With the increasing merger and acquisition (M&A) activities in India in the past few years, the importance of due-diligence has elevated. 2017 was one of the most significant years for the Indian government’s regulatory reform agenda. From GST to RERA, a lot has changed for the businesses. While the mergers and acquisitions (M&A) activity have been tepid in the last few years, as compared to 2017, the value of M&As involving Indian companies increased two-fold within the first nine months of 2018.
With the rising M&A activity, the importance of due-diligence has increased as well. It is with the help of this standard process that investors, businesses, and venture capitalists analyse the credentials of a company. But the recent reforms by the government, combined with the increasing use of technology, has drastically changed the trends of due-diligence in the country.
For any company aiming for merger and acquisition, it is essential to be aware of these latest trends to implement them. 5 of the most influential trends in the industry are as follows-
- Corporate Governance
It is imperative for the buyer to be aware of all the latest corporate laws in India. While The Companies Act of 2013 governs most of the corporate laws, several changes have been made to the act in 2015 and 2018.
These changes are with regards to the decision making in the boardroom, M&As, corporate social responsibility, shareholding, and party transactions. Even the Companies Act of 2017 ironed out a lot of inconsistencies of financial regulatory mechanism between SEBI and the RBI.
- Increasing Transparency
Due to digital technologies, the modern world is now more connected. Due to this, people now get news from multiple sources. Every other news outlet has a different opinion about a company which they do not mind sharing digitally.
This has made it very difficult for companies to manage their reputation. This significant change in what people expect with regards to transparency requires the risk management professionals of a company to rethink the way in which they protect, screen and monitor their organisation.
- Labour Laws and Employment Contracts
The increasing transparency has also given more voice to employees of the companies. This has made labour laws and employment contracts a significant part of due-diligence. In India, the labour laws ask for at least benefits and guarantees to all the employees which supersede the provision of their labour contracts.
Companies with more than 100 employees also need permission from the government to layoff employees. Apart from the laws and contracts, a buyer should also look into the clauses like employee poaching, non-disclosure, unfair competition, patents, trademarks, trade secrets, etc. in employee contracts.
- Tax Due Diligence
While tax due-diligence has always played a crucial role in due-diligence during M&As, the implementation of GST has significantly changed the dynamics. Apart from understanding the tax profile of the company, a buyer should also look into potential tax benefits.
This is mostly done with the help of indemnities and tax warranties in the agreement. Buyer should take a balanced approach for tax protection to make sure that the transaction commerciality is not impacted for the seller.
India’s economy has been consistently improving, making it an excellent place for foreign investors. But with the rapidly changing due-diligence dynamics, it is highly recommended that buyers hire a reputed advisory service with expertise in the Indian markets. Most top advisory service providers are well-versed with the latest trends in due-diligence, allowing buyers to get a clear idea of whether they should proceed with the transaction or not.
India offers a complex mix of regulatory, economic, and legal landscape for doing business. With new elements being added to the due diligence process on a regular basis, it is essential for buyers and sellers to be well-aware of all the latest trends for successful transactions.
Some of the most popular industry trends are discussed above, and businesses should look for ways to try and implement them as soon as possible. Alternatively, a due-diligence advisory service can be hired to make sure that the diligence covers everything necessary for smooth mergers and acquisitions.