M&A on the move: India continues to outpace global slowdown

‘When the world slows down, India speeds up.’ This perhaps sums up the market mood. From Q3CY24 to Q3CY25, India’s M&A value surged by 37% to an impressive $26 billion across 649 transactions. Notable transactions included Tata Motors’ $4.45 billion acquisition of Iveco, Japanese financial group MUFG acquiring a 20% stake in Shriram Finance for $4.4 billion, Adani Ports' $2.07 billion outbound acquisition of Abbot Point Port, and Sumitomo Mitsui Banking Corporation's 20% stake in YES Bank for $1.6 billion. While sectors such as banking, financial services, and insurance (BFSI) witnessed massive investments, technology, media, and telecommunications (TMT) led in deal volumes, particularly in AI, cloud, and cybersecurity. 

In an era where due diligence is becoming increasingly data-driven, good governance and transparency are now the bare minimums. AI is challenging the fundamentals of deal execution; India is still struggling with the basics; and the factors listed below are hindering robust development of the M&A space. 

The tryst of anti-abuse doctrine with legitimate tax planning 

The evolution of India's Judicial Anti-Avoidance Rules (JAAR) can be seen through the lens of significant judicial decisions that have shifted the focus from form-based tax planning to a more thorough scrutiny of restructurings and foreign investments based on their substance. Past rulings of the Supreme Court supported treaty-driven structures of tax planning, unless characterised as sham or fraudulent. 

After 2017, the General Anti-Avoidance Rules (GAAR) legislation empowered the tax department to disregard structures that lack commercial substance, thereby limiting the reach of treaty-based structures. 

The recent Supreme Court decision in the Tiger Global-Flipkart case has reinforced the view that GAAR can override tax treaty entitlements. The decision clarifies that possession of a valid Tax Residency Certificate (TRC) is insufficient for investment entities set up as conduits in Mauritius to claim treaty benefits. The ruling further denies the promised grandfathering benefit on investments made before April 1, 2017, under the India-Mauritius tax treaty and reinforces the principle of 'substance over form' in such structures. 

With the introduction of the 'multilateral instrument’, most Indian tax treaties prescribe an overarching threshold of fulfilling the principal purpose test, which is more onerous than GAAR for claiming treaty benefits. From a policy perspective, it would bring much clarity if there were guidance on situations in which the tax authorities are likely to question the commercial substance of a structure and invoke GAAR. 

The testing of structures on the altar of GAAR has percolated to increased scrutiny of transactions in group restructurings. A case in point is the recent GAAR panel ruling on Hinduja Group's NCLT-approved demerger and Vedanta's Mauritius holding structure. These transactions have been re-characterised by the tax department as impermissible avoidance arrangements despite having regulatory approvals, emphasising that transactions cannot be shielded from scrutiny if the primary purpose is to obtain a tax benefit. 

The invocation of GAAR has led businesses to be penalised for incidental tax benefits. The need of the hour is for the legislators to introduce rules for fiscal consolidation. 

Inflexible valuation and pricing norms 

A locked-box structure pricing model is frequently used in the Indian M&A space to determine deal pricing. Specified tax and regulatory factors often influence deal pricing. For example, the seller and the buyer are subject to deemed tax consequences if the share price of an unlisted company is below its fair market value. Further, in a listed company scenario, market fluctuations can cause differences between the agreed offer price at the beginning of a deal and the actual price on the day the transaction is consummated, which can have adverse tax consequences under the valuation rules. 

Pricing guidelines also apply in cross-border transactions (e.g., a minimum floor price, which is the fair market value of the shares, applies when a non-resident purchases shares from a resident). Additionally, parties cannot defer more than 25% of the entire consideration for longer than 18 months. The intent of implementing these pricing restrictions was to protect investors, but they often become impediments to commercial considerations during deal structuring. The taxability of the deferred consideration at the point of accrual or at the time of actual receipt continues to be prone to litigation. In the current business environment, there is an increasing need to adopt sophisticated Western approaches to financing, allowing hybrid structures, and offering greater flexibility in the taxation of earn-out arrangements. 

The Covid ghost 

The defamed Press Note 3 (PN3) introduced during Covid-19, which mandated prior RBI approval for receiving FDI from border-sharing countries, has outlived its utility given the current geopolitical landscape. The growing role of China in investing in India’s manufacturing chain through raw materials and access to rare-earth minerals, chips, and technology has spurred the growth of GCCs in India. 

PN3 approvals delay deals involving acquisitions, transfers, or rights that trigger control under shareholder agreements. These have impacted structuring, valuation, and downstream investments in deals, leading investors to consider renegotiation or insurance options such as 'PN3 risk insurance.' Such regulations pose compliance risks for Chinese-linked investments, slowing private equity and venture capital deals. 

Though there is a debate to rationalise the PN3 framework, including sector-specific relaxations for electronics and capital goods, measures such as incentivising automatic FDI up to 49% should be accelerated. 

To summarise, the M&A market is increasingly K-shaped, favouring large and technology-led deals. In 2026, it is anticipated that deal value will remain high, given the focus on India. Staying competitive in the global M&A market necessitates keeping up with current trends, which requires India to adapt to the changing landscape. 

(Butani is the managing partner, while Lohia is a partner at BMR Legal Advocates. Views are personal.)