CROSS-BORDER MERGERS : THE FALLOUT OF BHARTI-MTN DEAL

Subject: Corporate law: Mergers

Legislations :
 Companies Act, 1956.
 Foreign Exchange Management Regulations, 2000
 Substantial Acquisition of Shares and Takeover Regulations, 1997
(SEBI Takeover Regulations).

I. INTRODUCTION

Mergers and Acquisitions Aka M&A as has been their nick name, garnered for itself a lot of
attention since a decade. Twenty- first century organizations are more goal focused or rather
inclined towards utilitarianism, that is to say the identity doesn’t cater importance but the
maxim profits that satisfies the majority shareholders. M&A may be undertaken to access the
market through an established brand, to get 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.1

The globalization and liberalization of marketing and investing policies of various countries
have consequently resulted in the growth of cross-border mergers and acquisitions. In the
conventional mergers and acquisitions, the primary objective of a cross-border merger is to
acquire larger shares of the market with increased economies of scale through the newly formed
organization,which would be otherwise impossible by the companies operating independently.2

This being the brighter side of the aspect, the darker side has huge affects on the financial
system of the country. Earlier the Indian capital markets were thin and restricted but now it is
drastically impacting on the resource allocation process of the economy. With the foreign
capital market issuing overseas (American Depository Receipts & Global Depository
Receipts), there is a huge domestic resource mobilization by the corporate. With the more and
more transaction of great magnitude, new permutation and combination of problems are
arising. 3 One such being the instant case.

II. HOW IS BHARTI-MTN DEAL ANY DIFFERENT FROM THE CONVENTIONAL

MERGERS?

The only thing for which, people are ready to donate their organs is mobile, which is nothing
but a futile 4.5 inch plastic, without mobile services. Bharti Airtel has achieved a significant
milestone in India with decreased call rates, increased mobile data speed and high profits which
encouraged it to strike a deal with a South African based company, MTN Ltd in 2008 and 2009.
Bharti Enterprises overlooked the future of the telecom industry in South Africa, which was
immensely growing as against the Indian market which was projected to reach a flat customer

1
Vikram Malik, Revision of the Companies Act, 1956, INDIA LAW JOURNAL, available at
www.indialawjournal.com/volume1/.../article_by_vikram_malik.html (Last visited on January 28, 2019).
2
Ibid.
3
Depository Receipts and the Takeover Regulations, available at
http://indiacorplaw.blogspot.com/search?q=bharti+mtn+GDR (Last visited on January 28, 2019).
base. In 2008, the two telecom enterprises failed negotiations, when at the last-minute MTN
demanded Bharti Airtel to become its subsidiary. Talks of a $24 billion deal with MTN started
in 2009, to make it what would be the world’s third largest telecom company also shattered
due to the regulatory hurdles of the South African Government.

The deal was for MTN to buy 25% of Bharti, where as Bharti would acquire about 36% of
MTN’s equity and all of this with the Dual Listed Company (DLC) structure led to the fall out
of the deal.

III. THE GRAND FALLOUT

To elaborate DLC (also referred to as a ‘Siamese Twin’), the foreign countries agree in a
contract called the “Equalization Agreement” to operate the business independently, retaining
the identity, the stock exchange listing and creating separate shareholder registry. Companies
usually succumb to dual listing structure at times to avoid the capital gains tax which is levied
during the conventional method of merging. Conventional merging also requires a lot of forms
to be filled along with various officials’ approval which is not so in the case of a DLS. This
way the respective companies preserve their identity and also reap the combined benefits of
the merging. It also ensures equal rights of the shareholders both in voting, dividends and an
appropriate management structure.

The South African government wanted the MTN Enterprise to be enlisted in the Stock
Exchange of India and vice-versa, but Indian laws do not allow dual listing. The obligations
under Chapter-III of SEBI takeover regulations calls for the company to make a public offer to
buy an additional 20 per cent equity beyond 15 percent.4 It also led to the speculation that the
South African Government didn’t want the national character of the company to blend into a
Indian Company. Various other complications along with the difficulty in amending SEBI led
to the ‘deal of the decade’ being scrapped.5

Name: Anjani Harika

Semester and Roll Number: VIII Semester, 2015-041
Ph. No: +91-9080400195

4
Amendment to the Takeover Regulation by SEBI, available at
http:// www.sebi.gov.in /press/2009/2009300.html (Last visited on January 28, 2019).
5
Takeover Code revision to impact Bharti-MTN deal: Analysis, available at
http://www.moneycontrol.com/news/cnbc-tv18comments/takeover-code-revision-to-impact-bharti-mtn-
dealanalysis_416446.ht (last visited on January 28, 2019)