A US private equity fund acquires a majority stake in an Indian listed company without running a full regulatory compliance review. Post-closing, the fund discovers that the target failed to make mandatory open offer disclosures under SEBI's Takeover Code, that two key subsidiary licences were not properly transferred, and that the target has a contingent FEMA liability from an undisclosed related-party transaction. The cost of remediation exceeds the transaction's entire acquisition premium.
India's M&A legal landscape has matured significantly since the Companies Act 2013 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011. But the complexity of multi-regulatory compliance — involving SEBI, the CCI, the RBI, sector regulators, and the Ministry of Corporate Affairs — means that inadequate legal due diligence remains the most common source of post-closing disputes in Indian transactions.
SEBI Takeover Code — SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Governs the acquisition of shares or voting rights in listed companies. Acquirers crossing the 25% threshold (or making an incremental acquisition of 5%+ between 25–75% when already holding over 25%) must make an open offer to public shareholders at a regulated minimum price.
NCLT Scheme — Mergers structured as "amalgamations" under the Companies Act 2013 must be approved by the National Company Law Tribunal (NCLT). The NCLT approves the scheme and the merger is effective from the "appointed date" specified in the scheme rather than the effective date of the NCLT order.
The Five Key Regulatory Touchpoints in an Indian M&A Transaction
Every substantive Indian M&A transaction involves potential review or clearance requirements across five regulatory areas. Managing these in parallel, with clear sequencing, is the central legal challenge of Indian deal execution.
- Ministry of Corporate Affairs (MCA) / NCLT: For mergers and demergers by way of a court-approved scheme. The NCLT process (now typically 6–9 months) runs in parallel with commercial negotiation and requires board, shareholder, and creditor approval at specified meetings.
- SEBI: For any transaction involving listed securities — open offer obligations, pre-clearance for preferential allotments, and continuing disclosure obligations. SEBI's informal guidance mechanism can be used to resolve uncertain regulatory questions before announcement.
- CCI: Mandatory pre-merger notification where deal thresholds are met. The 30-working-day Phase I review period applies from the date of complete filing. Phase II investigations can extend up to 210 working days.
- RBI / FEMA: For cross-border transactions involving foreign investment flows, share swaps with foreign consideration, or acquisition of Indian companies by foreign entities. FC-GPR or FC-TRS (transfer of shares from resident to non-resident) filing requirements apply.
- Sector Regulators: Depending on the target's business — IRDAI (insurance), RBI (banking and NBFC), TRAI (telecom), SEBI (broking), MIB (broadcasting), or state-level approvals (power, mining) may apply.
Core Legal Due Diligence Areas for Indian M&A Targets
A comprehensive Indian M&A legal due diligence review covers the following principal areas:
Corporate and Title: Verify the target's incorporation, share capital structure, authorised/issued/paid-up capital consistency, shareholder register, and any existing share encumbrances (pledge, lien, right of first refusal). For a private company, examine the Articles of Association for pre-emption rights, tag-along or drag-along provisions, and change-of-control triggers. These provisions often require consents that must be obtained before completion.
Material Contracts: Review all material contracts (customer agreements, supplier agreements, key employment contracts, financing agreements, JV agreements) for change-of-control provisions. A change-of-control clause may allow the counterparty to terminate or renegotiate the contract on completion — a material risk if the target's revenue is concentrated.
Regulatory Licences: Identify every regulatory licence, permit, and registration on which the target's business depends. Verify each licence's validity period, renewal status, transferability, and whether the acquisition triggers a consent requirement from the issuing authority. Many Indian sector licences (NBFC registration, IRDAI licence, ISP licence) are non-transferable and require fresh applications on change of control.
Litigation and Contingent Liabilities: Review pending civil, criminal, tax, and regulatory proceedings. Indian litigation often involves long pending periods — a dispute filed in 2018 may still be in the pre-trial stage. Assess the quantum of contingent exposure and obtain representations and warranties (or price adjustments) appropriately.
Tax Compliance: Verify GST registration and filing compliance, TDS/TCS deduction and deposit history, income tax assessment status (particularly for any pending assessments or reassessments under Section 148), and transfer pricing compliance for related-party transactions.
Open Offer Mechanics Under the SEBI Takeover Code
For acquisitions of listed Indian companies, the SEBI Takeover Code imposes open offer obligations that are structurally different from comparable requirements in other jurisdictions. Key features:
- Trigger: Acquiring 25% or more of a listed company's voting rights, or acquiring 5%+ while already holding between 25% and 75%, triggers a mandatory open offer to the remaining public shareholders.
- Size: The acquirer must offer to purchase at least 26% of the total number of shares of the target from the public (not just from the seller).
- Price: The minimum offer price is the higher of (a) the negotiated acquisition price, (b) the weighted average market price during the 60 trading days preceding the announcement, and (c) the highest price paid in any acquisition during 52 weeks prior to the announcement. This can materially affect deal pricing in volatile market conditions.
- Funding: The acquirer must demonstrate that 100% of the offer consideration is available in an escrow arrangement before the public announcement of the offer. Acquiring without adequate funded commitment is a SEBI violation.
Frequently Asked Questions
Does every acquisition of an Indian company trigger a mandatory open offer?
No — only acquisitions of shares in listed companies. Private company acquisitions do not trigger SEBI open offer obligations. For listed companies, the 25% threshold (or 5% incremental acquisition between 25–75%) triggers a mandatory open offer to public shareholders for at least 26% of total shares at a regulated minimum price.
How long does CCI review take for an Indian M&A transaction?
Phase I review is 30 working days from the date of a complete filing. If CCI identifies competition concerns and opens a Phase II investigation, the review can take up to 210 working days. Most transactions clear in Phase I. Filing must be complete and accurate — incomplete filings restart the review clock.
What is the successor liability risk for a buyer in an Indian share acquisition?
In a share acquisition (as opposed to an asset deal), the buyer acquires the company as a going concern, including all historical liabilities — tax assessments, GST demands, environmental penalties, PF arrears, and regulatory violations. Due diligence must cover at least five years of compliance history, and representations and warranties (or price holdbacks) must specifically address contingent tax and regulatory liabilities.
Can the target's key licences be transferred automatically in a merger under NCLT scheme?
Not always. Many regulatory licences (IRDAI, RBI NBFC registration, ISP licence, FSSAI licence) are personal to the licensee and require the issuing authority's prior consent for transfer, even within a court-approved merger. Failure to obtain consent can result in the acquired business operating without a valid licence post-merger.
This article is published by an independent law firm for informational purposes only and does not represent or claim affiliation with any government body, international organization, or official authority.