In the architecture of multi-jurisdictional M&A, often where a small India presence is involved, the India component is sometimes treated as a procedural footnote. This assumption can be costly. Even where Indian operations seem peripheral or de-minimis, they can have significant regulatory and tax implications. Left unchecked, these issues can escalate from diligence findings to deal blockers.
This piece explores how these risks often surface in seemingly straightforward deal scenarios and why early local engagement is critical.
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The global equity payout
Tender offers are becoming increasingly common as listed companies look for more flexible and shareholder-friendly ways to return capital or streamline equity structures. When such offers are extended globally, they often capture employees of Indian subsidiaries who hold vested stock options or restricted stock units (RSUs).
Although the transaction is driven and executed from offshore, it triggers compliance obligations under Indian law. The Indian subsidiary must report both the acquisition and subsequent sale of shares to the Reserve Bank of India (RBI) through form filings. If employees receive proceeds offshore, the funds must be repatriated to India within 180 days.
At the same time, the vesting of shares or options constitutes taxable income for the employee. The Indian subsidiary is required to withhold and remit this payroll tax. For many companies, this creates a cash-flow event that has not been budgeted for. A delay or shortfall in remittance can amount to a tax default, carrying penalty exposure.
An effective way to avoid this is by involving local counsel and finance teams early. Mapping the Overseas Portfolio Investment (OPI) reporting process (i.e., the RBI filings required for employee share acquisitions and disposals) with the Indian subsidiary's authorised dealer bank and planning for tax withholding ensures that both regulatory and payroll obligations are met without last-minute issues.
The acquihire
Acquihires (transactions structured primarily to secure a target's team and know-how) are increasingly common in global technology and services deals. Where the target employs personnel through an Indian subsidiary, the transfer of such employees to the buyer's group can trigger Indian tax and regulatory implications, even if the deal is negotiated offshore with transaction documents governed by foreign laws.
Under Indian law, such arrangements may be treated as related-party transactions if the terms are negotiated by overseas entities. In that case, the Indian component must comply with transfer pricing requirements, including adherence to arm's-length valuation principles and, where necessary, support through a valuation report. In addition, if any payments are made by the buyer's Indian affiliate for employee release or transfer of intellectual property, it must not exceed fair market value, failing which transfer pricing issues may arise.
Where Indian employees are directly engaged by the foreign transferor entity, the consideration paid for their transition may also constitute income sourced in India, triggering withholding tax obligations.
To mitigate these risks, the transaction should clearly delineate payments between facilitation fees to the transferor, signing or retention bonuses to employees and separately valued intellectual property transfers. Comprehensive documentation and post-closing filings are essential to ensure regulatory defensibility.
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The diligence surprise
Sometimes the biggest risks are buried in the past. A US-to-US deal might appear straightforward until diligence reveals that the target's Indian subsidiary failed to make a foreign exchange filing years ago. Under Indian law, such non-compliance is a continuing breach that triggers penalties, but more importantly, it prevents the company from completing future filings or reporting new share transfers.
If the transaction involves a direct transfer of Indian shares, closing cannot occur until the breach is resolved, often through a compounding process with the RBI. This involves admitting the default, filing delayed forms and paying a penalty. Where the transfer is indirect, closing can proceed but the buyer should protect itself through contractual safeguards (such as indemnities) covering the cost and risk of future regularisation.
Considering the impact of such issues on ongoing needs and compliance status of the Indian company or its shareholders, it's crucial to solve such problems at the time of the transaction rather than reacting later.
The internal restructuring
In practice, the Indian entity does not always sit neatly within the offshore group structure. For historical or practical reasons, founders may have incorporated the Indian operating company directly, with shareholding held in their personal names (or by relatives, friends or early associates), rather than through a foreign holding company. Even where the Indian business is relatively small, this can create a misalignment between where value is generated and where it is captured within the global group.
Investors and counterparties typically expect the Indian operating business to sit within the offshore group through a clear parent-subsidiary chain. Where the Indian company is held directly by founders (or their relatives / associates), groups often restructure to move it under a newly incorporated holding company (or other offshore parent), so that value and economics are consolidated at the offshore level. This "flip" is commonly undertaken ahead of a fundraising round or group consolidation exercise (including where global IP is to be centralised offshore) and can generally be achieved through one of three structures.
- Under a share transfer, Indian founders sell their shares to the offshore holding company. The transfer, from resident to non-resident, is regulated by India's foreign exchange laws and must be reported to the RBI. While straightforward to implement, it triggers Indian capital gains tax for the founders.
- A primary issuance avoids this tax event by having the Indian company issue new shares to the offshore holding company, reducing the founders' holdings to a nominal level. However, the holding company must remit full subscription proceeds as fresh capital into India, which can create "trapped cash" - funds that cannot always be easily repatriated under India's foreign exchange regime, and is viable only if the Indian company has business needs towards which such funds may be deployed.
- A hybrid structure, combining a limited share transfer with a primary issue, can balance tax efficiency with liquidity needs, though it requires more documentation and valuation work.
Before execution, counsel must model the comparative tax cost, funding mechanics and foreign exchange implications to select the most efficient route and sequence the required valuation and regulatory filings accordingly.
Conclusion
The Indian leg of a global M&A deal is rarely a procedural formality. It is a web of local tax and regulatory rules that can affect the timing and economics of a global transaction. Whether it involves a global equity plan, an acquihire or a reverse flip, early engagement with Indian advisors can mean the difference between a smooth closing and an expensive delay. In cross-border deals, India's local compliance terrain may be intricate - but with the right foresight, it need not become a hurdle.
(This article has been authored by Monika Srivastava: Partner at Khaitan & Co; Sanchit Agarwal: Partner at Khaitan & Co; Romit Kohli: Associate at Khaitan & Co.)
Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the opinion of NDTV Profit or its affiliates. Readers are advised to conduct their own research or consult a qualified professional before making any investment or business decisions. NDTV Profit does not guarantee the accuracy, completeness, or reliability of the information presented in this article.
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