policy package was removing the provisions relating to concentration

of economic power under the Monopolies and Restrictive Trade Practices Act (MRTP Act), including

those related to acquisitions, through an Ordinance, in September 1991. It was much later in 2002 that

the Competition Act finally replaced the MRTP Act. The provisions relating to the regulation of

mergers and acquisitions (M&As; referred to as combinations) came into force in June 2011.

Following the path laid out in 1991, successive governments relaxed the FDI policy. It was claimed in the

year 2000 that India had become one of the most open economies for FDI, especially for the manufacturing

sector.

4

The reliance on FDI continued as reflected in the Common Minimum Program of the United

Progressive Alliance (UPA-1) which assumed office in 2004. It said, “FDI will continue to be encouraged.

The country needs and can easily absorb at least two to three times the present level of FDI inflows.”

5

The

National Democratic Alliance (NDA-2) government reiterated the importance of FDI in its “Make in India”

initiative, which was announced within a few months of assuming office in 2014. Several reforms were

introduced as part of Make in India for getting FDI and fostering partnerships. These were reportedly

aligned with the World Bank’s Ease of Doing Business parameters to improve India’s global ranking.

6

The experience of the past three decades, however, indicates that India lags far behind in realizing

its industrialization objectives. The National Manufacturing Competitiveness Council (NMCC) spoke

of increasing the share of manufacturing to 23%in a decade,

7

while Make in India spoke of 25%by

2025.

8

The efforts to increase the share of the manufacturing sector in gross domestic product to 25%,

however, did not make any headway; the share of manufacturing was 16.4%of gross value added

(GVA) (at current prices) in 2019–2020.

9

1. Ministry of Finance, Budget Speech 1991–92 (final), para. 12, https://www.indiabudget.gov.in/doc/bspeech/bs199192.pdf

(last visited Nov. 15, 2020). All the URLs were live at the time of submitting the paper.

2. Ministry of Industry, Statement on Industrial Policy (July 24, 1991). https://dipp.gov.in/sites/default/files/chap001_0_0.pdf

(last visited Nov. 25, 2020).

3. Ministry of Finance, Budget Speech 1992–93, para. 22.

4. Planning Commission, Report of the Steering Group on Foreign Direct Investment (Aug. 2002).

5. PTI, Text of Draft of Common Minimum Programme, REDIFF, May 22, 2004, https://www.rediff.com/election/2004/may/

21cmptext.htm (last visited Nov. 15, 2020). Prior to UPA-1, the Union government was headed by the National Democratic

Alliance (NDA-1) during 1998–2004.

6. “Make in India: The Vision New Processes, Sectors, Infrastructure and Mindset,” Make in India, https://web.archive.org/

web/20210112014100/https://www.makeinindia.com/art icle/-/v/make-in-india-reason-vision-for-the-in itiative (last visited

Feb. 17, 2021).

7. National Manufacturing Competitiveness Council, The National Strategy for Manufacturing (Apr. 10, 2009), https://web.

archive.org/web/20090410005158/http://nmcc.nic.in/pdf/strategy_paper_0306.pdf (last visited Nov. 15, 2020).

8. Initially it was envisaged that the target of 25%would be reached by 2020.

9. India, National Statistical Office, First Advance Estimates of National Income 2019-20 (Jan. 7, 2020).

Rao and Dhar 159