Due Diligence In Indian M&A: Common Pitfalls And Best Practices
Doing deals in India, like buying or merging companies, can be a bit like exploring a maze. You think you see the exit, but there are hidden turns and unexpected obstacles. One big issue is trying to understand the real money situation. For example, “Company A” a mid-sized company is being acquired. Their books show steady profits, but further investigation reveals they’ve been underreporting cash sales to avoid taxes, creating a skewed financial picture. Or, how do you put a fair price on their old looms and spinning machines, which are crucial to their operation but have depreciated differently than reported? Then there are the taxes, which can be super complicated here, especially with the GST system, and the risk of hidden debts or lawsuits that suddenly pop up. For instance, this company might be facing a pending lawsuit from a local environmental group for improper waste disposal, a liability not listed on their balance sheet. These aren’t just textbook problems; they’re the kind of things that can blow up a deal.
Legal risks in Indian M&A are not just about reviewing contracts—they involve understanding a constantly evolving regulatory landscape. For example, a tech startup based in a rapidly growing innovation hub might suddenly find its business model threatened by new data privacy regulations.
Land ownership issues are another common pitfall. Many land records, especially in smaller towns, are outdated or incomplete, leading to disputes. Imagine acquiring a factory, only to discover multiple families claiming ancestral rights over the land, delaying operations and escalating legal costs.
Building a Strong Foundation: Essential Practices for Due Diligence
So, how do you avoid all these pitfalls? It starts with planning. You need a solid game plan, a team of experts, and clear goals. Bring in financial wizards to look at the numbers and local lawyers who know the ins and outs of Indian law. Go see the company in person, check out its operations, and look at its supply chain. For example, when acquiring “Company B”, a due diligence team could include a specialist in Indian software licensing laws and a cyber security expert to review their data handling practices.
Use online “rooms” (Virtual Data Rooms or VDRs) to keep all your documents safe, and hire translators if you need them. Double-check everything, and write down all your findings in a report. And when you’re negotiating, make sure you get promises and protections in case something goes wrong later. For example, negotiate a robust warranty and indemnity clause to protect against undisclosed environmental liabilities identified at “Company B.”
Basically, you need to be thorough and careful. Get the right people, use the right tools, and ask the right questions.
Navigating the Future: Securing Success in Indian M&A
After you’ve done all your digging, you need to make sure everything’s documented. You want to make sure you have warranties to protect your company from any surprises. And you need a plan for how you’re going to bring the two companies together.
The world of Indian M&A is changing, and you need to stay ahead of the curve. Using tech to double-check data, and keeping up to date on legal changes, are vital.
Doing your homework is the key to a good deal. By being careful and thorough, you can make sure your merger or acquisition is a success. And as India’s business landscape keeps growing, doing your due diligence will be more important than ever.
King Stubb & Kasiva,
Advocates & Attorneys
New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Mangalore | Pune | Kochi
Tel: +91 11 41032969 | Email: info@ksandk.com
By entering the email address you agree to our Privacy Policy.