In 2022, the consolidated M&A market in India witnessed a significant upswing, with total deal activity reaching USD160 billion (Deloitte: India M&A Trends 2023). About 20 substantial transactions were completed, collectively contributing around USD152 billion to the market (IFLR: M&A Report 2023: India). This surge in activity included deals of varying sizes, from mid-sized transactions to mega-deals, reflecting the market's diversity.

The primary buyers were a blend of strategic and financial investors. Corporations seeking strategic expansion and synergies constituted a substantial portion of the buyer base. Strategic buyers sought to capitalise on synergies and market expansion opportunities. Financial investors, including private equity firms, were actively involved in pursuing investment opportunities. Private equity firms actively engaged in various deal types, including primary investments and secondary buy-outs.

Several sectors experienced heightened M&A activity, contributing significantly to both deal volume and value. Notable sectors included civil aviation, cement, and pharmaceuticals. These industries attracted substantial attention due to their growth potential and strategic importance in the Indian economy.

The market in 2022 featured a mix of trade sales and private equity deals. Private equity transactions encompassed various deal types, including primary investments and secondary buy-outs, reflecting the adaptability of investors to market conditions.

In the authors' view, robust demand and competitive bidding in 2022 often led to favourable valuations for sellers. However, market dynamics can vary depending on the specific industry and unique circumstances surrounding each deal.

Debt financing played a pivotal role in facilitating M&A transactions. Non-resident buyers often leveraged debt (from non-resident banks or financial institutions) to fund acquisitions with favourable financing terms. The Indian exchange control regulations impose restrictions on Indian banks financing acquisition of shares.

Certain transaction types, for example, consolidations in fragmented markets and divestitures by conglomerates streamlining their portfolios, were more prevalent in 2022. These transactions contributed significantly to the overall M&A landscape.

Notably, 2022 witnessed a substantial increase in strategic M&A deals. These transactions grew by 126% (Deloitte: India M&A Trends 2023) in terms of deal value, underlining the growing emphasis on strategic expansion and synergistic partnerships in the Indian M&A landscape.

In 2022, the M&A market in India witnessed several noteworthy trends in deal structures and types of consideration.

The prevailing trend in deal structures leaned significantly towards mergers, which emerged as one of the most prominent transaction types. Additionally, share sales gained prominence, reflecting strategic preferences among buyers and sellers. These trends in deal structures aimed at optimising various aspects of the transactions, for example, taxation and operational synergy.

Consideration in M&A transactions in 2022 primarily comprised of cash. The inclusion of deferred consideration, especially through earn-out structures, became a common practice. This trend was driven by a desire to manage and mitigate potential risks associated with economic uncertainties and post-closing performance. It also ensured that a portion of the purchase price was contingent on the future performance of the acquired business and protected against losses due to breach of warranties. However, payment of deferred consideration in cross-border transactions is heavily regulated.

In the M&A market, price determination mechanisms varied based on the deal structure and mutual agreement between parties. Two predominant mechanisms emerged:

These trends reflect the evolving nature of M&A transactions in India, as parties seek innovative ways to structure deals, manage risks, and align interests. The choice of deal structure and consideration type continues to be influenced by various factors, including market dynamics, regulatory changes, and the specific objectives of the parties involved.

In the realm of private M&A transactions, several noteworthy trends have emerged in terms and documentation, reflecting evolving market practices:

Due diligence in private M&A transactions is a meticulously organised process. Typically, it commences with the acquirer providing a comprehensive checklist of information required for conducting due diligence. The target company then compiles and uploads the necessary information into a secure data room. The buyer's legal, tax, and financial advisors systematically review these documents, culminating in the preparation of a high-level due diligence report. The due diligence process is critical to evaluate the target's legal, financial, and operational aspects, enabling informed decision-making and negotiation of favourable terms. Buyers are increasingly focused on identifying legal, regulatory, financial, and operational risks and opportunities. Typically, buyers prefer a high-level due diligence report or a red-flag due diligence report as opposed to a detailed due diligence report.

Traditional negotiated sales remain common and widely adopted in Indian M&A transactions. The parties engage in direct discussions to arrive at mutually agreeable terms. This approach provides flexibility and allows for tailored agreements, particularly in complex or unique transactions.

The M&A market is experiencing a surge in auction sales. Auction sales involve a structured and competitive process where multiple potential buyers participate in a bid to acquire the target company. This approach aims to enhance transparency, competition, and price discovery. Sellers and their advisors play an active role in organising and managing the auction process, ensuring a fair and efficient transaction.

The primary corporate entity commonly involved in private acquisitions is a private limited company, with limited liability partnerships (LLPs) playing a smaller role.

Private limited companies can be incorporated as companies limited by shares or guarantee or as unlimited companies. The most common type is the private company limited by shares. Key features include limited liability for shareholders, a division of capital into shares, and relative flexibility in terms of corporate governance.

Private limited companies are the preferred choice in private M&A transactions due to their well-established legal framework, limited liability protection for shareholders, and the ease with which ownership can be transferred. The memorandum of association specifies share capital, share divisions, and subscriber details. The articles of association (articles) govern internal management, share transfers, and other operational matters. When acquiring a private limited company, amendments to the articles may be needed to facilitate the transaction.

Partners in an LLP are akin to shareholders, and designated partners are akin to directors. Capital is contributed by partners as capital contributions. LLP agreements govern partner rights, duties, and obligations, including provisions for capital contribution transfers and capital increases.

LLPs offer flexibility and limited liability protection for partners, making them suitable for certain private M&A transactions. LLP agreements define the partnership's internal workings, including capital contribution transfers and adjustments. However, their use in private M&A transactions is less common compared to companies.

The Companies Act, 2013 (CA 2013), and the Limited Liability Partnership Act, 2008, provide provisions for the merger of companies and LLPs, respectively. These mergers require approval from the National Company Law Tribunal (NCLT).

Cross-border acquisitions are subject to regulations of the Reserve Bank of India (RBI), which govern inbound and outbound acquisitions for companies and LLPs.

Private M&A transactions primarily involve private limited companies due to their robust legal framework, regulatory support for mergers, well-defined corporate governance structures, and limited liability safeguards for shareholders. While LLPs offer flexibility and limited liability protection, they are used less frequently.

The most common ways to acquire a private company are:

Acquisition of a target can be made by an asset purchase or a share purchase. The target's share capital can be acquired by purchasing existing shares or by subscribing to new shares. Other ways to acquire share capital, for example, minority squeeze-out and capital reduction, are tightly regulated and subject to principles set out by the courts from time to time. Therefore, a negotiated share purchase transaction remains the best way to acquire the share capital of the target.

In an asset purchase, specific assets of the target are acquired. Asset acquisition can be accomplished by:

This term is broadly used to categorise transactions which result in the combination of two or more legal entities into one. The result is the transfer of assets and liabilities of one entity (the merging entity) into another legal entity (the merged entity). The merging entity is generally dissolved after the transaction, without having to separately comply with the legal requirements of winding up under applicable laws. The shareholders of the merging entity are normally allotted shares in the merged entity. The CA, 2013 contains detailed provisions dealing with mergers and amalgamations. Within these regulations, a party can use a variety of structures. Mergers and amalgamations require the approval of the jurisdictional NCLT. This process typically takes ten to twelve months to complete. The CA, 2013 and Foreign Investment Regulations also provide the legal framework for a merger or an amalgamation of an Indian company with a foreign company and vice versa.

Share purchase. In a 100% share sale, all assets and liabilities of the company are automatically transferred to the buyer. The buyer may be exposed to unknown risks in a share acquisition. However, the risks associated with those liabilities can be mitigated by having representations, warranties, and indemnification provisions in the share purchase agreement.

Generally, share purchase transactions do not impact employees directly. There is no interruption in their service, and employees continue to receive the same compensation and benefits. Therefore, the requirement to pay retrenchment compensation under the Industrial Disputes Act, 1947 does not apply to share purchase transactions.

Asset purchase. An asset purchase is not favourable from a seller's perspective, as the seller is left with potential liabilities but without the corresponding assets to discharge these liabilities. There is considerable flexibility in determining which assets or liabilities are excluded from the purchase. The buyer has the flexibility to cherry-pick the assets and liabilities it intends to purchase.

The buyer may also have identified employees to be transferred as part of the asset sale. The consideration for transfer of employees is arrived at based on the provisions laid down under the Indian taxation laws. The liabilities in relation to the employee are also transferred. However, these liabilities are typically set off against the consideration. For example, liabilities of the employer include accrued leaves, and accrued and unaccrued amount of gratuity. In India, gratuity is a statutory retiral/separation benefit, applicable to employees who have completed five years of continuous service with the employer. Gratuity is payable at the time of cessation of employment after an employee completes five years of continuous service. However, completion of five years of service is not necessary where termination of employment is due to death or disablement. Employers typically make a provision of gratuity in their books of account. The buyer typically obtains representation and warranties from the seller and seeks indemnity with respect to any tax claims that can be made against the buyer by the statutory authorities, post the asset sale.

Share purchase. A share purchase has a simple and straightforward transaction structure and involves fewer documents than an asset purchase. The primary document is the share purchase agreement, which outlines the terms and conditions of the transaction. Other documents include a securities transfer form and filings with regulatory authorities. However, the representations and warranties sought from the sellers in a share purchase agreement are exhaustive.

Approval from the NCLT is not necessary, and there is no requirement to form a separate merger subsidiary to hold the business.

A share purchase transaction does not generally entail obtaining fresh business licences. Therefore, there is minimal business interruption. Share purchases may require government consents (depending on the industry) or third-party approvals in accordance with relevant change in control provisions in the underlying contracts. Share purchases may also involve more shareholder involvement.

Asset purchase. An asset purchase agreement details the transfer of specific assets, including tangible and intangible assets, and may require detailed schedules. An asset purchase is more time-consuming involving the preparation of a detailed asset listing, determining the most efficient manner to accomplish the transfer, calculating transaction costs, and obtaining a valuation for each asset. In addition, there are often separate assignments or agreements for each asset being transferred.

Asset purchases generally require more consents, both from within the company (corporate authorisations) and from external parties. These external consents may include approvals from contractual counterparties (for example, creditors) and consents necessary for business continuity. For example, if the asset purchase includes leased premises or contracts with key suppliers, consents may be needed to ensure a smooth transition. Transfer of employees will require specific consent from the employees being transferred. In a share purchase, consent of employees is not required.

An asset purchase carries the risk of failure to purchase all the assets a business needs to operate. It may also be difficult to separate the assets and the relevant contracts from the overall business and contracts of the target and to determine what is transferred and what is retained.

In some cases, post completion of the asset purchase, the purchaser may not have the requisite set-up to make use of the assets purchased. In these instances, the purchaser enters into a transition services agreement with the seller, where the seller agrees to provide certain services to the purchaser, for a specified time period, or until the purchaser has the necessary set-up to make use of the assets purchased.

However, an asset purchase can be more efficient to complete if the shareholders are a heterogenous group. It avoids the requirement to engage in negotiations with multiple shareholder groups (for example, polarised groups under the control of different people or companies).

Mergers and amalgamations. The CA, 2013 provisions dealing with mergers and amalgamations allow great flexibility in structuring transactions. The CA, 2013 allows parties to incorporate capital reduction and minority squeeze-out provisions in accordance with the mergers and amalgamations provisions. There are some regulatory costs levied by the regulatory authority at the time of incorporation, which are charged on an ad valorem basis. These costs are taken into consideration at the time of merging two or more entities.

Mergers and amalgamations do not require the unanimous approval of all the shareholders involved. They require the approval of shareholders holding three-quarters in value of the total paid up capital of the company. This threshold is particularly useful when anticipating challenges in getting all the shareholders on board in a share purchase transaction. While a dissenting shareholder can challenge the merger or amalgamation before the NCLT, they must satisfy certain minimum shareholding thresholds to mount a challenge.

In private M&A transactions, both buyers and sellers must carefully consider tax implications that can significantly impact the overall deal structure and financial outcomes.

Share purchase. Sellers often prefer a share sale, as it generally results in a single tax event, capital gains tax on the sale of shares. This can be advantageous as it simplifies the taxation process and may lead to more favourable tax treatment. However, the specific tax treatment can vary depending on the period of holding the shares, relevant residency or jurisdiction, and the seller’s individual circumstances.

There may be significant savings on the stamp duty costs involved in a share purchase transaction. The government has recently implemented a uniform stamp duty structure for the purchase of shares at 0.015% of the consideration amount.

In cross-border transactions involving a non-resident seller and buyer, sellers should be aware of potential withholding tax obligations. The purchaser is responsible for withholding tax on the purchase price and remitting it to the tax authorities. Delays or non-compliance can result in fines and interest charges. A valuation report will also need to be obtained with regards to the consideration price and the withholding made.

In global purchase transactions, a standalone share purchase agreement should be executed for the purchase of the Indian shares which will clearly state the India consideration. Ideally, the Indian consideration should not be combined with the global purchase consideration for Indian tax purposes.

Asset purchase. In an asset purchase transaction, stamp duty is levied on the individual assets being transferred. Stamp duty payable is usually a percentage of the market value of the assets and can vary between 1% to 3%.

Depending on the nature of the assets, Goods and Services Tax (GST) at the rate of 5% to 28% of the purchase price is payable. GST is borne by the purchaser and is paid to the seller along with the purchase consideration. The seller remits GST to the appropriate authority. After this, the purchaser can claim the input tax credit by making necessary filings with the appropriate authority.

Under Indian taxation laws, any sum paid over and above the fair market value is taxable in the hands of the seller as capital gains tax. Based on the duration for which the asset has been held by the seller, the capital gains tax can be classified as a long-term capital gain or short-term capital gain. In most cases, the consideration received by the seller from an asset sale is transferred to its holding company as dividend. The holding company will be required to pay tax on dividend. Typically, the tax on dividend is withheld by the Indian seller and is paid to the appropriate authority on behalf of the holding company.

Sale of companies by auction is quite common. A bidding process is typically organised by the investment banker. The bidding process culminates in bidders submitting a detailed bid. A bid should be clear, precise, and address all aspects of the acquisition, including the source of financing. A shortlisted acquirer moves to the next stage, that is, the process of entering into exclusive negotiations with the seller to conclude the transaction. Bidders who provide evidence of a clear source of funding are likely to be selected in the bidding process.

It is advisable to adopt a fair and transparent bidding process to reduce future claims.

Foreign ownership of Indian companies is regulated under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (Foreign Investment Regulations). The government has progressively liberalised foreign investment norms. The current Foreign Investment Regulations allow 100% foreign investment in most sectors open for private investment. However, there are some sectors where prior approval from the government is necessary before a foreign investment can be made, or where foreign ownership of less than 100% is permitted. Under the current foreign investment policy, foreign investment of more than INR50 billion (about USD601,437,500) must be reported to the RBI within 30 days of the date of issuance of equity instruments but not later than one year from the date of incorporation of the wholly owned subsidiary, regardless of whether the sector falls under the approval route or the automatic route.

Foreign investment in a private limited company must come through the foreign direct investment (FDI) route, and not from other routes, for example, foreign portfolio investment. The Foreign Investment Regulations require non-residents to meet certain requirements relating to the following:

A letter of intent, often referred to as a memorandum of understanding or term sheet, is commonly made between the buyer and the seller before a contract. These preliminary agreements are generally non-binding except terms that are expressly made binding.

Clauses dealing with break-up fee, exclusivity, confidentiality, governing law, and dispute resolution are generally binding.

Exclusivity agreements require parties to negotiate with each other exclusively, with a view to entering into a contract. The exclusivity is limited in duration and the parties are free to negotiate with third parties on its expiry.

An exclusivity agreement should be subject to stamp duty in accordance with the applicable law, for it to be enforceable before a court of law.

A non-breaching party can obtain an interim injunction order. While this provides immediate relief to the non-breaching party, the ultimate objective is to claim damages for breach.

Typically, acquisitions entail parties exchanging commercially sensitive and publicly unavailable proprietary information. It is important to ensure that the recipient of this information uses it only in relation to evaluating the proposed transaction. Therefore, parties enter into a mutual non-disclosure agreement to set out the confidentiality obligations in relation to proprietary information. These agreements are binding. The standard provisions seen in non-disclosure agreements in global deals are almost entirely enforceable under Indian law.

For enforcement and remedies available for breach of non-disclosure agreements, see above, Exclusivity Agreements.

Due diligence is typically carried out by the acquirer providing a checklist of information required, the target uploading the information in the data room, the acquirer's legal, tax, and financial advisors reviewing of documents, and preparing a due diligence report. The main areas covered under the requisition list for the purposes of the diligence are:

For current trends in due diligence procedures, see also Due Diligence.

Approval of the board of directors (board) is required for a company to take over a company or acquire a controlling or substantial stake in another company (section 179, CA, 2013). If there is a transfer of shares, the duly signed and stamped securities transfer forms executed between the buyer and seller must be presented to the board for their approval.

General restrictions. A private limited company is required to restrict the transferability of its shares (section 56,of CA, 2013). These restrictions are contained in the company’s articles. The restrictions are generally expressed as a pre-emptive right in favour of the other shareholders. It is therefore necessary to ensure that these shareholders waive their pre-emptive rights before the share purchase transaction is completed.

Drag along rights. The majority shareholder has the right to accept an offer to buy their shares and to force the minority shareholder to accept that offer. These rights are exercised when an investor intends to acquire a significant stake in the company.

Tag along rights. Certain shareholders (usually minority shareholders) have the right to tag along with the selling shareholder and sell their shares on the same terms as the selling shareholder. The selling shareholder will be obligated to include these shareholders as part of the share sale.

Change of control approvals. Certain registrations and licences obtained by a company for its business operations, contemplate prior approval of the statutory or regulatory authority, if the share sale results in a change of control. In some cases, a company is required to inform the governmental authority once the change in control has taken place.

Change in control approval is also a contractual requirement in agreements with third parties, for example, lease deeds or vendor contracts.

A copy of a proposed merger or demerger must be served on the companies' creditors, and the consent of the creditors constituting at least three-quarters in value must be obtained (section 230, CA, 2013). Their consent must be obtained in a meeting of the creditors, unless the NCLT has waived the requirement to hold a meeting, in which case, the consents are collected in the form of an affidavit. If there is no creditors' meeting, the threshold of approval is 90% of creditors in value.

The CA, 2013 does not require that consent is obtained by creditors in a slump sale or an itemised sale of assets. However, their consent is required if there are contractual provisions between the company and the creditor to that effect. Financing agreements typically require the borrower to obtain the consent of the creditors before the transfer of an asset.

A transfer of shares or fixed assets while tax proceedings are pending against a shareholder or the transferor company that holds those fixed assets, is void, unless the transferor company has obtained a no-objection certificate from the assessing officer (section 281, Income Tax Act). Purchasers typically require the sellers to obtain a no objection certificate. Alternatively, they may settle for an independent chartered accountant's certificate certifying the outstanding tax proceedings and tax demands to make a risk determination for not obtaining the no objection certificate. For entities operating within Special Economic Zones (SEZs) or Software Technology Parks of India (STPI), specific approvals and compliances related to these zones are paramount. SEZ and STPI units benefit from various tax incentives, customs exemptions, and regulatory relaxations. Therefore, any change in ownership or control of units often requires prior approvals from the authorities governing SEZs and STPIs. These approvals ensure that the new owner can continue to enjoy the benefits and incentives associated with the zone. Buyers and sellers engaged in transactions involving SEZ or STPI units should proactively engage with the relevant authorities to obtain the necessary approvals and maintain compliance with the unique regulatory framework governing the zones. Failure to do so can result in the loss of valuable incentives and benefits associated with operating within these specialised zones.

Other approvals required to be obtained at the time of making a foreign investment and anti-trust approvals are covered in Question 9 and Question 40, respectively.

The main documents required are:

A share purchase agreement typically includes (among others):

The main documents required are:

An Asset Purchase Agreement is more specific in nature (focusing on the assets being purchased) and includes (among others):

The main substantive clauses in an acquisition agreement are:

Share and asset acquisition agreements differ in:

It is essential for the parties to tailor agreements to the specific nature of the transaction and its associated legal and commercial considerations.

Seller warranties or indemnities are typically included in an acquisition agreement. These include:

For an asset sale agreement, the warranties or indemnities will be more specific in nature and will be limited to the assets being purchased by the buyer.

The main limitations on warranties are:

Qualifying warranties by disclosure is standard practice. Unless otherwise agreed, the buyer may insist on an indemnity in certain cases even after disclosure.

There are two types of remedies that are fundamentally used in an acquisition transaction:

Indemnity payments to a foreign party should be structured according to the Foreign Investment Regulations (see Question 9). A payment of damages under an indemnity may require the prior approval of the RBI.

Warranties and indemnity insurance or representations and warranties insurance are also emerging as an option to address the risks arising from breach of warranties. Increasingly, this is a key differentiator between various bidders and the bid that offers insurance is likely to stand a better chance of winning.

The statute of limitations generally prescribes three years for making monetary claims, subject to certain exceptions. However, parties to the transaction typically negotiate to align the limitation period with the relevant statutes. For example, the Income Tax Act allows an assessment officer to reopen assessment proceedings against a company up to seven years after the end of the relevant financial year. Therefore, the buyer typically asks for tax warranties for seven years from the end of the relevant financial year.

The following common conditions precedent are typically included in a share sale agreement:

At signing, the following documents are typically signed or produced:

The share purchase agreement and the asset purchase agreement lay down the mechanism for closing, which generally accounts for situations where closing takes place over a span of few days and cannot be achieved in a single day. Typically, the date of closing is the last date on which closing actions are completed by the parties.

These agreements also provide for a long stop date, that is, the date within which closing must occur. If all closing actions are not completed within the long stop date, the agreement is terminated, and the transfer of shares/assets will need to be unwound along with repayment of the consideration to the buyer, if already paid.

At closing, the following documents are typically signed or produced in a share sale:

The following documents are signed or produced in an asset sale:

Post-closing actions typically involve:

Different types of documents have different legal formalities. Documents which qualify as an instrument must be stamped in accordance with the relevant stamp act. The rate of stamp duty is prescribed by the federal government (if the instrument falls under the union list). The relevant state government is entitled to prescribe the rate of stamp duty if the instrument falls under the state list. The stamp duty should be paid at (or before) the time of executing the instrument. If the instrument is executed outside India, it must be stamped within three months of its receipt in India. An instrument which is not stamped under the relevant stamp law is not admissible as evidence before a court of law or an arbitral panel. In addition, a public authority can impound the document.

An instrument relating to a transfer of immovable property or intellectual property of a certain value must be registered with the jurisdictional sub-registrar's office and registration fees paid.

Any person authorised by the board can sign a document or instrument on behalf of the company. In some cases, the document must be stamped with the common seal of the company (if required under the company's articles).

There are no special requirements for the execution of documents by foreign companies. The only additional requirement is that affirmations, for example, affidavits and declarations, are apostilled in accordance with the HCCH Convention Abolishing the Requirement of Legalisation for Foreign Public Documents 1961 (Apostille Convention).

The Information Technology Act 2000 provides the regulatory regime regarding digital signatures and electronic signatures. Digital signatures (that is an asymmetric crypto-system and hash function) issued by recognised certifying authorities are a valid source of signature. A legal presumption exists with respect to documents that are digitally signed. Therefore, parties to an M&A transaction can use the digital signatures for executing documents.

However, there are certain documents that must be executed using wet-ink signatures. These are typically documents in relation to transfer of immovable property in an asset sale.

The formalities under the articles and the CA, 2013 must be complied with. A waiver of pre-emptive rights by the other shareholders must be obtained (see Question 12). In addition, any contractual stipulations regarding share transfers must be complied with.

The CA, 2013 requires the transferor and transferee to deposit a duly executed securities transfer form with the target's board. The securities transfer form must be stamped at the rate of 0.015% of the purchase consideration (including premium, if any). This is a federal levy and must be paid to the appropriate jurisdictional officer.

When the target's board have taken on record the duly stamped and executed Securities Transfer Form, the register of members and the register of share transfers must be updated to reflect the share transfers.

If the shares are held in dematerialised form, a securities transfer form is not required. Instead, the transferor and transferee must give the relevant transfer instructions to the relevant depository, who will carry these transfer instructions out in the electronic records it maintains.

In some cases, the regulatory authorities (depending on the target's permits) and third parties (depending on contractual obligations) must be informed of the change in control within the timelines prescribed in the permits and contracts.

Shares are considered goods under the Sale of Goods Act, 1930 (Sale of Goods Act). The following terms are implied by law as to the seller's title to the shares (unless the circumstances of the contract show a different intention):

(Section 14, Sale of Goods Act.)

Buyers typically ask for additional warranties in relation to title. The kind of additional warranties requested depends on the details of the transaction. These warranties are often heavily negotiated between the parties.

There are no clear rules. It may be difficult to hold a seller and its advisers liable for pre-contractual misrepresentation if the transaction agreement expressly excludes liability in relation to statements made before the conclusion of the agreement. Typically, the transaction agreement contains a clause which states that the transaction agreement overrides previous communications and statements made by the seller and their advisers. However, a seller and its advisers can be held liable for fraudulent misrepresentations.

The basic legal principle is that Indian parties are bound by Indian law. It has been held that Indian parties contracting out of Indian law is against Indian public policy. However, an agreement can provide for a foreign governing law if the agreement is between an Indian party and a foreign party. A transaction governed by a foreign law must still comply with specific Indian requirements under, for example, the Income Tax Act, Foreign Investment Regulations, and Competition Act 2002 (Competition Act).

Typically, in an asset purchase agreement, where assets of an Indian company are being transferred to another Indian entity, the parties generally opt for an Indian governing law, even if the parent entities of such Indian subsidiaries are non-residents. In a share purchase agreement, where either of the parties is a non-resident, and provided that the non-resident party is situated in a sophisticated mature jurisdiction, the parties opt for the governing law of such non-resident party.

In addition, two Indian parties can choose a foreign law for arbitration, if the contract has a foreign element to it. Two Indian parties can also choose a foreign seat of arbitration. The most common non-Indian forums chosen are the International Court of Arbitration and the Singapore International Arbitration Centre.

India has a robust and independent arbitration system for domestic arbitration and international commercial arbitrations. Private M&A-related disputes are typically resolved through arbitration or alternative dispute resolution (ADR) mechanisms specified in the transaction documents. It is market practice to include arbitration provisions in private M&A documents. Arbitration is often preferred for its efficiency, confidentiality, and flexibility in resolving disputes that can arise during or after the transaction.

Arbitration clauses are generally enforceable, and India has a well-established legal framework for arbitration. The Arbitration and Conciliation Act, 1996, governs both domestic arbitration and international commercial arbitrations conducted in India. The Act provides clear guidelines for the conduct of arbitration proceedings and the enforcement of arbitration agreements.

Local courts typically respect the choice of jurisdiction specified in an arbitration clause. Indian courts have shown a pro-arbitration approach and are inclined to uphold the parties' autonomy in selecting their dispute resolution forum. When parties agree to arbitration, courts generally refrain from intervening in the arbitration process unless there are compelling reasons to do so.

In the event of a dispute, the parties select arbitrators, and the proceedings are conducted in accordance with the arbitration agreement and applicable arbitration rules. The arbitrator's award binds the parties and is recognised and enforced as a court decree.

India is a signatory to the New York Convention on the Enforcement of Foreign Awards. Therefore, Indian law recognises and enforces certain foreign arbitration awards.

Cash is the most common form of consideration. Non-cash consideration, for example, a swap of shares, can be considered depending on the transaction structure. However, this remains a regulated activity under the Foreign Investment Regulations.

Tax considerations are often the biggest factor in determining the choice of consideration. The Foreign Investment Regulations are an important factor. The Foreign Investment Regulations generally require consideration to be discharged by payment of cash through ordinary banking channels. Non-cash consideration is only allowed in certain situations. The consideration payable in a transaction should also comply with the pricing norms:

(Rule 21, Foreign Investment Regulations.)

These pricing norms also apply to the allotment of shares to non-residents in a private placement or on a preferential allotment basis.

Deferred consideration structures or earn-outs can be implemented under the Foreign Investment Regulations. These structures are allowed under the automatic route if the following conditions are met:

In an allotment of securities to a non-shareholder, the CA, 2013 envisages a valuation undertaken by a registered valuer and the shares allotted at fair value.

The assessment of the purchase price in M&A transactions typically involves a valuation process conducted by qualified professionals. Chartered accountants, practicing cost accountants, or approved valuers, often from the panel maintained by the central government, are commonly engaged for this purpose. Valuation methodologies adopted should be internationally accepted or in line with prevailing market practices. A formal valuation certificate, issued by the valuer, reflecting the valuation and the methodology used, is an essential document in the transaction. In share sales, Indian exchange control regulations require that the valuation report should not be older than 90 days from the date of the share sale to ensure the accuracy of the valuation.

Fixed consideration, also known as a locked-box mechanism, is common in private M&A transactions. Parties agree on a fixed purchase price at the time of signing the agreement, and this price remains unchanged at closing. This method provides certainty to both buyer and seller.

Closing account adjustment mechanism. In some cases, parties opt to agree a tentative purchase price at signing, but the final purchase price is adjusted post-signing based on the target's audited or finalised accounts. This adjustment reflects any significant changes in the target's financial position between signing and closing. There is less flexibility in undertaking price adjustments for share sales under Indian exchange control regulations.

Earn-out consideration. Earn-outs are contingent payments linked to specific milestones or performance metrics. Post acquisition, the buyer may retain the seller as a key employee or consultant to ensure the achievement of these milestones. Earn-outs can align the interests of both parties and facilitate a smoother transition.

Deferred consideration structures or earn-outs can be implemented under the Foreign Investment Regulations. These structures are allowed under the automatic route if the following conditions are met:

Subject to the above restrictions and the mutual understanding of the parties, the deferred consideration can also be deposited in an escrow account opened by the parties. In the authors' experience in the recent past, almost all our transactions had a deferred consideration. This is done to bind the sellers to certain performance linked conditions post-closing, in cases where the sellers would have sold their stake but not exited the target or to insulate the buyer from claims especially when there are adverse due diligence findings.

A buyer listed in India can raise cash to fund an acquisition through the following routes:

Approval of the board is required in all cases. Approval of the shareholders is also required for a private placement of shares and public offer. The approval of the acquirer's shareholders by way of a special resolution is necessary if the value of the transaction exceeds either:

(Section 186, CA, 2013.)

The requirement to issue a prospectus applies to public companies intending to list their shares. A private limited company is not required to issue a prospectus at the time of making a private placement of shares.

The company must file:

Other regulatory approvals may also be needed, depending on the sector of the target.

A public company cannot give financial assistance (directly or indirectly) to a potential buyer of shares in that company or its holding company (section 67, CA, 2013).

This restriction does not apply to:

The securities transfer form must be stamped at 0.015% of the purchase consideration levied by the federal government.

Stamp duty is also payable on a share purchase agreement as the agreement is treated as an instrument. This is a state levy and states set specific rates. For example, if the share purchase agreement is being executed in the state of Karnataka, the stamp duty is capped at INR20,000 (about USD240).

An NCLT order sanctioning an amalgamation, merger, or demerger is considered an instrument and subject to stamp duty under the relevant state stamp act. The stamp duty is calculated as a percentage of the value of the transferor company’s properties located in that state, or a percentage of the value of shares issued to the shareholders of the transferor company (whichever is higher). However, certain state stamp acts do not have a specific entry dealing with stamp duty on NCLT orders. In these states, an NCLT order is treated like a conveyance and the stamp duty conveyance rate must be paid.

The business transfer agreement must be stamped on the ad valorem value. The range of stamp duty is 3% to 6% of the purchase consideration (depending on the state-specific stamp legislation).

Registration fees are payable to the sub-registrar's office if immovable property is being sold or leased. The state governments have jurisdiction to levy the registration fee.

In some states, a bill of sale is provided (in addition to an asset purchase agreement) to evidence the sale of assets and stamp duty is payable on that bill of sale. However, this requirement has been removed in most states, and the sale of an asset takes place by entering into an asset purchase agreement.

Stamp duty is payable on the entire consideration and the amount of stamp duty payable varies from one state to the other. There is no requirement to pay stamp duty on individual assets. Some Indian states provide a more relaxed stamp duty regime for intra-group mergers and amalgamations.

Income tax is payable on the gains made by the seller. These gains are taxed as capital gains. The rate of taxation depends on the residency status of the seller and the holding period of the shares, as follows:

There is a requirement to withhold applicable taxes when making payments to non-residents. The obligation must be discharged by the buyer of shares or assets. Payments made to a resident seller are generally not subject to tax withholding obligations.

India has also introduced indirect transfer taxes in 2012, but with retrospective effect from 1961. Under these provisions, an indirect transfer of an Indian company’s shares is subject to Indian income tax if both:

The value of a share is determined according to the value of the share on the date on which the financial year ended, preceding the date of transfer of share.

Indian transfer pricing rules apply in a transfer of shares between associated enterprises under the Income Tax Act.

Mergers and amalgamations can result in a taxable event in India if they involve a transfer of a capital asset in India. However, certain classes of mergers, amalgamations, and demergers have been specifically exempted from capital gains tax (if certain conditions under the Income Tax Act are met).

In a slump sale, the sale of an undertaking is subject to LTCG tax if the undertaking is held for at least 36 months. This is regardless of the holding period of individual assets. Capital gains from a slump sale are taxed at 20% (which is additional to any fees and levies) if the undertaking is held for 36 months or more and 30% (which is additional to any fees and levies) in any other case.

In an itemised sale of assets, the capital gains tax payable will depend on the holding period of the asset. Capital gains from an itemised sale of assets is taxed at 20% (exclusive of surcharge and cess) if the asset is held for 36 months or more and 30% (exclusive of surcharge and cess) in any other case.

Indirect transfer taxes also apply in an asset sale (subject to certain exemptions under the Income Tax Act).

Indian transfer pricing rules apply in a transfer of assets between associated enterprises under the Income Tax Act.

India has entered into double taxation avoidance agreements (DTAAs) with many countries. These DTAAs provide for a mechanism to deal with cross-border taxation issues. The DTAAs with certain countries, for example, Singapore, Mauritius, The Netherlands, and Cyprus provide a favourable framework for taxation of capital gains. Investments into India are generally routed through these jurisdictions under these provisions.

A merger or amalgamation can be structured in a tax-neutral way by fulfilling the conditions under the Income Tax Act.

Resident shareholders can also avoid paying LTCG tax on the sale of shares by investing the gains in certain specified assets or bonds.

However, India has introduced the General Anti Avoidance Rules (with effect from 1 April 2017). This is an overarching legislative framework that impacts all types of corporate restructuring activities whose primary aim is tax avoidance. These rules apply to transactions of a certain value. The Income Tax Department needs certain approvals before it can invoke the General Anti Avoidance Rules.

The definition of goods and services under the GST regime excludes shares and stocks from its scope. Therefore, no GST is payable on share purchase transactions.

In mergers, amalgamations, and demergers, no GST is incurred as this entails a transfer of an entire business as a going concern. Slump sale transactions are exempt from GST.

However, GST is payable on the sale of individual assets in an itemised sale of assets transaction. The rate of GST depends on the nature of assets transferred. GST ranges from 5% to 28%. However, GST paid on the sale of assets may be available as an input tax credit for the buyer (if certain conditions are met).

In a merger, amalgamation, or demerger of a company that owns an industrial establishment with another company, the accumulated losses and the unabsorbed depreciation of the amalgamating company can be carried forward and set off against profits of the amalgamated company (section 72A, Income Tax Act). However, this benefit is only available if certain conditions under the Income Tax Act are met.

The Income Tax Act also recognises the carry-forward of tax holidays available to the amalgamating company (if the amalgamated company meets certain conditions under the Income Tax Act).

The amalgamated entity is also allowed a deduction with respect to the expenditure incurred wholly and exclusively for the purpose of amalgamation. This can be used over a five-year period, commencing from the year when the amalgamation takes place.

Similar provisions are not available for an asset sale (other than an amalgamation) or a share sale.

Indian law categorises employees as "workers" or "non-workers," depending on the nature of the work they perform. Under the Industrial Disputes Act 1947, a person employed to do any manual, technical, skilled, or non-technical work is a worker, unless they are:

All other categories of employees are considered as non-workers.

Indian law does not recognise an automatic transfer of workers during transfer transactions. Their prior consent is required. The law does not expressly address the issue of transfer of non-non-workers. However, the rules applicable to transfer of workers are generally followed even in the case of non-workers.

Consent of workers or non-workers is not required under a share transaction, as this involves no transfer of workers or non-workers. However, their consent is required in asset transactions that involve their transfer. Also, certain enterprises with trade unions enter into a settlement agreement dealing with rights of workers. The settlement agreement must be complied with.

Workers are provided with certain protections in the context of a share or asset sale. Under the Industrial Disputes Act, a worker who has been in continuous service for at least one year cannot be dismissed unless the following conditions are met:

However, the above rules do not apply if it is shown that:

In addition to the Industrial Disputes Act, the relevant state Shops and Establishment Act also sets out certain requirements. The Shops and Establishments Act of most states also provides the necessary legal framework regarding employee dismissals.

The legal framework described above sets the minimum compensation payable to a worker when they are dismissed. However, parties can agree to a better severance package than the one provided under law.

The law requires prior approval from the jurisdictional labour officer if the retrenchment is proposed by a factory that has employed on average 100 or more workers per working day for the preceding 12 months.

Indian labour and employment law requires every establishment employing 20 or more persons to make provident fund contributions. The employer and the employee contribute an equal amount to a provident fund scheme established by the government. The rate of contribution is currently fixed at 12% of basic wages. Employees are also entitled to receive gratuity calculated as a percentage of their salary at the end of five years of continued employment with the relevant employer. This gratuity is currently capped at INR2,000,000 (about USD24,060) per employee. India has also established the Employees State Insurance scheme. This scheme requires both employers and employees to make certain contributions to a centrally administered insurance scheme. Employees or their legal heirs can rely on insurance in case of death or disablement.

The acquirer must ensure continuity of service to employees (see Question 38). The terms of employment must not be less favourable than those offered by the previous employer. Retrenchment compensation is payable to the relevant employee if these conditions are not met. The statutory social security and pension contributions (for example provident fund, pension, and gratuity) must be honoured by the new employer. These benefits are either paid out at the time of acquisition, or recorded in the books of the acquirer as payable. Most transactions record these benefits in the books of the acquirer as payable to ensure that the transfer does not result in interruption of service to employees.

The Competition Act regulates combinations. The Competition Act confers extra-territorial jurisdiction on the regulator over combinations based on assets in India and turnover from India.

At present, under the standard notification test, a transaction is notifiable to the CCI if the parties breach the asset and turnover thresholds and no exemption applies. For further information see, Merger Control: India Quick Compare Chart.

The CCI recently amended the definition of a combination by introducing the concept of deal value threshold. Any merger or acquisition in which the value of transaction, in which the acquisition of shares, control, voting rights, or assets of an enterprise, merger, or amalgamation exceeds INR20 billion (about USD240 million) will be classified as a combination and a prior approval from the CCI is required. However, the enterprise being acquired should have substantial business operations in India. The term substantial business operations in India is yet to be clarified by the CCI.

Where either the value of assets or turnover of the enterprise being acquired, taken control of, merged, or amalgamated in India is not more than that value as prescribed, the acquisition, control, merger, or amalgamation will not constitute a combination.

A combination that causes or is likely to cause an appreciable adverse effect on competition is prohibited and is void.

De minimis/small-target exemption. This is available where the value of assets being acquired, taken control of, merged, or amalgamated does not exceed INR3.5 billion (about USD42 million) in India, or the turnover from India is not more than INR10 billion (about USD120 million). This exemption is currently available up to 28 March 2027.

Any enterprise intending to enter a combination must notify the Competition Commission of India (CCI) and seek its permission for consummating the combination.

The CCI regulations also exempt certain categories of combinations that are ordinarily not expected to have an appreciable adverse effect on competition.

The CCI must make a decision regarding the combinations within 210 days of notification to it. However, the CCI must formulate a prima facie view about the combination within 30 days of notification of the combination. Generally, the CCI keeps to this time period.

The CCI takes the following factors into consideration when determining if a combination will have an appreciable adverse effect on competition:

India has a range of umbrella legislation, for example:

The broad principle under these statutes is that the occupier of the land is liable for contaminated land. However, government has tried to hold the causer of the contamination liable. For example, under the Guidelines on Implementing Liability for Environmental Damage due to Handling and Disposal of Hazardous Waste and Penalties, the occupier can be excluded from liability if they prove that the contamination was caused by the previous occupier or owner. For this reason, it is important that the buyer carries out environmental due diligence (among others), prior to acquiring the target. Typically, environmental due diligences are common where the target is engaged in the business of manufacturing goods, waste disposal, packaging and re-selling goods, and business activities of a like nature.

In a share sale, the buyer acquires all the liabilities, including environmental liabilities. Environmental liabilities can be excluded in asset acquisitions, depending on the transaction structure. However, given the risk of liability attaching to the occupier, it is best to have robust environmental warranties.

India has periodically revised its FDI policy to attract foreign investments and promote ease of doing business. Changes in FDI rules, for example, sector-specific caps and conditions, can significantly impact M&A transactions.

The CCI recently amended the definition of a combination by introducing the concept of deal value threshold (see Triggering Events/Thresholds). This expanded the scope of CCI review.

In 2022, the government and RBI overhauled the regime in relation to overseas investment by Indian entities issuing:

The new regime, among other things, permits round tripping for Indian entities up to two layers of subsidiaries, including entering into joint ventures with foreign entities. This will lead to global expansion of Indian businesses that have an existing downstream subsidiary.

In 2020, the government introduced the requirement for prior approval in cases where an investing entity in situated in a country sharing land borders with India, or where the beneficial owner of an investment in India is situation in these countries (see Question 9). Following this, the Ministry of Corporate Affairs, by way of an amendment in June 2022, mandated prior security clearance for any person who is a national of a neighbouring country and is proposed or has sought appointment as a director in an Indian company.

The Insolvency and Bankruptcy Code has been subject to amendments to streamline the resolution process for distressed companies. These changes can influence M&A transactions involving insolvent or financially distressed entities, impacting the rights and priorities of creditors and buyers.

The pace of economic recovery in India is expected to be a key driver of the M&A market in 2024. Factors including GDP growth, industrial production, and consumer sentiment will influence investor confidence and deal activity. Government policies aimed at stimulating economic growth, attracting investments, and improving the business environment will play a vital role in shaping the M&A landscape.

Ongoing regulatory and policy changes can significantly impact the M&A market. Investors will closely monitor shifts in regulations related to FDI, taxation, intellectual property, and data privacy. Policy initiatives that promote ease of doing business, reduce red tape, rationalise taxes, and enhance transparency can create a favourable environment for M&A transactions.

Different sectors will experience varying degrees of M&A activity based on industry-specific trends. Sectors including technology, healthcare, renewable energy, and e-commerce may continue to attract significant investment. Emerging industries and disruptive technologies could lead to strategic acquisitions and partnerships as companies seek to stay competitive.

Cross-border M&A transactions are likely to remain a prominent feature of the Indian market. International investors may explore opportunities to expand their presence in India or partner with Indian companies to access the domestic market. Bilateral trade agreements and geopolitical dynamics can influence cross-border deal flow.

ESG factors are gaining prominence in M&A decision making. Investors are increasingly assessing the environmental and social impact of transactions, and governance practices in target companies. Companies with strong ESG credentials may be more attractive to investors, and ESG-related due diligence could become a standard part of M&A assessments.

The adoption of technology and digital transformation initiatives will continue to shape M&A strategies. Companies that enhance their digital capabilities and embrace innovation may be more appealing to tech-savvy investors. Deals related to fintech, artificial intelligence, and cybersecurity could see increased activity.

The general elections in 2024 will introduce an element of political uncertainty to the M&A market. The outcome of the elections and the subsequent formation of the government will influence policy direction and economic priorities. Investors may adopt a cautious approach in the run-up to the elections, closely monitoring political developments for potential shifts in economic policies and government priorities.

The Digital Personal Data Protection Act, 2023 was notified in early August 2023. This Act is expected to be in force in the next ten months. The law applies to personal data that is maintained in digital form. The law will also apply to processing of personal data outside India if that processing is “in connection with any activity related to offering goods or services to data principals within the territory of India.” With the enforcement of the Act, M&A transactions are likely to focus more on data privacy and transfer of personal data.