What Are the Legal Aspects of Mergers and Acquisitions in India?

Mergers and acquisitions (M&A) refer to the consolidation of enterprises or their main financial assets through inter-business financial transactions. In India, M&A is one of the most effective methods for accelerating the implementation of a business plan for quick expansion. The M&A market in India is expected to witness a significant rise in transaction value, projected to reach a staggering US$183.50bn* by the end of 2024. Businesses across various industries, including communications, pharmaceuticals, automotive, food and beverage, and others, have experienced rapid growth due to their M&A strategies. 

However, merger and acquisition process in India carries significant legal implications, making it crucial for businesses to seek the assistance of corporate law advisors. We have created this comprehensive guide to simplify the legal aspects of mergers and acquisitions. Let’s get started!
 

Understanding Mergers and Acquisitions 

Mergers are defined as the unification of two separate entities into one. The primary goal of this mutual decision is to consolidate resources, markets, and operations for better efficiency and market reach. 

On the other hand, acquisitions occur when one entity takes over another. This can be done by purchasing another company or a business buyout with the goal of gaining market share or eliminating competition.
 

The Legal Framework Governing Mergers & Acquisitions in India 

The process of M&A in India involves crucial legal management and regulatory compliance and requires the sanction of the High Court. The involvement of the Central Government through entities such as the Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs ensures that all M&A activities are carried out in the public interest and according to the law. 

There are several acts that govern M&A laws in India. The most important laws in mergers and acquisitions are as follows:
 

• The Companies Act of 2013 

It outlines procedural requirements such as shareholder approval and obtaining approval from the National Company Law Tribunal (NCLT).
 

• The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011  

This law imposes strict guidelines to ensure transparency and fairness in the securities listed market.
 

• The Competition Act of 2002  

It mandates approval from the Competition Commission of India (CCI) for transactions affecting market competition.
 

• The Foreign Exchange Management Act (FEMA), 1999  

This act regulates foreign exchange transactions and governs foreign investments, including those made through mergers and acquisitions. 

Cross-border M&A transactions are subject to FEMA regulations, particularly concerning inbound and outbound investments, foreign direct investment (FDI), and external commercial borrowings (ECBs).
 

• The Insolvency and Bankruptcy Code (IBC), 2016  

It provides a consolidated framework for resolving insolvency and bankruptcy cases in India. IBC comes into action when distressed assets are involved in an M&A deal and regulates the mechanisms for acquiring such assets through corporate insolvency resolution, liquidation, and the sale of assets of insolvent companies.
 

• Tax Laws  

Tax laws play a crucial role in M&A transactions. Various tax laws, including the Income Tax Act, 1961, govern the tax implications of mergers, acquisitions, and other corporate restructuring activities.  

The Central Goods and Services Tax Act, 2017, along with relevant state laws on the taxation of goods and services, prescribes tax-related considerations for M&A in India, particularly for transactions with cross-border elements.
 

• Sector-Specific Regulations 

Certain industries, such as banking, insurance, telecommunications, and pharmaceuticals, are subject to sector-specific regulations that may impact M&A transactions within those sectors. It's essential to consider these regulations when structuring deals in such industries.
 

Legal Procedure for Mergers and Acquisitions

1. Valuation Analysis & Preliminary Review 

If a purchaser has not yet been identified, the process begins with an Information Memorandum, generally drawn up by the vendor to gauge market interest. It provides enough detail for potential purchasers to assess their interest without revealing confidential information. If there’s any interested purchasers, they will have to enter an NDA to secure the confidentiality of the target company and its sensitive business data.
 

2. Negotiation & Letter of Intent 

If the initial contact and negotiations go well, the acquirer requests detailed information from the target organization to help it evaluate the target as a potential acquisition target and as a stand-alone business. After developing many valuation models for the target company, the acquirer should have enough information to make an appropriate offer. 

Once the initial offer is made, the parties can engage in a more in-depth negotiation of terms to kickstart the process of mergers and acquisitions. The financial strategy of the transaction is also discussed and agreed upon mutually.  

Before finalizing the transaction, both parties agree on the price and other terms through a letter of intent. This is required before the target company offers the acquirer exclusive purchasing rights.
 

3. Due Diligence and Final Agreement 

Once the offer is accepted and approved, a thorough due diligence process begins. This extensive process aims to validate or adjust the acquirer’s valuation of the target company.  

During this process, the acquirer scrutinizes every aspect of its operations, including financial metrics, assets and liabilities, customer base, and human resources. Following the completion of due diligence, the parties sign a formal contract and decide whether to proceed with an asset acquisition agreement or a share purchase agreement.     

Once due diligence is completed, the acquirer and target company finalize the terms of the transaction based on the findings. They may adjust the previous offer depending on the risks associated with the transaction. The formal contract for sale is then signed, solidifying the terms of the merger or acquisition and determining the specific type of agreement—whether it’s an asset acquisition or a share purchase.
 

4. Merger Proposal 

The merger proposal must be approved by the boards of directors of both companies, and a special resolution authorizing Key Management Personnel to carry out the process is passed. An application is then filed with the High Court (HC) or the National Company Law Tribunal (NCLT).
 

5. Stakeholder Approval & Order Filing 

After obtaining HC approval, stakeholders are notified within the prescribed period about the upcoming gathering for verification purposes. Along with the stakeholders approval, the confirmed copy of the HC request must be documented with the RoC within the specified timeframe.
 

6. Post-Closure Integration 

The SPA/APA may include post-closing clauses, such as further obligations, finalizing the transfer of additional assets, obtaining consent, issuing notifications, affecting a price adjustment mechanism, or entering ancillary contracts. A post-closing integration exercise may also be undertaken to maximize synergies and ensure a successful merger and acquisition deal. 

Mergers and acquisitions in India are critical strategies for companies looking to expand and compete in a dynamic market. Understanding and complying with the legal framework is essential for the successful execution of these transactions. As the M&A market in India continues to grow, businesses must stay informed about regulatory requirements and best practices to leverage these opportunities effectively. 

* Statista. (n.d.). Mergers and Acquisitions - India | Statista market forecast.

Author

Advocate Prerna Oberoi

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