M&A Deals Surge, But Challenges Still Loom

A recent report revealed that India experienced a surge in merger and acquisition (M&A) activity last year, with growth in both transaction volume and disclosed deal value, following the corrective phase of 2023.[1] This M&A boom is said to be fuelled by a combination of strategic leadership, favourable financing conditions, and an expanding pool of available assets.

On the regulatory landscape, September 2024 saw a series of key notifications under the Competition Act, 2002, which revamped the merger control regime. These updates, inter alia, introduced new deal value thresholds, shortened the timeline for merger control reviews, and codified green channel rules, all of which are expected to streamline the process.

However, not all M&A deals follow through, highlighting the importance of understanding the reasons behind deal failures and the challenges that arise. While the first part of this article examined the main causes of M&A deal failure (read it here), the focus now shifts to the current trends, challenges, and overall viability of M&A deals.

The article will mainly focus on the practical difficulties that often lead to deal breakdowns and delays. The success or failure of M&A deals is increasingly influenced by a range of factors, from unexpected economic shifts and cultural mismatches to regulatory obstacles and integration challenges.

This piece aims to provide an overview of how evolving market dynamics and operational challenges impact the outcomes of M&A deals in today’s business environment.

Challenges to Consider

Power Struggle

It is pertinent to note that management plays an important role in the conclusion of the M&A process. However, conflicts between the management teams of merging entities—particularly regarding power, leadership, and cultural differences—can significantly hinder effective communication and integration, ultimately disrupting the merger.

Example: Sony India and Zee Entertainment Enterprises

The merger between Sony Pictures Networks India (SPNI) and Zee Entertainment Enterprises Limited (ZEEL), initiated in 2021, faced delays until 2024 due to various challenges, including disagreements and regulatory issues.[2] With Sony holding a majority stake, the merged entity was projected to become a media powerhouse, competing with Netflix and Amazon. However, one of the primary obstacles leading to the collapse of the deal was a disagreement over leadership.

Initially, Punit Goenka, ZEEL’s MD and CEO, was set to lead the new entity. Yet, Sony pushed for NP Singh to assume the role, especially in light of an investigation into Goenka regarding alleged fund misappropriation. While the Securities Appellate Tribunal (SAT) later lifted the SEBI ban on Goenka, the leadership conflict persisted. Goenka ultimately offered to step down, although he disagreed with Singh taking charge of the merged entity.

Political Influence

The existent political power on the media spectrum can affect M&As by raising concerns on the independence of media, regulatory challenges, and concerns arising from the potential conflict of interest. A politically connected company acquiring a media entity can lead to biased reporting, substantial government intervention, and political influence of oppositions, damaging the reputation of the company and affecting the market abruptly.

Example: Adani Group’s Acquisition of NDTV

A recent example is the acquisition of NDTV by the Adani Group, wherein the Adani Group aimed to increase its media presence by acquiring a majority and controlling stake in NDTV. One of the challenges faced in this deal was the strong opposition by the political leaders and major political influence affecting the company’s operations and business deals for future endeavours. This deal was also termed a bitter takeover battle between NDTV and the Adani Group.[3]

Divergent Business Model

Divergent business models affect M&A deals negatively by creating challenges in integration as differing approaches to revenue generation, customer targeting, and operational processes may lead to inefficiencies. This misalignment can lead to conflicting strategies and difficulties in achieving synergies, hindering M&A success.

Example: Microsoft’s Acquisition of Nokia’s Mobile Phone Business

Looking to boost its presence in the smartphone business, Microsoft acquired Nokia’s mobile business for $7.2 billion in 2013. However, the acquisition ultimately resulted in a significant tax write-off. The two companies faced challenges in aligning their strategies due to differing approaches to product development, marketing, and innovation.[4] While Nokia specialised in hardware, Microsoft’s strength lay in software, creating a gap that required both cultural integration and strategic alignment. Unfortunately, ongoing cultural friction hindered efforts to bridge this divide.[5]

Legal Battles

M&A deals are often badly impacted by pending litigations as they cause uncertainty and delay in the process. Sometimes, the deals are called off as regulatory bodies or courts would approve or challenge the transaction, making the integration process complex and degrading the corporate reputation.

Example: Amazon’s Opposition to Reliance-Future Retail Deal

For instance, the acquisition of parts of Future Group by Reliance Retail, announced in 2020, faced intense legal opposition from Amazon, which had a stake in Future Retail. Amazon claimed the deal violated a non-compete clause, leading to multiple court cases and regulatory delays. This also led to significant financial difficulties, including heavy debt and operational issues, making the integration more difficult.[6]

CCI Approval

The Competition Commission of India (CCI) plays a major role in M&A transactions by analysing whether a transaction would reduce market choice or create monopolies, in order to ensure that market competition is unaffected.

In addition, the CCI may also hold back or cancel a transaction if issues are brought up during scrutiny, requiring restructurings, and impose restrictions to protect competition. This could lead to delays and increased costs. Further, modification of the terms of the deal would impact the transaction’s success and the market’s perception.

Example: Reliance Industries and Walt Disney

A major challenge in the proposed $8.5 billion merger between Reliance Industries and Walt Disney in 2024 was regulatory scrutiny from the CCI, which raised concerns regarding the combined entity’s control over the cricket broadcast rights, leading to reduced competition in the market. This raised significant antitrust concerns, leading the CCI to issue a private notice to both companies seeking explanations and additional information, causing delays in the process.[7] The Commission ultimately gave approval after certain modifications, including a bar on the bundling of OTT ad slot sales for the IPL, ICC, and BCCI cricketing rights for the balance tenure of the existing rights.[8]

Way Forward

In summary, the dynamic nature of M&As in India necessitates that businesses be proactive, strategic, and flexible in order to overcome the real-world obstacles that frequently prevent deals from closing. These issues require active diligence and prompt legal resolution. Further, businesses can minimise disruptions and streamline the process by carrying out comprehensive due diligence, making sure that cultural compatibility is maintained, and effectively managing legal and regulatory risks.

Additionally, navigating the increasingly complex M&A environment requires focusing on long-term value creation, coordinating leadership teams, and cultivating investor confidence, optimising synergies and adopting a strategic approach that strikes a balance between current difficulties and long-term expansion, laying the base for long-term success.

References:

[1] https://www.pwc.in/assets/pdfs/deals-at-a-glance-annual-review-2024-v1.pdf

[2] https://indianexpress.com/article/explained/explained-economics/sony-zee-merger-plan-collapse-reasons-9123020/

[3] https://www.reuters.com/business/media-telecom/how-indias-adani-group-moved-stealthily-acquire-ndtv-stake-2022-08-24/

[4] https://em360tech.com/top-10/merger-acquisition-deals-failed

[5] https://successacrosscultures.com/2024/07/13/the-microsoft-nokia-deal-a-case-study-in-the-challenges-of-cross-cultural-mergers/#:~:text=The%20corporate%20cultures%20of%20the,leading%20to%20frustration%20and%20misunderstandings.

[6] https://www.scobserver.in/cases/amazon-future-reliance-dispute-amazon-com-nv-investment-holdings-v-future-retail-ltd/

[7] https://www.newindianexpress.com/business/2024/Aug/21/reliance-disney-merger-cci-raises-concern-over-cricket-broadcast-rights

[8] https://www.cci.gov.in/combination/order/details/order/1434/0/cases-approved-with-modification

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Photo by sihuo0860371 on Canva

The dynamic nature of M&As in India necessitates that businesses be proactive, strategic, and flexible in order to overcome the real-world obstacles that frequently prevent deals from closing. These issues require active diligence and prompt legal resolution. Further, businesses can minimise disruptions and streamline the process by carrying out comprehensive due diligence, making sure that cultural compatibility is maintained, and effectively managing legal and regulatory risks.

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Recent Company and LLP Law Amendments Impacting Startups

The legal and regulatory framework in India plays a pivotal role in shaping the growth trajectory of startups. Private limited companies are governed by the Companies Act of 2013, while the Limited Liability Partnership (LLP) Act, 2008, offers an alternative structure combining limited liability and partnership benefits. In recognition of startup challenges, the Indian Government has made significant changes to the Companies Act and the LLP Act.  These modifications seek to create a more business-friendly climate by streamlining compliance, lowering fines, and promoting innovation.

The Indian government has introduced several amendments to specific Acts over time, and these amendments are in line with a variety of other policies, which include Startup India and Digital India and are intended to promote innovation and business development. In addition to these reforms, the government’s Budget 2025 proposals are expected to further bolster the startup ecosystem by offering incentives for innovation, reducing tax burdens, and simplifying regulatory processes. These initiatives align with the government’s broader goals of fostering entrepreneurship, making India a hub for startup activity. This article examines the recent key amendments to company law and LLP law, focusing on their impact on Indian startups.

Key Amendments and their Impact on Startups

  • LLP (Third Amendment) Rules, 2023: Enhancing Transparency and Compliance

To improve accountability and transparency in LLPs, the Ministry of Corporate Affairs (MCA) unveiled the LLP (Third Amendment) Rules, 2023, in October 2023 (Click here to read our article on the Amendment Rules).[1] A notable modification requires each LLP to maintain Form 4A partner register at its registered office. Following the publishing of the Gazette notification, the existing LLPs had 30 days to comply with the amendment, which fosters investor confidence and aids in regulatory adherence.

Declaration of Beneficial Interest in LLPs

The 2023 amendment introduced provisions for partners to declare beneficial interests in contributions of the LLP. Partners holding such interests must submit declarations in Form 4B or Form 4C, as applicable. Upon receiving these declarations, the LLP is obligated to record them in the register of partners and file a return in Form 4D with the Registrar of Companies within 30 days. This measure aligns LLP regulations with those of companies, promoting greater transparency in ownership structures. 

LLP (Significant Beneficial Owners) Rules, 2023

In order to further improve transparency in LLP ownership structures, the MCA introduced the LLP (Significant Beneficial Owners) Rules, 2023. These rules closely mirror the provisions applicable to companies under the Companies (Significant Beneficial Owners) Rules, 2018, ensuring that LLPs disclose the details of individuals or entities holding directly or indirectly, 10% or more of the LLP’s contribution, voting rights, or exercising significant influence or control over decision-making, by filing a return in Form LLP BEN-2 and maintaining register of partners.

These provisions bring LLPs in line with corporate governance standards applicable to companies, thereby increasing transparency and helping prevent fraudulent ownership practices.

Recently, recognising the compliance burden on businesses, particularly startups and small LLPs, the MCA provided a relaxation in filing deadlines for:

    1. Form LLP BEN-2 (Declaration of Significant Beneficial Ownership) wherein the deadline for initial filings has been extended, giving LLPs additional time to report SBO details and no late fees were levied until May 15, 2024.
    2. Form LLP 4D (Filing of Beneficial Interest Declarations) wherein the MCA has granted LLPs an extension for submitting Form 4D, allowing them to comply with the new disclosure requirements without facing any penalties until May 15, 2024.

These relaxations are aimed at ensuring a smooth transition to the new compliance framework while reducing the regulatory burden on LLPs, particularly those in the startup ecosystem.

Appointment of Designated Partner for Disclosures

 To streamline the process of sharing information regarding beneficial interests, the amendment rules mandate that LLPs appoint a designated partner responsible for furnishing such information to the Registrar or any authorised officer. Accordingly, the LLP must specify one of the existing designated partners already in charge of compliance activities to furnish information regarding beneficial interest. Details of this designated partner must be provided in Form 4.  This requirement ensures accountability and facilitates efficient communication with regulatory authorities.

  • Extension of E-Filing Deadlines

The MCA extended the deadline for electronically completing the filing of LLP Form 3, Form 4 and Form 11[2] to November 30, 2023, without additional charges for delay, in recognition of the difficulties experienced by LLPs, particularly startups. This extension lessened the immediate compliance load and improved resource allocation. 

  • Amendments to the Definition of “Related Party”

Effective from April 1, 2023, the definition of “related party” was expanded under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations 2021. Prior to the LODR Amendment Regulations, the definition primarily included promoters, directors, and entities under common control. However, the amendment broadened the scope to include:

    1. Any person or entity holding 10% or more of the equity shares in a listed entity, either directly or indirectly through beneficial interest, during the preceding financial year (reduced from the earlier threshold of 20%).
    2. Any entity that is part of the promoter group, thereby ensuring that transactions with such entities are subject to disclosure and approval norms.

This expansion aimed to enhance corporate governance, improve transparency, and prevent conflicts of interest in related party transactions (RPTs). Additionally, startups seeking to procure public funds through an SME IPO should consider compliance with SEBI LODR obligations, especially for any reorganization and emergence of a new promoter and/or shareholder base, then they would need to consider these compliance disclosures under the related party transactions. This amendment necessitates that startups identify and disclose such relationships, ensuring greater transparency in financial dealings and adherence to corporate governance norms. 

  • Fast-Tracking Mergers of Startups Incorporated Outside India

In September 2024, a pivotal amendment was made to Rule 25A of the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, introducing Sub-rule (5).[3] This provision expedites the approval process for a startup incorporated outside India to merge with its wholly-owned Indian subsidiary by eliminating the need to obtain approval from the National Company Law Tribunal (NCLT). Further, based on the amendment of Rule 25A, compliance rules have been streamlined by the Central Government for enabling reverse flipping as well.

By simplifying this procedure, the government offers companies greater flexibility and opportunities to enter the Indian market, which is particularly advantageous for foreign startups aiming to establish a presence in India efficiently. 

This regulatory reform is said to have reduced the time for reverse flip mergers from 12-18 months to approximately 3-4 months.[4]

  • Companies (Prospectus and Allotment of Securities) Amendment Rules, 2025

In February 2025, the MCA amended Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014[5], granting a compliance extension for certain private companies. Specifically, private companies (excluding producer companies) that were not classified as small companies as of March 31, 2023, now have until June 30, 2025, to comply with the provisions of sub-rule (2). The Companies Act, 2013 defines a “small company” based on the thresholds of INR 4 crore paid-up capital and INR 40 Crore turnover, respectively, as of 2024. However, many early-stage start-ups, while still qualifying as start-ups under relevant criteria, often surpass these small company limits due to increased revenues or the infusion of venture capital and as a result, they lose their small company status and become subject to Rule 9B(2), which mandates the dematerialisation of their securities. However, with the recent extension, startups now have time until June 30, 2025, to comply, providing them more time to align with regulatory requirements and easing their compliance journey.

While concluding with these amendments, it is also notable that the Union Budget for 2025-26 extended the timeline for tax benefits available to startups under Section 80-IAC of the Income-tax Act, 1961. This allows eligible startups to claim a 100% deduction on profits for three consecutive assessment years out of ten, beginning from the year of incorporation.

The amendment extends the tax deduction benefit under Section 80-IAC for eligible startups by five years, allowing newly incorporated start-ups to avail of the deduction until April 1, 2030, instead of the previous cut-off of April 1, 2025. This extension provides businesses with additional time to operate while benefiting from tax breaks during their crucial early years when cash flow is typically limited, as every rupee saved can be reinvested into the business, and could be used to hire more staff, or dedicate towards launching new ideas in the market. This shows the government’s deliberate approach to empower the startup space rather than just offer support to relieve the financial constraints during a critical growth phase.  There is an ongoing commitment to help fulfil new businesses’ dreams by making sure that future businesses have the financial capacity to thrive and compete in the global market.

Opportunities for Startups

These amendments encourage startups to adopt a proactive compliance culture, which can reduce future risks and uphold confidence among domestic and international investors. The streamlined processes, reduced penalties, and emphasis on digital transformation empower startups to focus on innovation and growth.

Moreover, the expanded definitions, simplified compliance processes, and cost savings enhance the ease of doing business, enabling startups to scale operations seamlessly. Startups in tech-driven sectors can particularly leverage these amendments to attract investments and navigate the regulatory landscape more effectively.

Way Forward

The amendments to company law and LLP Law mark a significant step toward building a friendly regulatory environment for entrepreneurs in India. These changes help to resolve compliance issues and promote digital transformation, indicating the government’s commitment to boosting entrepreneurship.

To effectively benefit from these improvements, companies must invest in legal awareness, professional counsel, and compliance technologies. With ongoing efforts to raise awareness and additional reforms in the works, the Indian Startup Ecosystem is poised to achieve extraordinary success in the coming years.

References:

[1] https://www.mca.gov.in/bin/ebook/dms/getdocument?doc=Mzc2OTA4ODA4&docCategory=Notifications&type=open

[2] https://www.mca.gov.in/bin/dms/getdocument?mds=Zt6foWsl%252BABAbU7Pid9NGg%253D%253D&type=open

[3] https://www.mca.gov.in/bin/dms/getdocument?mds=qTyAFp6vBFvAIie1mgFTbg%253D%253D&type=open

[4] https://www.reuters.com/world/india/india-regulatory-reform-could-hasten-homecoming-ipo-bound-startups-2024-10-10/

[5] https://www.mca.gov.in/bin/dms/getdocument?mds=uB9cbvrHAgY40CP98CDaNQ%253D%253D&type=open

Image Credits:

Photo by Monster Ztudio on Canva

The amendments to company law and LLP Law mark a significant step toward building a friendly regulatory environment for entrepreneurs in India. These changes help to resolve compliance issues and promote digital transformation, indicating the government’s commitment to boosting entrepreneurship. To effectively benefit from these improvements, companies must invest in legal awareness, professional counsel, and compliance technologies. With ongoing efforts to raise awareness and additional reforms in the works, the Indian Startup Ecosystem is poised to achieve extraordinary success in the coming years.

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