CROSS-BORDER MERGERS IN LIGHT OF THE

FALLOUT OF THE BHARTI-MTN DEAL

by Esha Shekhar and Vasudha Sharma

Presented By:
Nitisha Mohanty
2385014
Mergers and acquisitions may be undertaken to access the market through an established brand, to get a
market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off
accumulated losses of one entity against the profits of other entity.

As seen with transactions completed in single countries, synergies are sought through such cross-border
mergers and acquisitions for enhancing cost efficiencies of the new company which results from the
process.

Although similar in nature, a cross-border merger differs from a cross-border acquisition-

A merger is a transaction in which two firms with their home operations in different countries agree to an
integration of the companies on a relatively equal basis. Blending of such operations would make the two
companies have capabilities that are expected to create competitive advantage that will contribute to success
in the global marketplace.
An acquisition is a transaction in which an expanding firm buys either a controlling interest or all of an
existing company in a foreign country.

Cross-border mergers and acquisitions are a quick pathway to enter a new market, permit the acquiring firm
to achieve critical mass presence in a market rapidly and result in more control as compared to other
market entry modes.
The article looks into the dynamics of such cross-border transactions involving Indian companies and
focuses on one particular example of an Indian telecom company, Bharti Enterprises recent attempts to
enter into a complex merger deal with a South African company, MTN Ltd.

In recent years, mobile services have achieved a significant milestone in India, with the country having
nearly 50 per cent telecom density. Increasing competition, decreasing call rates and fluctuating net profit
growth, however, made Bharti Airtel, the telecom arm of the company to enter into negotiations with the
above mentioned company, with the intention to enter the African continent, which is an immensely
growing market, with tremendous potential for growth, unlike India where telcos' growth is projected to
reach a flat terrain in five years.

After a failed attempt, the two companies again tried to tie up a complex cross-border merger in 2009 which
required Bharti to acquire about 36 per cent of MTN's equity and MTN to buy 25 per cent of Bharti;
however the deal fell through mainly because of South African company's demand for dual listing of the
shares of the company, which in turn required radical changes in foreign exchange, company, and
takeover norms in India.
 BHARTI-MTN DEAL
HISTORY OF THE BHARTI-MTN DEAL

(i) In 2008, talks ended because of a last-minute demand by MTN that Bharti Airtel become its subsidiary.

(ii) In 2009, Bharti Airtel and MTN were again close to a merger agreement as part of a $24-billion deal which would have created the
world's third largest telecom company. The deal, however, could not go through due to regulatory hurdles from the Government
of South Africa.

WHAT DEAL II ENTAILED AND WHY IT DID NOT SUCCEED ?

Details of Deal II
MTN was set to acquire approximately a 25% economic interest in Bharti. This acquisition was valued at around $2.9 billion, paid partly
in cash and partly through newly issued shares of MTN. The newly issued shares would constitute about 25% of MTN's currently issued
share capital. Bharti would acquire approximately 36% of MTN's currently issued share capital directly from MTN shareholders. The
consideration for this acquisition would be ZAR 86.00 in cash plus 0.5 newly issued Bharti shares in the form of Gross Depository
Receipts for every MTN share acquired. After the acquisition, Bharti's stake in MTN would increase to 49% of the enlarged capital of
MTN. This means that Bharti's ownership in MTN would rise to nearly half of the company. The consideration for the acquisition of MTN
shares by Bharti includes GDRs. Each GDR represents one share in Bharti and would be listed on the Johannesburg Stock Exchange,
providing liquidity and tradability for investors in South Africa.

This arrangement seems to be structured to benefit both companies, allowing MTN to gain a significant stake in Bharti while allowing
Bharti to increase its ownership in MTN, all while providing liquidity and flexibility through the issuance of GDRs.
Reasons for failure
The main problem with the deal was that the South African government wanted it to be listed in both countries. This led to other
complications, like MTN having to follow certain rules about buying shares [called open offer obligations under the Substantial
Acquisition of Shares and Takeovers Regulations, 1997 ('SEBI takeover regulations')] and the plan to issue American Depository Receipts
(ADRs) and GDRs with voting rights to MTN.

Dual Listing and its implications

Because both companies were pretty big, merging made a lot of sense. This way, they could keep trading in both countries just like before.
This process is called “dual listing”, where a company is listed on stock exchanges in two different countries. By doing this, they could still
obtain equity capital from the combined base of shareholders in both countries, just like they did before the merger.

To define a dual listed structure, it involves “a company linking with a foreign company in a way that allows each to retain its individual
identity, but with the shareholders of the two separate companies receiving a claim on the combined earnings as though they had
undertaken a conventional merger.”

A dual listed company (DLC), also known as a "Siamese twin" structure, involves two companies from different countries agreeing to
operate as if they were a single entity while maintaining their separate legal identities and stock exchange listings. These companies merge
their activities and cash flows through a contractual agreement. Despite operating together, they maintain separate shareholder registries
and identities.

The companies distribute cash flows to their shareholders based on a predetermined ratio outlined in an "equalization agreement." This
agreement ensures that shareholders of both companies receive equal treatment in terms of voting and cash flow rights, regardless of the
company they originally invested in. The equalization agreements cover various issues such as dividend distribution, liquidation
procedures, and corporate governance, ensuring fairness and consistency in the treatment of shareholders from both entities.
In a dual listed company (DLC), the two companies typically share a single board of directors and operate with an integrated management
structure. It's somewhat similar to a joint venture, but instead of sharing ownership in just one project, they share everything they own.

DLCs have specific corporate governance requirements to ensure fairness and equality among shareholders. This includes guaranteeing
equal rights in areas such as voting and dividends, and often involves establishing a unified board of directors.

Maintaining listings in multiple markets through dual listing can give the merged company better access to capital. This is because local
investors are already familiar with the respective companies, making it easier to attract investment from both countries.

When two companies from different countries form an equity alliance without a full merger, dual listing allows them to continue being
listed on stock exchanges in both countries. This means shareholders can buy and sell shares of both companies on the exchanges in either
country.

Dual listing can also be chosen to avoid capital gains tax that may result from a traditional merger. Additionally, it can help preserve the
existence of each company, especially in complex cross-border mergers that require various official approvals.

The South African government wanted MTN to continue to be listed at the Indian Stock Exchange, but Indian corporate laws do not allow
dual listing, and it will need major amendments to key corporate laws of the country. The scenario in India is such that it allows only
foreign firms to issue Indian Depository Receipts (IDRs'), while Indian companies can issue ADRs and GDRs, which are consequential
changes, which occur after deciding on the optimality of dual listing
Issuance of GDRs
The deal involved MTN buying a 25% stake in Bharti Airtel, with an additional 11% held by MTN shareholders. The acquisition included
36% of Bharti's shares in the form of Global Depository Receipts (GDRs).

The main issue was whether this acquisition would trigger obligations under SEBI Takeover Regulations. These regulations require making
a public offer to buy an additional 20% equity if acquiring more than 15% of an entity's economic interest.

To avoid this obligation, the deal structured MTN's acquisition as an "economic interest" in Bharti, exempting it from certain takeover
regulations. MTN held non-voting equity to comply with Indian Companies Act, and SEBI issued guidance exempting MTN from making
an open offer unless the GDRs were converted into voting shares.

The problem arose with proposed changes in SEBI Takeover Regulations, impacting Bharti's plan to issue GDRs. Initially, MTN wouldn't
need to make a public offer until GDRs were converted into shares. But SEBI's revised regulations equated GDRs with voting rights to
domestic shares, triggering open offer requirements if the 15% threshold was crossed.

This change affected the deal's dynamics. MTN would get no voting rights with GDRs and faced the requirement to acquire a majority 56%
share in Bharti, which wasn't part of the original plan. Options included issuing GDRs for less than 15% stake or issuing the agreed 36%
stake without voting rights.

These complications, along with political concerns about maintaining South Africa's national character, led to the deal being scrapped. The
refusal of dual listing and SEBI's regulatory changes made the deal unfeasible.
EXTENT OF OVERHAUL IN INDIAN LAWS NEEDED

The regulatory challenges faced during complex mergers highlight gaps in Indian laws. While this particular merger stands out, it
underscores broader issues with India's capital controls amidst a growing economy. Regulatory changes, such as SEBI's guidelines in 2009,
often respond to political pressures rather than addressing deeper economic and policy issues.

To facilitate cross-border deals like this, significant amendments to company and foreign exchange laws are needed. This includes allowing
dual listing, which is currently prohibited in India. Amendments to the Companies Act, Securities Contracts (Regulation) Act, takeover
regulations, and listing agreements are necessary to enable dual listings and protect shareholder rights.

In a dual listed company, investors can buy shares in one country and sell them in another. However, achieving this requires substantial
legislative changes and careful consideration of shareholder protections and market regulations.

Indeed, achieving dual listing would require significant changes, including permission for trading shares denominated in foreign currency.
Currently, India's capital account is not fully convertible, meaning there are restrictions on transactions that alter assets or liabilities outside
India. Dual listing necessitates full capital account convertibility, allowing shareholders to buy shares on one exchange and sell them on
another.

India would need to move towards full capital account convertibility, a shift from its current regulated system. This would mean Indian
citizens could hold shares in foreign currency, enabling Indian companies to participate in overseas buyout opportunities. Without these
changes, Indian companies would be limited in their ability to issue shares and engage in cross-border transactions.
Indian laws have begun to adapt to changing needs, as seen in the recent amendments to Foreign Ownership of Indian (FOI) guidelines.
These changes responded to industry demands and helped revive deals like the Bharti-MTN merger after its initial failure in 2008. While
previous changes primarily impacted inbound foreign investment, the current demand is for rules to ease outward investments, necessitating
amendments to capital account convertibility rules.

The Tarapore Committee report has set a schedule for these changes by 2012, but the frequency of deals like Bharti-MTN suggests a need for
swifter action. Changes to the Foreign Exchange Management Act (FEMA) are also necessary, as domestic trading in shares denominated in
foreign currency requires Reserve Bank of India approval.

One solution could be listing foreign companies on Indian bourses through Indian Depository Receipts (IDRs), although this option hasn't
been widely utilized yet. IDRs could temporarily address the lack of capital account convertibility, allowing trading of foreign shares in
Indian markets. For instance, Bharti Airtel could be traded in South Africa's currency through depository receipts, while MTN could be listed
on Indian bourses via IDRs, enabling trading in rupees.

In summary, the absence of full capital account convertibility doesn't have to hinder agreements between companies like Bharti and MTN.
Utilizing IDRs could kick-start the market for such instruments in India and facilitate cross-border trading despite regulatory limitations.
 CONCLUSION

The potential reasons for the deal falling through may extend beyond regulatory hurdles to include
confidential commercial factors. Common practice involves signing a Memorandum of Understanding
(MOU) before such transactions, often with a confidentiality clause. Parties may have assumed they could
obtain necessary government approvals and exemptions. However, the requirement for a Dual Listed
Company (DLC) structure posed challenges, which could have been averted with DLC arrangements but
conflicted with proposed SEBI Takeovers Regulations amendments.

This deal underscores the need for Indian policymakers to adapt to globalization's realities, as such mergers
are becoming more common. It highlights the importance of ensuring legal and regulatory changes are
interconnected and don't contradict each other. A holistic approach is necessary to prevent companies from
resorting to unconventional methods when legal pathways are available.
THANK YOU