This blog is written by Anushka Deolekar a Second-Year Law student of University of Birmingham

Cross-Border M&A’s in India: A Critical Perspective

Over the last decade, India has emerged as a preferred destination for undertaking cross-border M &As. Since I have been closely associated with this line of thinking, I think it is high time that one looked at the potential and pitfalls of these business overseas strategies in the Indian context.

The Allure of the Indian Market

Of course, there is no doubt that India has a large population and growing economy which makes it favourable to companies abroad. The potential of the market is immense due to its population of more than 1.3 billion people and the developing middle class. To my mind, this demographic dividend is the leading source of this phenomenon in the case of cross-border M&As. However, I can say that many foreign business entities do not calculate the fact that the Indian market is rather quite multifaceted. The global and regional differences in terms of languages, cultures, and consumers’ choices make the adoption of a standardized strategy impossible. Circumstances that have paid off include conformism; multinationals like Unilever and Suzuki have gained competitive advantages in their internationalization process.

Regulatory Hurdles: A Necessary Evil?

The external environment that has often been cited as a constraint to cross-border M&As by Indian firms is still considered to be very rigid and bureaucratic. Though I also appreciate the fact it is irritating to tackle the jigsaw of regulations I also understand that there should be some regulations in every country to shield, its interest. However, the current system presented in the paper is far from ideal. The many levels of screening that require the participation of several government agencies not only cause the delay of transactions but also the expense. To my mind, the government does not provide sufficient incentives for the attraction of foreign investment while trying to protect to barriers of domestic businesses.

The Tax Conundrum

India has been for long criticized for the unfriendly tax environment it has imposed for cross-border M&As. The ability of the Nigerian government to sanction retrospective tax for financial transactions in 2012 also reduced investors’ confidence. Even though the recent attempts to resolve all these disputes are appreciated, the harm to India as an investment destination has been greatly affected. I can categorically state that I find it very important that there should be good predictability of tax regimes so that investors from other countries can invest in the country. The recent efforts to cut the tax rates and slim down a range of tax incentives introduced by the government of the day are indeed positive, however, much more must be done to restore the confidence of the international business community.

The Cultural Integration: Overlooked Challenge

According to my observation, perhaps the most overlooked aspect of cross-border acquisitions is that of culture. Another weakness of using this strategy is that failure to overcome cultural differences between the acquiring company and the Indian target can lead to the failure of even good strategies. Many foreign managers have problems feeling the contexts of business management in India starting from the value of building friendships up to the expected organizational culture of many companies in India. In my experience, I have witnessed many acquisitions that failed to demonstrate cultural due diligence and ended up losing talent and experiencing operating problems after the takeover.

The Way Forward

Hence, the purpose of this paper is to analyse cross-border M&As in India and despite difficult challenging, I remain positive. The country’s market size combined with the availability of human resource expertise, especially in areas of fields such as information technology makes the country a favourite for international investment. To fully capitalize on this potential, I believe several key steps are necessary:

1. Regulatory reforms:

The government should go further to ease the approval in the destination of FDI as well as enhance the public notice given to regulations about investment by foreign entities.

2. Tax stability:

Like in any other business, the investors require a stable and most preferably, a predictable tax policy to encourage them to invest more.

3. Sector-specific approach:

What should be done, though is to avoid a generalized approach to minimize foreign investment from a particular sector and instead should try to draw a line on a sector-wise basis while getting the required input from the overseas investors.

4. Cultural training:

Those organizations entering cross-border deals should seriously consider investments in cultural assimilation initiatives to facilitate the running of post-acquisition operations.

5. Long-term perspective:

Former trades also mean that both international and Indian investors must view such deals strategically in the sense that they should not be aimed at getting quick money but achieving good growth in the business.

Conclusion

Presenting the cross-border M&A opportunities for both the foreign investor as well as the Indian company. To fully realize this opportunity, decision-makers need to be able to understand as well as fully appreciate the potential risks that may come with a particular deal. In my opinion, the success of other cross-border M&As in India in the time to come will largely depend upon all the parties of the business world including the foreign investors, the Indian companies, and the government of this country to evolve and sustain the proper right environment for the sound and healthy business transactions all over the world. Although going forward, the path is not without its obstacles, I do believe that deconvolving a proper strategy for cross-border M&As, could be of paramount importance in the pursuit of India’s economic growth and integration in the global economy.

Citations

· World Bank, 'Population, total - India' (World Bank Data, 2021) https://data.worldbank.org/indicator/SP.POP.TOTL?locations=IN accessed 24 September 2024

· Rajesh Kumar, 'Strategies of MNCs in India: A Case Study of Hindustan Unilever Limited' (2019) 7 International Journal of Research and Analytical Reviews 94

· Department for Promotion of Industry and Internal Trade, 'Consolidated FDI Policy' (Government of India 2020)

· The Income Tax Act 1961 (as amended by The Finance Act 2012)

· The Taxation Laws (Amendment) Act 2019

· Pankaj Ghemawat and Steven A Altman, 'The State of Globalization in 2019, and What It Means for Strategists' (Harvard Business Review, 6 February 2019) https://hbr.org/2019/02/the-state-of-globalization-in-2019-and-what-it-means-for-strategists accessed 24 September 2024

· NASSCOM, 'Indian Tech Start-up Ecosystem: Year of the Titans' (NASSCOM 2021)

· Ministry of Commerce and Industry, 'Doing Business Reforms' (Government of India 2020)

· OECD, 'OECD Economic Surveys: India 2019' (OECD Publishing 2019)

· NITI Aayog, 'Strategy for New India @ 75' (Government of India 2018)

· Günter K Stahl and Andreas Voigt, 'Do Cultural Differences Matter in Mergers and Acquisitions? A Tentative Model and Examination' (2008) 19 Organization Science 160

· McKinsey & Company, 'India's Turning Point: An Economic Agenda to Spur Growth and Jobs' (McKinsey Global Institute 2020)