Market Insights

Navigating Regulatory Landscape For M&A In India

Mumbai business district

India, recognized as an economic powerhouse and home to the world’s second-largest population, has been a hub of rapid growth in the M&A sector, boasting an impressive Compound Annual Growth Rate (CAGR) of 39%, indicating consistent year-on-year expansion. However, sourced by Merger market database and Deloitte Analysis, the M&A landscape took a significant hit in 2023, witnessing a substantial 27% decline in overall deal value, amounting to US $138 billion, alongside a 16% drop in deal volume compared to the preceding year. This downturn can be described to a host of formidable challenges, including elevated interest rates, a global economic downturn, heightened regulatory scrutiny, the impending Indian general elections, and prevailing geopolitical risks throughout the year.

Graph showing Overall M&A deal value in India fell by 27% in 2023 while the deal volume fell by 16%

A closer examination of India’s M&A environment reveals a noticeable shift towards smaller strategic transactions within the overall M&A activity. Particularly noteworthy is the uptick in the share of mid-market deals valued between US $100 million to US $1 billion, climbing from 20% in 2022 to 35% in 2023. This trend signifies a deliberate strategic adjustment by acquirers toward smaller investments, reflecting a response to the uncertainties prevailing in the global environment.

Active Sectors for M&A in India

In 2023, despite a global downturn in M&A activities, India saw a remarkable surge in inbound M&A, capturing 41 % of the market share with deals worth US$55 billion, up 27 % year-over-year. This growth was mainly fueled by strategic investments from the Netherlands, the US, and Germany, which accounted for 65 % of the strategic inbound value. Key sectors such as Financial Services, Energy, Healthcare, and Manufacturing thrived from these investments, bolstered by strong local demand and supportive government policies.

Table showing Value and volume growth by sectors in 2022-23

Financial Services Sector

In 2023, amidst a 45% year-on-year decline in deal value, the Indian financial services sector exhibited resilient M&A activity, characterized by a notable 23 % increase in deal volume. This surge was driven by prudent strategic decisions, a keen pursuit of market consolidation, and the integration of advanced technologies, particularly in digital banking and fintech. Noteworthy transactions during this period were aimed at fortifying product offerings, expanding customer outreach, and harnessing technological advancements. A standout example is the acquisition by Kotak Mahindra Bank, securing approval from the Reserve Bank of India to acquire Sonata Finance for ₹537 crore (US$ 767 million). This strategic maneuver aligns with Kotak Mahindra’s endeavor to enhance its footprint in the non-banking finance sector, facilitating the expansion of its product suite and clientele, all while capitalizing on cutting-edge technological innovations.

Energy Sector

In 2023, the Energy Sector experienced a notable 63 % year-on-year surge in deal value, propelled by several significant transactions. Despite this, deal volume witnessed a decline of 27 %. Renewable energy remains at the forefront of sector dominance, contributing over 70 % of the total deal value, largely influenced by inbound private equity (PE) transactions. This trend is guided by robust government incentives aimed at augmenting generation capacities, heightened foreign interest in solar and wind assets due to their cost-effectiveness, and India’s escalating energy demands. By the conclusion of 2023, India’s renewable energy sources, encompassing large hydropower, boasted a combined installed capacity of 180.79 GW. Additionally, the nation aims to achieve a production target of five million tons of green hydrogen by 2030, backed by the development of 125 GW of renewable energy capacity. The sector’s growth trajectory is further propelled by government policies and strategic investments in solar and wind energy, rendering it a focal point for M&A activity.

Industrial & Manufacturing Sector

In 2023, the Industrial & Manufacturing sector experienced remarkable growth, with a notable 33 % increase in deal value and a 22 % rise in volume year-over-year. This surge in deal value was predominantly propelled by the automotive segment. Furthermore, the sector saw consistent FDI inflows, with cross-border deal value soaring by 97 % YoY, driven by strategic acquisitions in auto components and electric mobility sectors. Firms prioritized supply chain optimization and the transition to electric technologies, fueling this trend. Additionally, the sector witnessed significant restructuring activities, with some of the largest transactions including the transfer of stake in Siemens Ltd. by Siemens Energy BV and Maruti Suzuki India’s stake acquisition in Suzuki Motor Gujarat.

Medical & Pharmaceutical Sector

Medical and Pharmaceutical Sector continues to be a robust sector for M&A in India, with consistent growth in deal volumes over the past five years. The sector benefits from an influx of quality assets and a positive outlook, which attracts both domestic and international investors. Large conglomerates and mid-market players actively pursued acquisitions to enhance their service offerings and expand their footprint in this sector.

M&A Regulations and Policies in India

In India, M&A activities are governed by a range of regulatory bodies and their respective legislations. These laws and regulations, enforced by authorities such as SEBI, CCI, RBI, MCA, and IBBI, play a crucial role in shaping and overseeing the M&A activities in the country. The following provides an overview of these key regulatory bodies and the laws they have established to govern M&A transactions in India.

Regulatory Frameworks and Laws

  • Securities and Exchange Board of India (SEBI):

SEBI regulates securities markets in India and has established several guidelines that impact M&A activities, such as the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which dictate the compliance requirements for listed companies undergoing mergers or acquisitions​.

  • Competition Commission of India (CCI):

The Competition Act, 2002, is a critical piece of legislation overseen by the CCI, which assesses the impact of M&A on market competition. Recent amendments aim to streamline the approval process and ensure that mergers do not adversely affect competition.

  • Reserve Bank of India (RBI):

The Foreign Exchange Management Act (FEMA), 1999, and related policies under the RBI’s purview govern cross-border M&A activities, regulating the flow of foreign exchange and setting compliance requirements for international transactions​.

  • Ministry of Corporate Affairs (MCA):

The Companies Act, 2013, provides the legal framework for corporate restructuring, including mergers and acquisitions. It outlines the procedural requirements and approvals needed from bodies like the National Company Law Tribunal (NCLT).

  • Insolvency and Bankruptcy Board of India (IBBI):

The Insolvency and Bankruptcy Code (IBC), 2016, facilitates the acquisition of distressed assets and companies, providing a clear and efficient framework for insolvency resolution​.

Government Initiatives and Favorable Policies:

Despite the intricate regulations governing mergers and acquisitions (M&A) activities in India, the Indian government has undertaken various initiatives to foster a favorable environment for foreign investors, particularly in the realm of M&A. These initiatives, coupled with pertinent legal frameworks, aim to streamline procedures, minimize bureaucratic obstacles, and offer financial incentives, thereby positioning India as an attractive hub for foreign investments.

  • Liberalization of Foreign Direct Investment (FDI) Rules:

India has been steadily opening various sectors to foreign investments, which is crucial for foreign companies looking to enter the Indian market through M&A. By increasing the FDI caps in sectors like defense, railways, and insurance, the government allows more room for foreign entities to acquire stakes in Indian companies. This liberalization not only attracts more foreign capital but also brings in advanced technologies and practices.

  • Ease of Doing Business Initiatives:

The government has launched several initiatives under the umbrella of making it easier to do business in India. These include the digitization of government services, streamlining of bureaucratic processes, and improvements in the legal framework related to business operations. Such measures reduce the complexity and time involved in executing cross-border mergers and acquisitions, thereby making India a more attractive investment destination.

  • Foreign Exchange Management Act (FEMA) Regulations:

The FEMA Cross-border Merger Regulations, 2018, specifically provide a framework for merger and acquisition deals involving Indian and foreign companies. These regulations facilitate both ‘inbound’ mergers (foreign companies merging into Indian companies) and ‘outbound’ mergers (Indian companies merging into foreign companies). By simplifying compliance and offering clear guidelines, these regulations help in reducing uncertainties and legal hurdles for cross-border transaction.

  • Competition Act, 2002:

This act is critical in maintaining a fair competition environment in India. It regulates anti-competitive agreements and prevents abuse of dominant positions. For cross-border M&A, the act requires companies to notify the Competition Commission of India (CCI) if the transaction falls under the category of a ‘combination’ that could impact competitive conditions in India. This ensures that such mergers do not adversely affect market competition​.

  • Tax Incentives:

The Indian tax regime offers various incentives for M&A activities. Provisions in the Income Tax Act provide exemptions from capital gains tax for transactions structured as mergers or demergers, under certain conditions. These incentives make it financially advantageous for both Indian and foreign companies to engage in cross-border M&A. Moreover, specific rules aim to prevent tax evasion while still promoting genuine business restructuring through M&A.

  • Regulatory Clarity on Share Transfers and Takeovers:

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, commonly known as the Takeover Code, provide clear guidelines on how acquisitions and takeovers should be conducted. This includes requirements for open offers, disclosure norms, and other compliance issues. Such regulatory clarity ensures that both domestic and international investors understand their rights and obligations, thus facilitating smoother transactions​.

  • Production Linked Incentive (PLI) Schemes:

Introduced in various manufacturing sectors like electronics, pharmaceuticals, and automobiles, these schemes offer incentives on incremental sales, aiming to boost manufacturing capabilities and exports from India.

  • Special Economic Zones (SEZ) Act, 2005:

Offers duty-free imports, tax holidays, and simpler compliance procedures for businesses operating within SEZs, aiming to enhance foreign investment and promote export-oriented growth.

  • Digital India Initiative:

By improving digital infrastructure and connectivity, this initiative makes it easier for foreign investors to start and manage businesses in India, particularly in tech-driven sectors.

These initiatives collectively aim to enhance the ease of doing business, provide fiscal benefits, and create a supportive ecosystem for foreign investors looking to engage in M&A in India. By understanding and leveraging these policies, foreign investors can effectively navigate the Indian market and capitalize on the growth opportunities it offers.

Regulatory Challenges for M&A Activity in India

While the regulatory framework supports M&A activities, it also poses challenges such as bureaucratic procedures and the need for approvals from multiple regulatory bodies, which can be time-consuming.

  • Regulatory Complexity:

While the regulatory framework is supportive, it can also be complex and multi-layered, involving various approvals and compliances from different authorities such as SEBI, CCI, RBI, and MCA. Navigating this landscape requires careful planning and local expertise​.

  • Bureaucratic Delays:

Despite improvements, bureaucratic processes in India can still be time-consuming, particularly for approvals from government bodies or in dealing with legal and regulatory hurdles. This aspect can delay transaction timelines and increase the cost of transactions​.

  • Market Competition and Valuation Concerns:

With an increasing number of foreign players entering the market, competition for valuable assets has intensified, leading to high valuation multiples. This scenario demands thorough market analysis and valuation expertise to ensure investments are made at strategic valuations​.

  • Cultural and Operational Challenges:

Integrating into the Indian market often requires adapting to local business practices, cultural norms, and consumer expectations. Effective integration post-acquisition can be a significant challenge, impacting the overall success of the M&A transaction.

How a consulting firm can help

In the dynamic realm of mergers and acquisitions within India, businesses are encountering a swiftly evolving legal landscape, ripe with complexities. To navigate the complexities of the Indian legal and regulatory landscape requires thorough due diligence and often the assistance of local experts​.

ARC Consulting emerges as a vital ally amid this transformative milieu. With a keen focus on the nuances of the Indian market and regulatory intricacies, ARC Consulting stands as a beacon of guidance. Our seasoned experts, stationed across India and globally, bring forth a wealth of experience to the table. Through bespoke solutions tailored to each phase of the M&A journey, we empower our clients to navigate with confidence and strategic finesse.

At ARC Consulting, we offer a comprehensive suite of services meticulously designed to empower our clients at every stage of their M&A journey:

Unrivaled due diligence assessments, uncovering hidden risks and untapped opportunities.

  • Strategic advisory services, crafting bespoke M&A strategies tailored to your unique objectives.
  • Expert deal structuring and negotiation support, ensuring optimal transaction terms and outcomes.
  • Regulatory compliance guidance, providing peace of mind through adherence to local laws and regulations.
  • Seamless post-merger integration assistance, fostering smooth transitions and maximizing synergies.

With our seasoned team of professionals stationed across India and around the globe, ARC Consulting is committed to delivering tailored solutions that drive success and unlock value for our clients. Together with us to navigate the complexities of the Indian M&A landscape with precision and insight, guiding you towards your strategic goals with confidence and clarity.

Summary – 2024 and Beyond

The M&A landscape in India is experiencing a resurgence and evolution in 2024, as highlighted by the PwC India report ‘Deals at a Glance.’ The first quarter of the year witnessed a significant uptick in deal volume, with 455 transactions totaling USD 25.6 billion in disclosed value. This surge, representing a 24% increase from the previous quarter of 2023, reflects renewed confidence among businesses in pursuing strategic transactions amidst evolving market dynamics.

India’s burgeoning economy and favorable demographic dividend make it an attractive destination for M&A activity in 2024 and beyond. However, the regulatory framework governing such transactions in India remains complex and nuanced. Compliance with competition laws and adherence to sector-specific regulations are crucial aspects that demand meticulous planning and strategic foresight from stakeholders.

As businesses explore M&A opportunities in India, partnering with experienced advisors who possess a deep understanding of the local regulatory dynamics is essential. Leveraging their expertise can help businesses effectively navigate regulatory hurdles, mitigate risks, and unlock value in the vibrant Indian market.

In summary, while India presents promising prospects as a future M&A destination, adeptly navigating the regulatory landscape emerges as a critical imperative for success in 2024 and beyond.

Read more about our extensive advisory & strategy services.


Active Sectors for M&A in India

M&A Regulations and Policies in India

Summary – 2024 and Beyond

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