Leveraged buyouts of distressed Indian companies

Amidst the brouhaha surrounding the new Companies Act, a framework for revitalizing distressed assets in the economy became fully effective on 1 April. The framework envisages, at least in spirit, a paradigm shift in the legal regime on leveraged buyouts (LBOs) in India. The Reserve Bank of India (RBI) had released the framework at the end of January, following a discussion paper on the issue in December 2013.

An LBO, simplistically stated, implies the acquisition of controlling interest in a company, where the purchase price (or a majority of it) is financed through leverage, i.e. borrowing.

This development is significant when you consider the law which affects LBOs in India. Under the RBI’s master circular on loans and advances, promoters’ contributions towards the equity capital of a company were to come from their own resources and a bank was not allowed normally to grant advances to take up shares of other companies.

Anuj Prasad is a partner, Anu Susan Abraham is a principal associate designate and Anandita Kaushik is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.