Cross-border M&A in India [Part-I]: Understanding the Legal Landscape

This article is the first of a two (2) part series offering foreign investors practical insights on negotiating and managing investments in India. India is currently one of the most promising markets in the world and is demonstrating considerable potential to keep growing at the same pace over the next decade. Every international business or investor would be keen to gain a foothold in the Indian market. While the current economic environment looks positive for India, the ruling government has also been committed to making India an investor friendly market. Various efforts have been made to simplify the legal regime to make it more investor friendly. While immediate results may be hard to achieve, the long term positive impact of reforms such as the GST, Commercial Courts, Insolvency Code etc., will certainly make the landscape more attractive for investors. However, there are still certain obstacles, in the present day, that impinge efficient deal making. This first part aims to highlight some of the current practical challenges that foreign investors should be mindful of while contemplating investments in India.

Contractual Protections – Ineffective Standalone Remedy

Investors should bear in mind that relying solely on contractual provisions for protection may not be the best course. Litigating in Indian courts to enforce a contract is time consuming and may not be commercially feasible. This concern is reinforced by the low-ranking that India has as per World Bank’s report on ‘enforcement of contracts’. For a strategic investor, litigation may still be an option depending on the values involved in the dispute. But, for a financial investor to engage in prolonged litigation may not be an option, given their limited fund life. Keeping this practical challenge in mind, investors should consider realigning their deal negotiations and transaction structures. In a dispute scenario, transaction structures and documentation should allow an investor the ability to secure an interim relief order from Court or place the counter party under considerable practical challenges such that they are compelled to settle the issue. Investors should factor the current unequal playing field for enforcement of contracts when negotiating contractual provisions with Indian counter parties. Indian counter parties usually factor the benefits of a lapse enforcement regime in India while conceding obligatory positions at their end. They also rely on the comfort that obligations provided under a contract by an offshore investor can be effectively enforced in the home jurisdiction of the investor. This is assuming that most foreign investors operate out of developed jurisdictions with an expeditious dispute resolution system compared to India.

Therefore, negotiation tactics for an Indian investment should consider the inequality in enforcement as a risk and hedge for it appropriately. Transaction structures should be explored to balance the skewed enforcement position among contracting parties. The optimum balance also depends on the financial wherewithal of the contracting parties vis-à-vis each other. Start-up businesses set up by first generation entrepreneurs are unlikely to intentionally falter on their contractual obligations. They are generally weary of getting entangled in court litigation which can be a drain on their limited resources and time. Mid-market companies would also be careful of breaching obligations owed to a much larger counterpart, for similar reasons. However, businesses with reasonable financial wherewithal may often use their resources to frustrate any legitimate enforcement attempts by foreign investors. There are many examples of such instances in the Indian context. While investing in India, along with conducting a due diligence of the business, it may be useful to do a background check on the credentials and past conduct of the tentative partner.

Perspective on Contracts – Cultural Differences

Many Indian businesses have historically been informal about contracts in the ordinary course of business. They largely rely on templatised forms of agreements for various business transactions and may not delve into details that do not impact immediate financial matters. Unless the contract is of a significant value, professional advisors may not be engaged for negotiation or finalisation of contracts. The reason for this approach arises from the knowledge that enforcement of contracts is time consuming and commercially unviable. It is important to bear in mind this cultural difference. In this context, it would be prudent to detail the important transactional requirements in the initial term sheet so each side can transparently discuss their concerns and requirements. Attempting to include material obligations while drafting the long form of the agreements may turn out to be counter-productive in the long run.

Avoid ‘Aggressive’ Interpretations of Law – Keep it Simple

Regulatory environment in India is complicated with multitude of legislations drafted with substantial subjectivity. The ambiguity in various statutes operates as an obstacle to the freedom of parties to contract. It requires care to ensure that contracts are not in contravention of applicable statues. In addition to this, attempting complicated structures based on aggressive interpretations of applicable law, would vitiate the chances of successfully enforcing a contract. Investors should ideally adopt a transaction structure that falls expressly within the letter of the law or the exceptions to the prescribed restrictions. It would unquestionably be safer to have a transaction structure that is plainly within the letter of law, than attempting a complex structure based on an aggressive interpretation.

Interim Relief – Strategy for Settlement

Obtaining an interim relief from an Indian court is the best possible outcome for a dispute in today’s environment. Further, given the timelines to achieve finality of a dispute, parties may be better off considering options to settle the matter after an interim relief order. It would be impractical to expend time and money, attempting to achieve finality of a dispute in Indian courts. Contractual protections and structures should be designed to also provide the best possible outcome for an interim relief against a counter party. Any form of interim relief from an Indian court that can create practical difficulties for the counter party to continue operations will provide negotiating leverage to the foreign investor.

Frivolous Criminal Proceedings – Any Means to Win

Parties to a civil dispute could also initiate frivolous criminal proceedings against each other. The delays in concluding a civil litigation has prompted certain businesses to resort to frivolous criminal proceedings to settle business disputes. Criminal laws in India need an overhaul to meet contemporary requirements. The present system offers scope for an unscrupulous partner to initiate frivolous proceedings at a local police station without proper cause or evidence. Generally, accusations in such proceedings are with respect to cheating or dishonesty. In such an offence, the police officer is empowered to arrest the accused and place him in custody. Under law, the arrested person can seek bail from the local court. But, getting a bail is easier said than done. Despite multiple judgements by the Supreme Court directing that ‘bail should be the norm and denial of bail should be the exception’, lower courts routinely disregard this direction. The fear of being incarcerated albeit for a short period is sufficient to get an accused to drop all civil claims and settle the matter. This is a challenging issue to encounter in India and representatives of investors should be well prepared to deal with any such eventuality. There are protections under criminal law which can be availed to prevent such untoward tragedies. But, the situation should be handled tactfully by an investor in close coordination with their advisors.

The above description is not meant to be exhaustive, but to provide an insight to some practical aspects surrounding transactions in India. India is an emerging market and akin to most developing countries, it has its unique set of challenges. Anyone looking to avail immediate opportunities may find the above concerns to be daunting. However, viewing the Indian opportunity from a long-term perspective will allow investors to look beyond the concerns and spot the upside. India continues to remain an attractive market. Political stability coupled with the zeal of the current dispensation to take bold and reformative measures is a sign of better things to come. In the next part of this article, we will offer some suggestions to work around some of the issues encountered by foreign investors.

Ajay Joseph

Partner, Veyrah Law

Views expressed above are for information purposes only and should not be considered as a formal legal opinion or advice on any subject matter therein.


The rules of the Bar Council of India prohibit lawyers and law firms from advertising or soliciting for work. This website is not meant for advertising the practice or for soliciting clients and is solely created for providing information. Any action taken by you based on the information provided in this website is at your own risk and Veyrah Law or its members will not be liable for any loss you suffer due to such actions. By accepting the terms contained here you agree that you have read and understood these terms, ‘Terms of Use’ and the ‘Privacy Policy’ contained in this website. Further, you agree that you are viewing the contents of this website at your own discretion to obtain necessary information.