M&A in India: The Case for an Integrated Code

As India’s economy grows and its global prominence rises, a unified code is no longer an option but a strategic imperative—enhancing competitiveness, attracting investments, and paving the way for a transparent and efficient corporate environment.

In the dynamic world of mergers and acquisitions (M&A), deals take on varied forms and serve a multitude of objectives. They range from transactions between two unrelated counterparties or external deal scenarios to internal group restructurings and family arrangements. Each type of transaction comes with its own set of complexities, driven by commercial objectives and compounded by regulatory and tax hurdles.

Despite these defined objectives, the fragmented framework means stakeholders are often left navigating a maze of various laws. This highlights the need for a unified Integrated Code for M&A, focusing on three critical dimensions.

Integration of Laws Governing Deal Structures

The Companies Act, 2013, serves as the foundational legal framework for all companies in India, listed or unlisted. It provides substantive and procedural provisions to address share issuances, mergers, demergers, and other schemes of arrangement, inter-company investments, divestments, and related party transactions. Listed companies operate under an additional layer of complexity via SEBI Regulations. For instance, mergers and demergers, once evaluated by SEBI for protecting minority shareholders, are now governed by a detailed code outlined in SEBI’s Master Circular dated 20 June 2023, covering valuations, automatic listing, majority-of-minority approvals, and procedural compliances. Transactions like preferential allotments, divestment of undertakings, and related-party dealings must also comply with SEBI ICDR and LODR regulations, while takeovers or promoter transfers exceeding 5% are regulated under the SEBI Takeover Code.

Cross-border transactions introduce yet another layer of complexity, whether for listed or unlisted companies. FEMA NDI Rules, ODI Rules, and ECB/FPI Rules govern inbound, outbound, and debt transactions, covering substantive provisions, valuation norms, and compliances, creating a maze of overlapping requirements. Similarly, IndAS—such as IndAS 103 for business combinations or IndAS 109 for hybrid instruments—changes the fundamental basis of how a transaction is accounted.

Tax laws complete this intricate web, addressing mergers, demergers, slump sales, sales of shares and securities, GAAR, and deemed gift provisions, each with nuanced interpretations that must integrate with the commercial objectives and regulatory labyrinth. Stamp duty laws operate differently across states, resulting in significantly varying levies.

This multi-faceted framework makes deal execution a formidable task. Each law, though comprehensive in its domain, operates in isolation, requiring stakeholders to “stitch” together compliance across various frameworks. For example, a merger involving the issuance of a debt instrument as consideration to provide exit to certain shareholders may not be tax-neutral. However, issuing redeemable preference shares (RPS) as consideration to a foreign shareholder may require RBI approval. Issuing RPS to shareholders in a merger involving listed companies is generally not permitted under SEBI laws. Adding to the complexity, a debt-like instrument, even if structured as RPS, would be classified as a liability under IndAS 109, potentially impacting the debt-equity ratio, while dividend payments would be recorded as interest costs, directly affecting profit-before-tax.

An Integrated M&A Code could be the solution to this labyrinth. By harmonizing laws across domains and removing substantive and interpretative silos, it would eliminate conceptual overlaps and reduce redundancies.

Integration of Valuation Laws

Valuation is a cornerstone of every M&A transaction, influencing deal structure, pricing, and stakeholder decision-making. However, the current regulatory framework governing valuation is fractured. Tax laws require floor valuations under sections 50CA and 56(2)(x) to determine fair market value for share transfers. Simultaneously, FEMA Rules prescribe pricing guidelines for inbound and outbound investments, which often differ in methodology and interpretation. For listed companies, additional complexities arise from SEBI’s Takeover Code and ICDR Regulations, which introduce distinct valuation requirements tailored to specific transaction types.

While most regulations agree on the principle of establishing a floor or a capped price to protect stakeholder interests, the methodologies prescribed under tax, FEMA, SEBI, and the Companies Act can vary widely, introducing potential discrepancies in valuations. Moreover, the requirement for valuation reports prepared by registered valuers under the Companies Act or merchant bankers in certain cases adds to the conundrum.

An integrated valuation framework could standardize methodologies across tax, FEMA, SEBI, and the Companies Act. Such a framework would provide clarity on acceptable valuation approaches and promote consistency.

Integration of Regulators, Processes, and Litigation

M&A in India currently navigates a jigsaw procedural landscape, requiring approvals from multiple authorities, each with its own jurisdiction and processes. Under the Companies Act, any M&A falls in the domain of NCLT approval, a process that involves significant timelines and procedural complexity. Listed companies attract scrutiny from SEBI and stock exchanges. Transactions exceeding specified thresholds fall under the purview of the CCI, while cross-border transactions fall within the realm of RBI, which oversees FEMA compliance. Finally, tax authorities scrutinize transactions for implications under capital gains, GAAR, and other tax provisions. A siloed approach often results in varying interpretations, procedural delays, and unpredictability in corporate jurisprudence, complicating deal consummation.

This fragmentation extends into the domain of litigation, where disputes arising from M&A transactions are addressed through multiple forums. Regulatory challenges often escalate to various jurisdictional appellate authorities, while tax disputes have life cycles extending to decades in certain cases. Each forum operates independently, creating inefficiencies, increasing costs, and contributing to inconsistent rulings.

An integrated approach to regulators, processes, and litigation is essential to streamline M&A transactions and harmonize varying interpretations. Establishing a common M&A Regulator could centralize oversight and ensure collaboration across domains, replacing siloed decision-making with a unified perspective by providing a single-window approval mechanism for any transaction.

The Case for a Unified Integrated Code

India’s fragmented M&A ecosystem—characterized by overlapping laws, divergent valuation methodologies, uncoordinated regulators, and siloed litigation mechanisms—impedes efficiency, predictability, and investor confidence. This disjointed approach prolongs timelines, increases compliance costs, and deters investments. Each dimension adds layers of complexity, often at the expense of commercial objectives.

An Integrated M&A Code could address these systemic challenges. As India’s economy grows and its global prominence rises, a unified code is no longer an option but a strategic imperative—enhancing competitiveness, attracting investments, and paving the way for a transparent and efficient corporate environment.

Binoy Parikh is Executive Director, Katalyst Advisors.

Views are personal, and do not represent the stand of this publication.