Isha Agrawal
January 27, 2025
In recent years, India has emerged as a major participant in global mergers and acquisitions, attracting significant international investments. Whilst cross-border mergers and acquisitions in India pose certain apprehensions due to complex regulatory, environment, cultural and economic nuances and concerns associated with them, India remains a burgeoning attraction for investments by foreign investors.
Any business entity, whether domestic or foreign, must take into account several critical factors when operating in India, which includes establishing an appropriate business framework and ensuring compliance with all legal and regulatory requirements associated with newly formed and existing enterprises. Such measures are essential to protect interests of the business and to navigate complexities of India’s ever-evolving legal environment. Additionally, organizations must evaluate potential tax implications and economic consequences. India presents a wealth of opportunities through its rapidly growing economy; however, for those unacquainted with the landscape, intricacies of the legal system may prove somewhat intimidating.
Therefore, choice of a foreign entity to merge or invest an existing Indian entity, will have considerable consequences for its competence to conduct business operations, gain market knowledge, develop business relationships, and implement financial strategies within India's regulatory environment. This article will identify and examine key global challenges faced by global corporations while undertaking investments in India through cross-border mergers and acquisitions and propose alleviation measures to navigate complexities.
Adapting to regional business practices, including negotiations, decision-making processes, and corporate governance norms, is essential for successful integration of entities undertaking any transaction. Thorough and well-thought structuring of entities is required to ensure compliance with applicable laws and regulations. However, undeniably, Indian regulatory environment is constantly evolving, therefore, making it crucial for companies to stay abreast of latest amendments and guidelines. Primarily, amongst other challenges, obtaining necessary approvals from various regulatory bodies, including the Competition Commission of India (“CCI”), the Reserve Bank of India (“RBI”), and sectoral regulators, can be time-consuming and challenging.
Certain cultural and linguistic barriers may hinder effective communication and integration of investor entity and investee, while economic fluctuations, such as changes in exchange rates and interest rates can significantly impact valuation and feasibility of the transaction. Further, political instability and changes in governmental policies, can pose additional risks and uncertainty with respect to foreign investments.
To handle risk considerations associated with cross-border mergers and acquisitions deals, acquirer organizations may need to readjust their risk perceptions and traditional due diligence processes. Since conducting a thorough due diligence in the Indian context can be challenging due to limited access to reliable information and potential information asymmetries, the deal team must identify and reflect on common risk factors such as legal and tax implications as per applicable laws, availability, accuracy, and reliability of the target company's financial information upon review of annual returns and financial statements. Further, diligence process must also focus on whether the entity adheres to anti-bribery and anti-money laundering laws amongst others. Therefore, an extensive due diligence is required to profoundly understand particular industry-specific requirements post investment for instance compliances, certifications, licenses, specifically in the highly regulated industries such as healthcare, chemicals, telecom and financial services. By virtue of multiple legal and regulatory considerations, both industry and country specific legal and regulatory challenges require specialized expertise, which may be an impediment due to stringent deadlines.
With complex global integration causing delays in the investment process, an integration strategy and suitable planning is required, or else it may result in missed collaborations, operational disruptions, resulting in legal implications which may also be serious at times. Therefore, it is exceedingly imperative that structuring of any investment is tactical, aligns with business objectives and does not substantially increase costs or legal ramifications.
Identifying and mitigating legal and regulatory risks associated with target entity in any proposed investment requires in-depth knowledge and discernment of the Indian legal framework. Cross-border mergers and acquisitions legislations are evolving, with numerous compliance and reporting requirements laid down under the Foreign Exchange Management Act, 1999 (“FEMA”), and directions, regulations, circulars, and rules made thereunder, Companies Act, 2013 (“Companies Act”), Securities and Exchange Board of India Act, 1992 (with all guidelines and regulations), Foreign Direct Investment (“FDI”) policy, Information Technology Act, 2000, Digital Personal Data Protection Act, 2023, Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 etc.
Various legal structures are available contingent upon factors such as the scope of planned activities, intent of the parties, the desired level of governance, and the regulatory framework pertinent to the specific industry. For example, foreign corporations may establish liaison offices, branch offices, or project offices within India to fulfil objectives in line with activities authorized by the RBI and the FDI policy, along with the rules made thereunder. For foreign investors with an existing footprint in India wishing to broaden their investments or expand through acquisitions, considering downstream investments may be more advantageous, as investments and acquisitions through an Indian subsidiary generally impose fewer compliance requirements compared to foreign direct investments. These frameworks ensure compliance with relevant regulations while safeguarding the interests of all stakeholders involved, including investors, promoters, and the investee company.
Moreover, it is essential to conduct a thorough examination of the legal, financial, tax, and secretarial restrictions and limitations, including but not limited to, adhering the FDI policy, FEMA, and the Companies Act, along with the rules and regulations made thereunder. Further, CCI plays a crucial role in curbing anti-competitive practices within the Indian market. Its objective is to promote greater transparency and accountability in high-value transactions, ensuring such mergers and acquisitions are subject to regulatory oversight to mitigate anti-competitive effects. Any investment that surpasses designated asset or turnover thresholds is required to receive approval from the CCI, thus safeguarding against the creation of monopolies or a significant reduction in market competition.
By conducting comprehensive research into the relevant regulatory requirements, tax implications, and potential repatriation limitations concerning the proposed investment, an investor or acquirer can ensure compliant and successful operations within India’s dynamic business landscape.
Primarily, at the onset, a holistic analysis of the target entity’s financial and legal facets addressing areas of concerns and/or threats with respect to the proposed investment needs to be conducted along with providing observations and viable recommendations. Such end-to-end examination of the target entity's corporate structure, borrowing capacity, loans and debts, intellectual property and other tangible assets, ongoing/past litigations, if any, compliances, permits, and registrations and if the same is in compliance with applicable laws, is crucial to identify potential liabilities, legal and/or financial risks associated with any proposed investment.
Upon satisfactory consummation of the due diligence process, resultant findings must be reflected as action items, including conditions precedent, closing action items, and conditions subsequent, which the investor or acquirer may require to be fulfilled by the target entity and/or its promoters. Moreover, due diligence findings may also be entailed as specific representations and warranties associated with the proposed transaction along with specific indemnity protection clauses may be drafted and included within the definitive documents to address and mitigate potential losses, claims, and non-compliance, if any, with applicable laws in India.
Additionally, to build robust partnerships, leverage local expertise and market access and explore investments in India, it becomes imperative for any foreign investor or acquirer to collaborate with experienced legal, financial, and tax advisors with in-depth knowledge of the Indian markets in accordance with applicable laws. Further, to optimize effectiveness of due diligence in time-sensitive situations, it is advantageous to enhance communication and collaboration by leveraging technology platforms.
On the other hand, to promote cultural adaptability, appropriate knowledge and information must be provided to stakeholders forming part of the transaction in order to enhance understanding of Indian business practices, cultural norms, local customs while upholding a global perspective upon completion of the proposed transaction. To effectively address and alleviate any global challenges associated with an investment, promotion of inclusivity and diversification also becomes essential. To mitigate potential challenges and concerns within the industry, the use of online resources and thorough research is essential to stay abreast with the latest regulatory amendments and legal implications.
Significant complications may arise in the event an investor or acquirer intends to terminate the investment arrangement with the investee entity and founders, for any reason, including disputes over exit rights stemming from unclear or ambiguous language in exit clauses, exit period, event of default, challenges in determining the price for the exit provided to the investor, or any other provisions outlined in the definitive agreements in relation to the rights of the investor or acquirer. Consequently, it is essential to engage in careful and deliberate negotiations and meticulously draft definitive agreements to ensure success. This will not only safeguard the interests and rights of investors/acquirers but also seek to minimize the obligations, disputes and risks associated with any investment.
A well-structured legal framework can be established through an exhaustive assessment, due diligence, and a clear understanding of essential components including the business overview, the roles of directors, number of partners, owners, members, or trustees involved. It is crucial to assess control mechanisms, business objectives, the capacity to secure loans and attract investments, processes for repatriating funds, available tax advantages, residential and citizenship statuses, and any changes that could impact the legal structure. Moreover, prior to undertaking any mergers and acquisitions transaction, global corporations must evaluate their long-term goals, applicable laws in relation to the investment, and compliance obligations as an investor, choose an optimal business location, consider operational feasibility, assess costs, and ensure availability of funds, among other critical factors.
Since prevailing laws for cross-border mergers and acquisitions are constantly progressing, entities are required to conform with the evolving applicable laws in India to mitigate any legal and tax consequences. By comprehensively understanding the intricacies of the various business structures available, the risks associated with each, and necessary compliances requirements to be undertaken within the Indian landscape, businesses can substantially minimize legal and financial risks while enhancing their probabilities of success and facilitate an informed approach to navigate impending complexities.
With thorough identification and evaluation of the advantages and restrictions of each accessible structure of investments in India, a foreign entity or formerly existing Indian entity can expand and establish a robust groundwork for continuing success in the Indian ecosystem. Additionally, while deciphering and consummating a probable investment opportunity, an in-depth analysis needs to be undertaken of the legal, financial, tax, and secretarial compliances and limitations laid down under the Companies Act, FDI policy, FEMA and the rules made thereunder. By cautiously navigating the discoursed challenges, understanding mitigation measures and leveraging opportunities presented by the Indian markets, global corporations can efficaciously complete cross-border mergers and acquisitions investments to achieve their strategic objectives in the dynamic and expanding Indian economy
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