The year 2018 was a fantastic year for mergers and acquisitions (M&A) activities in India as the year witnessed many deals close to $5 billion such as Walmart-Flipkart, Tata Steel-Bamnipal Steel, UPL- Arysta LifeScience Inc, compared to only one in 2017 which was the Idea- Vodafone mega-merger.

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Come February 2019, only one deal in the billion-dollar category—valued at $ 1.3 billion—was announced. Further, the Union Budget did not create any favourable policy statements for encouraging deal activities in India. Regulatory delays in approval, unwanted litigations, rising transaction costs, aggressive approach by the tax department and upcoming general elections may result in 2019 being a bumpy ride for M&A activities in India.

One of the reasons for rising deal activities in India was the effective resolution under Insolvency and Bankruptcy Code (IBC) which gained momentum in the year 2018. The stressed assets have attracted the interest of global and domestic players and created fierce competition among investors and strategic buyers looking to pick up such stressed assets. The year 2019 too seems promising with definitive legal developments with respect to the evolution of IBC law.

However, the time taken for implementation by the regulators including legal loopholes being used by various parties to delay the outcome of such resolutions does have a negative impact on the transactions being consummated followed by delays in the revival of stressed assets as well as further investments by the acquirer.

These factors may not completely discourage companies from undertaking M&A activities but have now become an important factor for consideration, especially since the cost of transactions may sometimes become prohibitive.

Another factor that could affect the M&A markets in India is the continually changing tax environment. One such evolving tax aspect is the ‘angel taxation’ which was introduced in the Union Budget of 2012 as a measure to prevent generation and circulation of unaccounted money. While the intention of the government is justified in bringing in checks and balances against such abuse, it is wrong to tax capital brought into the companies and against the basic principles of taxation of “income”. Though certain startups satisfying certain conditions have been exempt from this hardship, it does not serve the larger purpose of promoting entrepreneurship and fundraising. Ultimately “beauty lies in the eyes of the beholder (investor)!” and therefore, the government should act as a catalyst and not as a roadblock.

A decision with respect to any M&A transaction is based on the assumption that the extant rules and regulations and policies affecting business will continue to be stable, consistent and further liberalized in order to enable ease of doing business in India. In contrast to this expectation, the government imposed additional conditions and restrictions on the marketplace e-commerce activities vide Press Note dated December 26, 2018, pursuant to which many foreign-owned marketplace e-players had to rejig their business model. One can always debate and justify such variations as a measure to check anti-competitive abuses and to provide for a fair and transparent business environment in order to protect consumer interests. However, such roller coasters are undesirable for promoting India as an attractive M&A destination.

Though India has recorded a jump in ‘ease of doing business’ rankings, it will be interesting to watch whether the definitive outcome of general elections in mid-2019 coupled with improvements in the factors enlisted above, brings in “Acche Din” for M&A activities in India!

Saumil Shah is Partner and Supriya Zaware is Senior Associate at Dhruva Advisors LLP