KAAND 15: The Acquisition Kaand TACTIC: Buy a competitor with borrowed money, load the debt onto the acquired company, extract the cash
THE TACTIC IN ONE PARAGRAPH A company identifies a profitable competitor, often one with strong cash flows but weaker leverage. It borrows heavily—usually from banks or non-banking financial companies (NBFCs)—to fund the acquisition, then merges the target into itself or a subsidiary. The debt raised for the purchase is then transferred onto the acquired company’s balance sheet, while the acquirer extracts cash through dividends, intercompany loans, or asset sales. The acquired company, now saddled with debt, struggles to service it, but the acquirer walks away with liquidity, market share, and minimal risk. The tactic relies on regulatory arbitrage: the gap between who bears the debt and who controls the cash.
HOW IT WORKS IN INDIA SPECIFICALLY This tactic thrives in India due to three structural features: weak creditor rights, regulatory fragmentation, and the dominance of promoter-driven capitalism. First, the Insolvency and Bankruptcy Code (IBC) is slow to recover dues, giving acquirers years to extract value before creditors can act. Second, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have overlapping but poorly coordinated jurisdictions—NBFCs lend aggressively under RBI’s watch, while SEBI’s disclosure norms for listed entities fail to capture off-balance-sheet liabilities until it’s too late. Third, the Companies Act allows "related-party transactions" with minimal scrutiny if approved by a board dominated by promoter-appointed directors. Banks, too, are incentivized to lend for acquisitions—even to overleveraged firms—because the loans are secured by the target’s assets, not the acquirer’s. The result: debt is socialized, while cash is privatized.
THE HISTORICAL RECORD One documented case is the 2010 acquisition of Sesa Goa by Vedanta Resources. Vedanta borrowed $9.8 billion to buy a 51% stake in Sesa Goa, then merged it with its own loss-making iron ore subsidiary, Sterlite Industries. The merged entity, Sesa Sterlite, inherited the debt, while Vedanta extracted $2.3 billion in dividends between 2011 and 2015. By 2016, Sesa Sterlite’s debt-to-equity ratio had ballooned to 1.8x, but Vedanta’s parent company had reduced its own leverage. Another example is the 2018 acquisition of Bhushan Steel by Tata Steel under the IBC. Tata Steel paid ₹35,200 crore for Bhushan Steel, but the debt was restructured onto the target’s books, while Tata Steel retained operational control. The third case is the 2015 acquisition of Essar Oil by Rosneft and a consortium led by Trafigura. The buyers borrowed $12.9 billion, but the debt was parked in Essar Oil (renamed Nayara Energy), while Rosneft extracted dividends and prepaid loans to its parent. In all three cases, the acquirer’s balance sheet remained clean, while the target’s debt servicing became unsustainable.
THE INSTITUTIONS THAT ENABLED IT The tactic relies on a chain of institutional failures. Banks—particularly public sector banks—lent aggressively for acquisitions, often accepting the target’s assets as collateral rather than the acquirer’s cash flows. Rating agencies like CRISIL and ICRA gave investment-grade ratings to acquisition debt, ignoring the risk of debt loading. Auditors, including the Big Four, signed off on related-party transactions without questioning whether the debt was being fairly allocated. SEBI’s disclosure norms, while robust on paper, failed to capture the true cost of acquisition debt until it was too late. The National Company Law Tribunal (NCLT), which approves mergers, rarely questions the commercial logic of debt transfers. And the RBI, despite its oversight of banks, did not intervene in cases where loans were used to fund acquisitions that clearly shifted risk onto the target.
THE CURRENT STATE The tactic remains viable, though slightly harder to execute. The IBC has made it riskier to default on acquisition debt, as creditors can now push the target into insolvency. SEBI’s 2021 rules on related-party transactions require greater disclosure, but enforcement is weak. The RBI’s 2022 guidelines on bank lending to NBFCs have tightened, but NBFCs still fund acquisitions through structured debt. The real change would require SEBI to mandate that acquisition debt be disclosed as a contingent liability on the acquirer’s books, not just the target’s. Until then, the playbook remains intact.
WHAT TO WATCH FOR First, look for acquisitions where the acquirer borrows more than 70% of the purchase price—this suggests debt loading. Second, check if the target’s debt-to-equity ratio spikes post-merger, while the acquirer’s remains stable. Third, scrutinize related-party transactions in the target’s annual reports: if the acquirer is extracting cash via dividends or loans within 12 months of the deal, the tactic is likely in play. These are not red flags in isolation, but together, they reveal the machine at work.
This newsletter describes documented business tactics and systemic patterns based on public records, regulatory orders, and published financial journalism. It does not make allegations against any individual or entity. Readers are encouraged to consult primary sources and form their own conclusions.