Despite global uncertainties, India's M&A landscape remains robust, with domestic deals driving growth and diverse sectors attracting investments. Experts predict a positive outlook for H2 2024, bolstered by policy continuity and abundant dry powder.

 

Contrary to popular predictions, dealmaking in India has remained a mixed bag in the first half of 2024. While deal volume went up in the second quarter of the year, led by a busy domestic market, deal value in the first half of the calendar year actually dropped 9 percent to $38 billion as against the $41.74 billion in the same period in 2023, Bloomberg data shows.

Market analysts and legal experts still maintain a positive outlook for the second half of the year, to be driven by large amount of dry powder from private equity investors, controlled inflation, robust GDP, low interest rates, and the stock market's buoyancy.

With the Narendra Modi-led Bhartiya Janata Party coming back to power for a third term, its pro-business outlook and promise of regulatory continuity has brought some relief to a jittery market, but questions remain about the coalition alliance’s ability to pass strong reforms.

Foreign investment has also been hard to find, even as international funds like Blackstone, KKR, Bain Capital and Goldman Sachs look to increase investment in the country. But domestic dealmaking remains the backbone of Indian M&A, with a 29 percent rise in volumes and a 2.5-fold increase in values compared to the previous quarter. 

POST-ELECTION CONCERNS

Legal experts anticipate sustained activity in the lower end of the M&A market, as domestic players seek market consolidation and strategically invest their substantial cash reserves.

Sidharrth Shankar and Vikram Raghani, co-chairs of the corporate practice at J. Sagar & Associates, say the remaining half of 2024 may witness some strategic small M&As between Indian and foreign partners. “The cash-rich Indian business houses are also expected to strengthen their portfolios through tactical M&As,” they note.

“It is noteworthy that the current coalition government may not be able to enact radical legislative reforms, but initial indicators suggest that the government will continue to liberalize laws to improve the ease of doing business in India,” they add.

 

“Now that the dust has settled, it is largely business as usual. There hasn’t been a drop-off in deal activity, and the M&A market remains busy. The big-bang market frenzy, which was expected by some, may not happen, but we are seeing M&A based around the themes of consolidation and strengthening core businesses continue.”

- Anand Jayachandran, Cyril Amarchand Mangaldas

 

Anand Jayachandran, a corporate partner at Cyril Amarchand Mangaldas, says that it is business as usual for Indian dealmaking post-elections, even as investors in the government sector employ a wait-and-watch approach to see if the weaker coalition government can ensure a continuity of pro-business reforms.

“Now that the dust has settled, it is largely business as usual. There hasn’t been a drop-off in deal activity, and the M&A market remains busy. The big-bang market frenzy, which was expected by some, may not happen, but we are seeing M&A based around the themes of consolidation and strengthening core businesses continue,” Jayachandran says.

“In sectors and companies with significant government involvement, there is some waiting and watching to see if there will be continuity in policies as far as the new government is concerned,” he adds.

India’s largely stable outlook and strong pipeline is owed to its diversified growth, outside traditional sectors such as IT/ITES and pharmaceuticals, which also remain strong. Defence, space, aviation, financial technology, artificial intelligence, green energy, e-mobility, infrastructure, and agritech markets are also attracting a lot of domestic and foreign investment.

“India’s robust capital markets present an attractive opportunity for exits via IPOs and hence continue to attract foreign funds and investors,” Shankar and Raghani explain.

Varun Vaish, a corporate partner at Luthra and Luthra Law Offices India, points to the growth in technology start-ups, particularly in the agricultural space, as an attractive opportunity for investors.

“Technological advancements in agriculture, including precision farming, agrifintech, and supply chain improvements, are attracting investments, and hence the agritech/agrifintech sector will certainly witness significant M&A growth in 2024,” Vaish says.

“The cyber security and data protection sector is another emerging area that could be the focus of increased M&A activity given the increased investor interest in this sector post the central government's planned implementation and enforcement of the Digital Personal Data Protection Act, 2023,” he adds.

REGULATORY REFORMS

Indeed, new government regulations around data protection, antitrust law, capital markets and sector-specific laws for healthcare, pharmaceuticals, space, and renewable energy are poised to spur growth in new markets. In the same vein, the government’s flagship production-linked incentive schemes and global deleveraging from China are bringing more manufacturing to India than in the recent past, particularly in the technology, semiconductor and renewable energy space.

“There's also been a significant rise in Private Investment in Public Equity (PIPE) deals. Investors are attracted to the market-based valuations and liquidity these deals offer, and this trend looks set to continue in 2024,” Vaish explains.

Pro-business regulatory reforms of the last few years have made India an attractive market for global private equity investors and large corporates.

Easing restrictions on ‘round-tripping’ investment structures, tax barriers, foreign direct investment, and an increased focus on ESG disclosure have cleared the way for foreign capital.

“Significant regulatory changes are expected to facilitate increased deal activity. The tightening of unsecured lending regulations by the Reserve Bank of India (RBI) in 2023 may prompt the consolidation of Non-Banking Financial Companies (NBFCs) to comply with capital norms. The liberalization of insurance regulations and the relaxation of Foreign Direct Investment (FDI) norms, which allowed higher stake ceilings for foreign investors in 2022, are anticipated to continue attracting new strategic and private equity players in 2024. Additionally, the RBI's 2023 digital lending guidelines, which permit Fintech lenders to enter guarantee arrangements for loan defaults, are expected to strengthen Fintech lending business models and stimulate inbound deal activity,” Vaish says.

Adds Jayachandran: “SEBI’s recent decision to open the door to fixed price de-listings is a long-overdue and welcome move. This will help structuring deals where acquirers were previously deterred by the prospect of being held hostage by a small group of minority shareholders.”

INVESTOR CONCERNS

While domestic regulatory changes are key to making India a good place to invest, international geopolitical and economic conditions may likely result in investors taking a cautious approach.

Geopolitical tensions, particularly the protracted conflicts in Ukraine and Gaza, coupled with decelerating capital markets and apprehension over potential global interest rate hikes, are dampening the appetite of private equity funds and multinational corporations for emerging market investments.

Shankar and Raghani at JSA say that the fear of economic turbulence, given India’s coalition government, is also a major challenge to dealmaking in the second half of the year.

With increased regulation also comes increased regulatory scrutiny, which may impact the country’s investment climate.

“Recent regulatory actions by the RBI have raised concerns in the finance, banking, and fintech sectors. Stricter regulatory oversight of business deals around compliances, competition, and pricing may impact deals, Shankar and Raghani say.

“The rise of artificial intelligence and its impact on certain sectors has cautioned the investors as it may disrupt the traditional business models,” they add.

Vaish at Luthra adds that regulatory changes, such as the recent amendments to the Competition Act, 2022 in addition to hidden liabilities pertaining to ESG and data privacy compliances, may impact deal timelines.

Competition from capital markets, with sellers preferring an exit via an IPO as opposed to a sale, is also a concern for dealmakers in 2024, Vaish adds.

Lastly, the outlook on financing for deals remains positive despite a general global funding slowdown. Multiple financing options are making dealmaking more competitive, often resulting in higher valuations.

Shankar and Raghani of JSA elaborate on these options: "Some of the trending financing methods include equity financing, external commercial borrowings, equipment financing, invoice factoring, and the issuance of debt securities by companies. Furthermore, intercorporate loans, working capital loans, and business lines of credit are facilitating easier cash availability."

This diversity in financing is driving market competitiveness, as CAM's Jayachandran notes: "Deals are getting more competitive, with the combination of private equity firms and large corporates with strong balance sheets spurring much of the activity. This is particularly evident when coupled with the growth in equity capital markets."

Looking ahead, Luthra's Vaish offers an optimistic perspective: "While 2023 saw a more cautious approach, the outlook for the coming year is positive. We're expecting better valuations and strategic opportunities to drive increased activity. Importantly, companies are likely to leverage their strong cash positions to finance acquisitions. Many corporations have accumulated substantial cash reserves, which they can use alongside corporate funds and equity to finance deals."