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The East looks West


05 September 2011

Last year saw a dramatic surge of transactions by Indian companies tapping increasingly innovative forms of global finance to transform their operations at home and enter new markets abroad.  

Our lawyers around the world are now right at the centre of this corporate adventure.

Buoyed by staggering GDP growth – averaging 8.4% per annum in the six years to 2010 – India has become an increasingly vibrant market for M&A transactions and innovative corporate finance.

In the early days of this growth story, much of the debate was about Western companies breaking into high growth economies, like India and China.

Now the focus has shifted and what is most remarkable is the speed at which Indian firms, like their Chinese competitors, are accessing the global financial markets to transform their own operations and break into new markets.

"Companies within India's corporate elite are now looking to be more than just national champions," says Sanjeev Dhuna, a member of Allen & Overy's India Group. "They are pushing away from their national moorings and expanding, not just to achieve growth in developing markets but in developed economies too."

He points out that M&A activity has grown significantly, but the majority of those deals have been outbound. Inbound activity, while growing, is still being held back by regulation, worries about corruption and the fear of unexpected shocks.

The pace of outbound deal-making is now accelerating.

The motivation is clear. Companies want to achieve global scale, source coal and other natural resources, find new outlets for products and gain access to technology. Importantly many of the deals are transformational, and, thanks to a war chest of cash and ready access to global debt, equity and capital markets for funding, many are audacious.

Take the USD 9.6 billion reverse takeover of Cairn Energy's Indian operations by Vedanta Resources, who we acted for. This deal has turned Vedanta Resources from a mining group into a fully-fledged and globally-minded natural resources conglomerate. Vedanta Resources is listed in London, giving it greater freedom to innovate. "A lot of companies are now looking at whether they should seek an offshore listing and we are seeing lots of innovative financings designed to tap into deeper funding pools. This is a necessary development to try to mitigate regulatory constraints in the domestic market," says Sanjeev.

Jonathan Brayne, chairman of our India Group, says there are good incentives for international banks to provide funding.

"With the economic challenges facing developed markets, corporations and financial institutions are struggling to get a good pay back for their investors. So they are looking to high growth markets like India where returns can be higher."

As a result India's own financial markets are also progressively being reshaped as Indian companies become less conservative and start using a much wider range of financial instruments, including hybrid and corporate high-yield bonds in the international markets.

Companies across sectors – including telecoms, infrastructure, outsourcing, IT, health and education – are looking to expand.

Bharti Airtel's USD 10.7 billion takeover of Zain Africa's mobile phone operations in 15 African countries, is a case in point. The deal, in which we acted for the banks, was then India's largest ever financing and transformed Bharti into the fifth largest mobile phone operator in the world.

Tom Levine, Corporate partner in Abu Dhabi, says that the deal was noteworthy for more than just its size.

"Bharti's acquisition of Zain's African portfolio poses the question of whether the low-cost operator model that Bharti developed in India could be successfully exported to Africa – a question yet to be answered."

But energy and natural resources deals continue to dominate the scene, as India looks for new ways to fuel its relentless economic growth.

We acted for Reliance Industries in its groundbreaking USD 7.2 billion partnership with BP – one of the largest-ever direct foreign investments in India – which will see the two companies working together to exploit oil and natural gas reserves and develop the infrastructure to transport and market gas within India.

The deal is a striking example of how Indian companies are using ambitious transactions to gain access to expertise. It also shows that major international oil companies are increasingly prepared to form partnerships with national companies in growth markets (Energy futures).

This burst of activity provides A&O with a major opportunity, not least because many of the international transactions are being conducted using English law.

A&O's presence in Australia and Indonesia, coupled with our long-standing relationship with Trilegal, our associated law firm in India, means that we are ideally placed to advise on the growing number of deals in the region. Our combination of integrated cross-border advice and a full-service offer on the ground is unique among international law firms.

"We're seeing huge demand for high quality legal services from both corporates and banks. Few law firms have the presence, or the relationships, in key emerging markets or the interconnectedness to offer this service," says Sanjeev.

India is currently leading the way in Australia's natural resources boom, overtaking China as a bidder for assets. "Before this year I had never acted for an Indian client in 23 years of practice," says Barry Irwin, a partner in Sydney. "Now Indian companies account for over half my work."

Singapore is a key hub for financing Indian deals, thanks to favourable tax treaties and historic cultural ties. India-related work now accounts for some 85% of the deals Kayal Sachi, a banking partner there with many years of Indian experience, is acting on.

Recent deals include the AUD 1.8 billion bid for the Abbot Point coal terminal in Queensland by India's biggest coal importer, Adani Enterprises. We acted for Standard Chartered, an important strategic banking client in the region, in the provision of a USD 1 billion loan facility for Adani.

"Our profession is very much relationship-driven – that's how business in Asia is done. We've built up lots of important relationships with companies, banks and regulators. It's very important that we have the Allen & Overy name on the legal panels of banks and that we have the bandwidth across the region to service these deals."

But is corporate India's expansion sustainable?

Kayal again: "People say we might see a slowdown in the next few months. That's possible. But there's still a huge amount of interest in the natural resources sector and I expect to see Indian companies continuing to invest heavily in Australia, Indonesia and Africa."

This is one in a series of articles that looks at the shape of change in the global economy. You can view the entire series on the Allen & Overy Annual Review 2011 microsite.


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