Solar M&A in India: Navigating Land Acquisition and FDI Rules (2023–2025)

India’s renewable energy sector is one of the largest growth stories worldwide, with solar power leading the transition. For multinational corporations seeking to enter the Indian market through mergers and acquisitions (M&A), the opportunity is immense—but so are the regulatory challenges. Two issues consistently emerge at the center of deal negotiations: land acquisition and foreign direct investment (FDI) regulation.

Land Acquisition Hurdles in Solar M&A

Solar Parks vs. Private Land

1.  Solar projects in India are typically set up in either government-sponsored solar parks or on privately acquired land.
2. Solar parks are relatively low-risk because the state government or a designated agency aggregates land, converts its use, and grants sub-leases to developers. For investors, this reduces uncertainty about title, land ceiling laws, and conversion processes.
3. Private land acquisitions, by contrast, can involve hundreds of individual plots. Here, risks include unclear land titles, incomplete agricultural-to-non-agricultural conversion, disputes over common lands, and restrictions on non-agriculturists holding agricultural property.
4. For M&A transactions, this distinction is critical. Acquiring an entity whose assets lie within a solar park generally requires less diligence compared to acquisitions where land is privately aggregated.

State-Level Challenges

Land is governed by state law in India, and the hurdles vary by jurisdiction. For instance:

• In Rajasthan, which hosts some of the largest solar projects, recent changes have increased stamp duty and registration costs for land-related instruments. This directly affects project valuation and deal pricing.
• In other states, delays often arise from conversion processes, ceiling exemptions, and permissions to use agricultural land for renewable projects.
• Since M&A transactions are highly sensitive to timelines, such state-specific hurdles can derail closing schedules if not identified early.

Forest and Commons Land Concerns

• Another emerging area of risk is the classification of land as forest or common property resources. Even when land is recorded as revenue land, courts have expanded the definition of “forest” for environmental protection purposes. This creates litigation exposure for solar projects situated on such land.
• For M&A, the absence of clear records or pending disputes on this front must be treated as a red-flag diligence issue and addressed through indemnities or escrow arrangements.

FDI Regulatory Framework

•  Sectoral Position

 India allows 100% foreign direct investment in the renewable energy sector under the automatic route. This means that, in principle, foreign investors can acquire equity in solar companies without prior government approval. This liberal policy has been a major driver of capital inflows into Indian renewables.

• Beneficial Ownership and PN3 Restrictions

 Since Press Note 3 of 2020, however, special restrictions apply to investments originating from, or ultimately owned by entities in, countries sharing a land border with India. If the beneficial owner of an investment falls within this category, government approval is mandatory.

For multinational corporations with complex ownership structures or fund investors from multiple jurisdictions, this can create hidden risks. Even a minority shareholder from a restricted jurisdiction can trigger the approval requirement, leading to delays of several months.

• FEMA Restrictions on Land Ownership

 Under the Foreign Exchange Management Act (FEMA), foreign nationals and companies cannot directly purchase agricultural land, plantation property, or farmhouses in India. Renewable energy projects are often developed on land converted from agricultural use, meaning the Indian project company must hold the land, not the foreign parent entity.

Therefore, foreign acquirers typically invest through an Indian special purpose vehicle (SPV) that owns non-agricultural land or sub-leases within a solar park. This ensures compliance while giving the foreign investor indirect control.

• Pricing and Reporting Norms

FDI transactions must comply with RBI pricing guidelines for share transfers and fresh issuances, along with strict reporting obligations such as Form FC-GPR (for new shares) and Form FC-TRS (for transfers). Non-compliance with these procedural rules can result in penalties and complications during future exits or listings.

Common Issues in Solar M&A Transactions

1. Incomplete land records: Missing title deeds, unregistered family settlements, or unclear mutation entries are frequently encountered.
2. Conversion delays: Agricultural-to-non-agricultural conversion orders may be pending or conditional on additional payments.
3. Regulatory changes: New stamp duties or state renewable energy policies can alter project economics mid-transaction.
4. Connectivity bottlenecks: Even where land is secure, delays in substation connectivity and evacuation approvals can undermine a project’s value.
5. FDI approval risks: Beneficial ownership from restricted jurisdictions can unexpectedly shift a deal from automatic to approval route, extending timelines.

Structuring Strategies to Mitigate Risks

1. Prefer Share Acquisitions over Asset Purchases: Acquiring shares in an SPV that already holds the project land (with proper conversion and approvals) is usually preferable to direct land or asset acquisitions. This avoids triggering FEMA property restrictions and reduces the number of registrations and approvals required.

2. Use of Escrows and Indemnities: Where land title or conversion processes are incomplete, parties should adopt escrow mechanisms or specific indemnities tied to resolution of those issues. This allows transactions to close while still protecting the buyer against future regulatory costs.

3. Park-Based Investments: Investing in projects located in solar parks reduces land aggregation risks. In such cases, diligence should focus on the terms of the sub-lease agreements, compliance with park rules, and the duration of the lease.

4. FDI Compliance Structures To manage FEMA and PN3 risks:

• Route all land holdings through an Indian SPV.
• Map beneficial ownership early to determine if the automatic route applies or if government approval is required.
• Include protective covenants in transaction documents to prevent any change in beneficial ownership between signing and closing.

5. Staggered Investments in Greenfield JVs: For greenfield platforms, foreign investors can structure equity commitments in tranches, linked to milestones such as successful land conversion or grid connectivity approvals. This ensures capital is deployed only after critical risks are mitigated.

6. Contractual Protections Transaction documents should include:

• Split long-stop dates: one for land-related conditions and another for corporate/FDI approvals.
• Change-in-law clauses: to cover unforeseen increases in land-related costs such as stamp duties.
• Detailed disclosure schedules: on title, conversion, and environmental approvals to bind the seller.

Due Diligence Checklist

For solar M&A, a focused diligence checklist should cover:

• Land title chains (30 years where possible).
• Conversion orders and proof of fee payments.
• Ceiling exemptions under state land laws.
• Forest/commons land classification risks.
• Substation connectivity approvals and curtailment history.
• Beneficial ownership mapping for FDI purposes.
• FEMA compliance records, including FC-GPR and FC-TRS filings.

Entry Models for MNCs

1. Acquiring operational SPVs in solar parks: Easiest path with lower land risks.
2. Portfolio acquisitions with mixed assets: Higher returns but requires careful land diligence and escrow protections.
3. Joint ventures with phased equity infusions: Best for greenfield development; allows staged deployment as risks are resolved.

Strategic Takeaways

• Land-related risks are state-specific and often underestimated. They must be converted into contractual protections rather than post-closing assumptions.
• Although the sector is open to 100% FDI, beneficial ownership tests under PN3 remain a gating item for deal execution.
• FEMA compliance is procedural but strict, any slippage can complicate exits.
• Solar parks offer a cleaner entry route, while private land projects need robust diligence and structuring safeguards.

Conclusion

India’s solar sector offers unparalleled growth opportunities for foreign investors, but successful entry requires navigating two complex regulatory terrains: land acquisition and foreign investment rules. By preferring SPV acquisitions, leveraging solar parks, mapping beneficial ownership early, and embedding strong contractual protections, multinational corporations can mitigate risks and structure transactions that withstand legal and commercial scrutiny.

In short, India remains a highly attractive renewable energy destination but in solar M&A, deal structure is as important as deal value.