Asian giants should fuel freer cross-border investments

While the world hopes the global meltdown will soon be a thing of the past, investment activities in major economies come under close scrutiny. Simultaneously, the existing legal and regulatory regimes are being tested against investors’ need to invest and corporations’ need to consolidate their positions in the global market.

Looking beyond the borders

One way to achieve better growth is to look beyond a country’s borders. In most cross-border investments the key considerations are likely to be:

(i) The legal regime that governs the target (and is it in harmony with that which governs the investor or acquirer?); (ii) the legal barriers to a particular structure (there may be pre-emptive or restrictive clauses governing the investee company that make an acquisition difficult); (iii) the challenges of acquiring an asset or a business as opposed to acquiring shares; (iv) consideration payable, and its financing or funding; (v) competitive bidding versus private agreement; and (vi) various tax implications.

As is evident, harmony in legal regimes is a factor that will influence all the other conditions. This article restricts itself to the issue of harmonious legal regimes.

Similarity or parity in legal regimes not only makes it simpler to navigate regulations during investment and subsequent administration of the target, but also adds to the investor’s confidence in the jurisdiction.

The Chinese dragon

The following are often cited as key features that typify foreign investment into China:

(i) The investment size is restrictive and a foreign investor cannot freely acquire a majority stake in a Chinese company. Investments above US$300 million need prior approval of the central government. (ii) The regulatory authorities are often reluctant to approve investment deals where a Chinese company (especially a state owned company) would be put entirely under foreign control. (iii) Use of convertible and other instruments are discouraged and investment through common stock is preferred.

As China continues to try and liberalize its outlook towards major foreign investment, it has discovered investment mechanisms like domestic RMB Funds, although their utility is yet to be fully tested. Further, measures like the publication of Opinion No. 9 by China’s State Council and the Administrative Measures for Establishment of Partnership Enterprises by Foreign Entities or Individuals in China (both in 2010) indicate that the authorities are trying to provide foreign investors a more conducive playing field.

The Indian story

The Indian reality is not very different from China. While the two countries began economic reforms late in the last century, both have entrepreneurs who are still looking at growing while retaining control over their enterprises. But, India is not averse to allowing 100% foreign control of an Indian company. This is evidenced by the fact that a majority of sectors allow foreign direct investment (FDI) up to 100% under the automatic route.

While foreign investors have to apply for regulatory approval, the primary regulator is the Foreign Investment Promotion Board (FIPB), which is under the Finance Ministry of the central government. However, it is often felt there are multiple regulators and no clear demarcation of responsibilities. New and hybrid instruments are still not very common in India, although appetite for the same is increasing rapidly.

An integrated Europe

The creation of the European Union (EU) and the European Economic Area has given European economies a harmonious playing field and provided an impetus for cross-border investments.

The European Directive on takeover bids establishes standard rules on takeover bids throughout the EU. The directive inter alia provides for the protection of minority shareholders while also establishing a mandatory bid regime and greater transparency of capital structures and defensive measures. The directive, which also introduces squeeze out and sell out rights (to be put into effect at fair price), aims to create a more integrated capital market within the EU.

Potential for growth

Rising Asian economies, like China and India, are younger than those in Europe and as a result they are more cautious about protecting domestic interests. This is why a cross-border acquisition between India and China is more unlikely than one between Italy and France (despite their rigid domestic laws). Asian economies that are currently on a more stable economic footing than their Western counterparts should use this opportunity to forge a strong platform to allow freer cross-border investments. While doing so they should take care to ensure that minority shareholders are not ignored.

Kalpataru Tripathy is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co, where Saurya Bhattacharya is an associate. The views expressed in this article are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.