M&A deals face delays over India's new labour codes, buyers factor in higher worker severance costs

M&A deals in contractor-heavy workforce are facing delays

Many mergers and acquisition (M&A) deals in sectors involving large blue-collar or contract-based workers have been delayed due to the implementation of new labour laws, sources tell Moneycontrol.

Several M&A deals, which are in "near-final stages" are experiencing complexities, as the companies who had complied with the previous labour laws, now have to undertake some additional measures, resulting in delay, the sources say.

"For deals where workforce retrenchments are reasonably anticipated or inevitable, monetary obligations on target companies qualifying as ‘industrial establishments’ under the new codes, is likely to stand enhanced from a compliance perspective, on account of new requirements now to contribute prescribed amounts to the ‘worker re-skilling fund’ in cases of retrenchments," one person aware of the matter said.

The re-skilling fund is a new provision introduced in the Industrial Relations Code, 2020. Its purpose is to provide immediate financial support to workers who have been retrenched (laid-off) to help them acquire new skills and find new employment opportunities. However, the rules are not yet notified.

Also, the Code on Wages, 2019, introduces a difference base for calculating terminal benefits, which raises the payment obligation to laid-off workers, as against the earlier law. For instance, in case of dismissal, the full and final settlement of wages and dues (including leave encashment) must be done within two working days from the employee's last working days. "These have to be calculated, before deals get finalized," the second source said.

The second person further said that deals in contractor-heavy workforce, such as manufacturing, logistics, infrastructure services, and parts of industrial operations, are experiencing a delay.

"This is mainly because the Codes have been notified, but many of the state-level rules needed to fully implement them are still pending," said the person, adding that parties are taking additional time to understand which compliance obligations apply during this transition period. "That said, these delays are driven by caution, not hesitation."

Expert’s take

Anshul Prakash, Partner at Khaitan & Co said: "Companies are responding by treating enhanced severance exposure, future reskilling fund contributions (once enforced), and higher gratuity provisioning as critical diligence items."

"Buyers are factoring these into deal pricing and protections—through indemnities, escrow mechanisms, or ring-fencing legacy liabilities," he added.

Sonakshi Das, Partner at JSA Advocates & Solicitors said that to ensure timely closure of M&A transactions, parties can explore the option to include “mutually agreed resolution” clauses in transaction documents, agreeing to resolve future issues and cost implications arising out of compliance infractions under the Labour Codes, in due course, on a good-faith basis.

“This of course, could be subject to deal-specific guardrails and additional considerations linked to specific indemnity, cap on liabilities and the like,” she added.

Others say, as more state rules are issued and the transition stabilises, M&A timelines are likely to be normalised—and potentially even improve—because the Codes aim to create greater uniformity and long-term predictability.

"Ongoing M&A transaction are paused/delayed so buyers can understand the financial impact of the deal better. Companies must consider both financial and operating aspects before going ahead with what will be irretrievable changes as a consequence of the merger or acquisition," said Suhail Nathani, Managing Partner, Economic Laws Practice.

Ketan Mukhija, Senior Partner at Burgeon Law said that while the overall pace of M&A remains healthy, deal teams are incorporating these regulatory changes into their assessment frameworks.