Inbound private M&A deals – value protection

Although international investors are often aware of the need to carefully structure investments into India, issues that affect value sometimes come as a surprise. These are summarized below.

Transfer pricing traps: Unless an international investor is an “associated enterprise” under section 92A of the Income Tax Act, 1961, its acquisition of an interest in an Indian target will not be subject to the arm’s length valuation rules. However, investors need to exercise care in relation to any previous documentation, such as letters of intent prior to the sale and purchase agreement, where their affiliates execute the transfers, as these have the potential to result in the application of the transfer pricing rules.

Difficulties in enforcing recoveries: Although deal protection provisions feature in Indian agreements, the enforcement of warranties, indemnities, guarantees and retention arrangements in favour of an international investor will require the approval of the Reserve Bank of India (RBI). The limited escrow exemption in the public context will not apply to private transactions.

The RBI may well approve payment when presented with a judicial award, but the lack of certainty is a concern and investors sometimes approach the RBI for advance approval. However, parties do not always do so due to timing concerns and the risk of the imposition of caps by the RBI.

Nikhil Narayanan is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the author and do not reflect the position of the firm.