Regulations to taxes: How India made M&A easier for its companies

M&A activity in India has largely been unaffected by geopolitical uncertainty

The aspirations of a young India and increased income levels have encouraged companies to consider mergers and acquisitions (M&A) to keep up with demand. In a world where consumer preferences change dramatically, M&As provide companies the means to remain competitive and introduce new solutions quickly.

Building scale rapidly remains a challenge for companies and inorganic growth is an immediate solution to the issue. At times, equity capital is required even to build scale organically, particularly when one looks at the high cost of borrowing in India compared to Western economies.

Recognising the need for global capital to fuel India’s growth, the government has introduced regulatory changes in a number of areas to encourage cross-border investments.

Foreign direct investment continues to be liberalised with the aim of integrating companies into global value chains, encouraging investments in manufacturing and enabling technology absorption in line with the Make in India and Atmanirbhar Bharat initiatives of the government.

In 2023, the rules for fast-track mergers under the Companies Act (2013) were amended to provide definitive timelines within which a regional director and a official liquidator are required to provide any objection to a merger undertaken through the fast-track route, failing which such mergers are deemed to be approved. And to encourage startups that were initially set up overseas to return to India, rules on fast-track merger were revised. The revision allowed the merger of overseas companies with their 100 per cent Indian-owned subsidiaries without the requirement of obtaining approval from the National Companies Law Tribunal.

Recently enforced amendments to the Competition Act (2002) require the Competition Commission of India (CCI) to form a prima facie view on a transaction that is notified to it within 30 days, failing which the transaction is deemed to be approved. In case of combinations, the total review period for the CCI has been shortened to 150 days from 210 days which theoretically should help in obtaining approval in an expedited manner.

A significant change is the abolition of angel tax. It was required to be paid by a closely held company if the consideration received by such company on the issuance of shares to any person exceeded the fair market value of such shares. This will encourage enterprises to command premiums in valuation without the risk of tax scrutiny of genuine investments. 

Changes have also been made to facilitate global expansion of Indian companies through M&As and other strategic initiatives. Overseas investment regulations were revamped in 2022 to encourage Indian companies to expand abroad. One of the key changes made in this overhaul was to provide clarity on transactions that had triggered concerns in India about ‘round tripping’. Under the previous regime, the central bank’s approval was needed if an Indian party was making an investment in an overseas entity which in turn had investments in India.

The blanket restriction has been removed and new regulations allow Indian companies to make investments in overseas entities which may also have investments in India as long as these do not result in more than two layers of subsidiaries. And recognising the need for flexibility in transaction structures, the revised overseas investment regulations have expressly permitted payment of deferred consideration by Indian companies when making overseas investments and removed the previous ambiguity that prevailed with respect to cross border share swaps.

M&A activity in India has relatively remained unaffected by geopolitical uncertainty. The Indian government has been quick in introducing regulatory changes to stimulate inorganic growth. While investors still crave for both clarity in regulation and interpretation/enforcement of regulations by government agencies in certain areas, the general trend seems positive, and we are almost certain to witness an uptick in both inbound and outbound M&As in India in the near future.

The writer is Partner, Shardul Amarchand Mangaldas