Deal Talk: From Sealing the Deal to Breaking It Apart: Legal & Tax Considerations for Unwinding M&A Transactions in India
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From Sealing the Deal to Breaking It Apart: Legal & Tax Considerations for Unwinding M&A Transactions in India
Introduction
Parties to mergers and acquisitions (“M&A”) often approach transactions with the optimism and commitment of a couple at the altar – convinced that it is a once-in-a-lifetime event. However, much like marriages, M&A deals are not immune to the unpredictability of time, changing priorities, and unforeseen circumstances. Strategic divergences, changes to commercial priorities, financial setbacks, or even the discovery of misrepresentations may compel parties to explore a path that may or may not be envisaged at the time of structuring such transactions – unwinding the transaction.
Unlike the forward-looking nature of a standard M&A, the process of unwinding involves an attempt to restore parties backwards to their pre-transaction position (i.e. the position prior to signing of the transaction documentation and as if the deal had never been consummated). But reversing a deal is far more complicated than structuring it – especially when consideration has been exchanged between the parties, rights have been transferred, and regulatory consents have been received and actioned upon thereafter.
In this edition of Deal Talk, we examine the legal, regulatory, tax and operational hurdles associated with unwinding Indian and cross-border M&A deals and how such unwinding would work basis the structure implemented for a transaction. Drawing on deal experience and Indian precedents, we also highlight practical challenges that sellers and purchasers should proactively consider when negotiating future M&A transactions.
M&A transactions being analysed
Based on the manner in which the consideration is exchanged between the parties, M&A transactions can be broadly bifurcated into the following types:
- Purchaser pays the entire consideration in upfront cash to the sellers (“Upfront Cash Deal”): In such deals, the entire consideration is paid to the sellers / company (as applicable) upfront in exchange for transfer of the shares. This model is preferred when the purchaser has the ability and means to pay the entire amount immediately.
- Purchaser pays some amount of the consideration upfront and defers the balance component to a later date (“Deferred Consideration Deal”): Such component of the consideration which is deferred is typically linked to (a) the achievement of specified targets (such as KPIs / EBITDA), or (b) are guaranteed payments to be made within the specified timelines. In case such Deferred Consideration Deal involves a non-resident, the deferred consideration component needs to be aligned with the requirements specified for deferred consideration deals under the FEMA (Non-Debt Instruments) Rules, 2019 (“NDI Rules”).
- Shares of two companies are swapped as consideration (“Share Swap Deal”): In case of a share swap, an acquirer acquires the shares of another company (either through a primary or secondary acquisition) and as consideration for the acquisition, the acquirer issues its own shares to the other company / selling shareholders of such company (as applicable).1 These structures are preferred in scenarios where there are liquidity concerns.
While the above bifurcation is based solely on the manner in which the consideration is paid by the acquirer, in terms of the mode in which the transaction has occurred, it can be either an acquisition by way of secondary transfers by all existing shareholders of the company (“Pure Secondary”), or an acquisition by way of a combination of a primary issuance to the proposed acquirer and secondary transfers by all the existing shareholders (“Primary – Secondary Combination”).
Legal Considerations to be borne in mind while unwinding M&A transactions
General considerations irrespective of the nature of consideration
While unwinding involves an array of legal and contractual considerations at play, there are certain factors that will have to be evaluated for unwinding regardless of the manner in which the consideration has been disbursed.
(i) Impact of the absence of unwinding clauses within transaction documents
In most cases, transaction documents do not contain express provisions for unwinding or reversing a completed deal. This is because incorporating such clauses often adds legal complexity to the transaction documents and is typically not a preferred negotiation point, given the sensitivities and implications associated with such provisions. That said, without such contractual mechanisms being expressly stipulated, parties must rely on mutual agreement or resort to general legal principles and court-driven remedies, as unilateral reversal would not be feasible given any form of unwinding would be a bilateral process. Often, the only unilateral recourse available is the initiation of a dispute, which is inherently time-consuming, uncertain, and costly.
Where an unwinding is sought against the backdrop of strained relations between the parties (such as in case of material breaches, fraud, commercial and strategic misalignment etc.), these remedies become even more difficult to seek. Even in case of initiation of a unilateral dispute, the initiating party may only be able to seek remedies such as damages, specific performance or interim relief, with none of these resulting in or being capable of having the effect of unwinding. From a contractual standpoint, while the remedy of rescission may be sought, it is typically granted sparingly, i.e., in cases of fraud, misrepresentation, or mistake (and subject to other requirements under Indian laws). However, the ideal remedy for rectification of certain instances would warrant an unwinding as compared to an interim relief or a specific performance, for instance, a share title issue being identified immediately after consummating a share purchase deal can potentially be resolved only through unwinding (and not specific performance / interim relief, as they will not reduce the title concerns associated with the securities). Further, this may become even more concerning in cases where there are no post-closing cooperation clauses in the transaction documents. In such cases, the absence of covenants requiring ongoing access to information, transition support, and / or cooperation with regulatory filings can make the unwinding operationally unviable.
While a natural solution may be to include a detailed unwinding clause in the transaction documents during negotiations, such clauses remain uncommon. This is partly because defining the specific events that may trigger an unwinding and prescribing the process is complex, and also because the uncertainties that arise in unwinding scenarios cannot be fully anticipated or legislated at the time of negotiation and documentation. The key reasons why mutually agreed unwinding clauses are yet to see the light of Indian M&A market is as follows:
- Unwinding clauses may sometimes be used strategically to create leverage or facilitate an exit from a transaction – outcomes that are not their intended purpose. Accordingly, since such clauses must be specifically negotiated and tailored to the circumstances of each deal, they are considered highly sensitive.
- Parties may opt to rely on standard clauses like force majeure, termination, or material adverse change clauses to address potential disruptions or unforeseen circumstances, rather than creating a specific unwinding mechanism, considering the general lack of circumstances within which a need to unwind a transaction is required. Additionally, unwinding mechanisms are often litigious and would introduce uncertainty in the transaction.
- Unwinding of a Pure Secondary and / or Primary – Secondary Combination remains subject to the prevalent legal, regulatory and tax regime at the time of unwinding, which may not guarantee success to the parties unless the mechanism for unwinding is so created as to be exempt from any such approvals / detrimental requirements.
- Another reason why unwinding clauses are not popularly negotiated clauses is that in essence an unwinding clause is predicting a structure for a problem that is yet to arise. This brings in a lot of uncertainty, for example the position of the parties at such future point with respect to liquidity availability, residency status, regulatory arbitrage, etc. Additionally, irrespective of whether the transaction is a Pure Secondary or a Primary – Secondary Combination or any other variation, any unwinding would impact the credibility or marketability of the asset and thereby lead to value deterioration in the long run.
(ii) Legal challenges / considerations associated with unwinding of primary issuances
M&A transactions may involve a Primary – Secondary Combination, in which case the unwinding of the secondary component and primary component will need to be evaluated separately.
Typically, a primary transaction after the security has been issued can only be unwound by the company by way of a buy-back or capital reduction in India. However, this is posed with the following challenges that are unique to each of the two routes mentioned above –
Buyback:
Buyback refers to the process of buying back, by a company, of its own shares from the existing shareholders (in exchange for consideration). Under the framework of Section 68 of the Companies Act, 2013 (“CA 2013”), a company is required to meet multiple requirements prior to undertaking a buyback, and some are as below –
- Board and / or shareholders’ approval (the latter by way of a special resolution) should be obtained, depending on the size of the buyback;
- The buyback can be made only out of free reserves, securities premium, or proceeds of a fresh issue (excluding the same kind of shares);
- The ratio of the aggregate of secured and unsecured debts owed by the company after buyback is not more than twice the paid-up capital and its free reserves;
- The buyback offer has been provided only a year after the date of closure of any previous buyback provided by the company;
- The maximum equity shares that can be bought back in a financial year should not exceed 25% of the total paid-up equity capital in that financial year
Due to the stringent requirements prescribed above, there is a possibility that companies may not be able to unwind transactions through a buyback in case they are not able to meet any of the above. Additionally, given that a buyback legally needs to be opened up to all the existing shareholders on a proportionate basis, the offer for buyback is made to all shareholders (including those who are not intended to be a part of the unwinding), and in such case if such shareholder also tenders its shares, the company will be obligated to buy the shares back even from such shareholder, which will lead to unintended leakages and impact the commercials associated with the unwinding.
Accordingly, given the practical, legal, and commercial uncertainties of this process, buyback by the Company is typically not considered when unwinding primary transactions.
Capital reduction:
Capital reduction refers to the process of “reduction” of the “capital” of the company, whereby a company reduces the investment of its shareholders in its share capital through the cancellation of shares issued to such shareholders.
In India, capital reduction is a National Company Law Tribunal (“NCLT”) driven process, which is initiated through a scheme filed by the relevant company before NCLT pursuant to receipt of necessary approvals from the board and shareholders (the latter by way of a special resolution). Further, the process is contingent upon receipt of regulatory and other approvals (which is granted by the NCLT only after it receives no-objections from other regulators governing the company, such as the Registrar of Companies, Regional Director, creditors of the company, etc.). In our experience, a capital reduction often takes between 8-12 months to receive an approval from the date of filing.
Typically, filing of the scheme also includes preparation and attachment of multiple supporting documents set out within the CA 2013 and allied rules / regulations, which increases the costs associated with unwinding the primary. That said, capital reduction may be considered a suitable route to unwind a primary since Indian law permits selective capital reduction or a squeeze out, which is particularly beneficial to only unwind such part of the transaction as was initially consummated through a primary infusion (with the flexibility for the secondary component being unwound through a sale back to the original purchaser, if feasible subject to the conditions set out below).
In sum, while capital reduction is a fairly time-consuming and expensive exercise, it is a suitable alternative for the unwinding of a primary (as opposed to a buyback) given that the company does not have to have a minimum free reserve / share premium requirement (in the manner applicable to buyback). This provides an avenue for unwinding to a larger number of companies. That said, this process is subject to the approval of the NCLT and cannot be consummated until such approval is received.
(iii) Regulatory approvals for unwinding
Most large-value M&A transactions in India, especially cross-border transactions, are often subject to various regulatory approvals (such as: (i) from the Competition Commission of India (“CCI”)) in case it exceeds the thresholds specified under the Competition Act, 2002; (ii) approval of the Government of India (if the investment is not under the “automatic route” of the Indian foreign direct investment policy or in case of a transfer that may trigger approval under Press Note 3 of 2020 (“PN3”)); or (iii) other sectoral regulators governing the affairs of the underlying target company (such as in case of change of shareholding of a non-banking financial company or insurance company exceeding prescribed thresholds). Unwinding a transaction may, in all likelihood, trigger a need for fresh regulatory approvals from such regulators which needs to be appropriately re-evaluated at the time of structuring the unwinding transaction.
That said, only in case the law has not substantially changed since the consummation of the transaction, there may be more commercial viability in unwinding the transaction. However, in case the laws have been substantially amended between the Closing and the proposed date of unwinding of the transaction, changes to law since the closing date of the original transaction (such as potentially changed sectoral limits, policy shifts, or newly introduced valuation restrictions) may impact the commercial feasibility of unwinding and provide less value to the parties.
Additionally, the issue of unwinding transactions has not yet been examined by Indian regulators (except in the case of Vikas Infotech – Shamli Steels, discussed below, which is still pending approval). Accordingly, it is unclear currently how regulators may approach such transactions when these are presented before them for their approval.
(iv) Regulations / guidelines applicable to listed companies
Where the target company is listed in India, the framework of the Securities and Exchange Board of India’s (“SEBI”) regulations will apply irrespective of the consideration structure or mode of acquisition / unwinding. For instance, any transfer of shares, whether structured through a cash deal or a share swap, will need to comply with the pricing provisions under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Similarly, acquisitions / unwinding transactions that cross the thresholds prescribed under Regulation 3 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 may trigger an open offer obligation, regardless of whether the consideration is paid upfront, deferred, or in kind.
Accordingly, an analysis of the applicability and impact of SEBI regulations on the transaction will need to be undertaken once again at the time of unwinding, in order to ensure that statutory requirements are complied with.
Consideration-linked implications
The next category of implications to be borne in mind stem from the manner in which consideration is disbursed within the transaction. This is particularly relevant where either party is a non-resident of India under the Indian foreign exchange laws, as the mode, timing, and channel of payment can trigger regulatory requirements under the Foreign Exchange Management Act, 1999 (“FEMA”), including pricing guidelines, permissible routes, and repatriation rules. Similarly, the disbursal of consideration also has to factor in the income-tax treatment under the Income Tax Act, 1961 (“IT Act”), since the withholding obligations, capital gains exposure, and taxability will vary depending on whether the purchaser or seller is resident or non-resident under Indian tax laws. In other words, both FEMA and IT Act considerations directly impact how, when, and in what form consideration may actually be paid out.
Certain general principles applicable to secondary transactions that are to be borne in mind (from a FEMA perspective), are as below:
- FEMA is not applicable to transfer of shares of an Indian company, between Indian residents (“Resident Principle”).
- In case of transfer of shares of an Indian company, by a resident seller to a non-resident purchaser, the consideration that needs to be paid will be at a minimum price of the fair market value (“FMV”). In other words, the FMV will be the floor (“Floor Principle”).
- In case of transfer of shares of an Indian company, by a non-resident seller to a resident purchaser, the consideration that needs to be paid will be at a maximum price of the fair market value (“FMV”). In other words, the FMV will be the cap (“Cap Principle”).
- FEMA is not applicable to transfer of shares of an Indian company, between non-residents (“Non-Resident Principle”).
We have prepared below a consolidated table of key FEMA and tax considerations that need to be appropriately evaluated at the time of unwinding of transactions, along with their impact on both of the parties –
|
Type of Transaction |
FEMA Considerations |
Tax Considerations |
|
Upfront Cash Deal |
|
|
|
Deferred Consideration Deal |
While most of the factors mentioned in Upfront Cash Deal would also be applicable for a Deferred Consideration Deal (such as FMV issues basis the residential status of the parties to the unwinding), one peculiar issue arises in unwinding Deferred Consideration Deals where the unwinding is triggered between the payment of the upfront consideration and the deferred consideration.
As per FEMA, a Deferred Consideration Deal can be structured with a non-resident party only through a deferment of a maximum of 18 months from the date on which the agreement for such arrangement is executed. Therefore, in the event an unwinding is triggered in such 18 months or until the payment of deferred consideration (given that there will be no maximum time limit for deferment in case of resident purchaser and seller), the shares would have been transferred from the sellers to the purchaser for the upfront consideration, however the deferred would still be outstanding. In the unwinding transaction, the seller (which is now the purchaser) would need to buy back the shares by paying the entire consideration subject to the pricing requirements under FEMA. Therefore, treatment of such outstanding deferred consideration would be a key negotiation point for such unwinding transactions. |
Tax on a Deferred Consideration Deal can be paid in one of the following manners: (i) payment of tax on the initial tranche and deferred component will occur in the financial year of Closing (i.e. payment of the initial consideration by the purchaser to the seller); and (ii) payment of tax on the deferred component of consideration subsequently, in the year of accrual.
Depending on the intricacies of the deal that may need to be factored in on a case-to-case basis, the tax considerations applicable to a Deferred Consideration Deal are likely to be similar to the tax considerations applicable to an Upfront Cash Deal. |
|
Share Swap Deal |
In cases where the consideration shares were transferred by an existing shareholder of the Company to a new purchaser, and in return, the purchaser transferred certain of its shares to the existing shareholder, the unwinding may be implemented through a re-exchange of shares. However, such reversal could give rise to transaction leakages on account of capital gains tax implications triggered upon the unwinding. Parties would need additional cash to be able to unwind a transaction through such method given that while the consideration would be paid in kind (through shares), the tax liability would be required to be addressed in cash.
The bigger concern arises in situations wherein the consideration was in the form of fresh issuance by the purchaser, of shares in the purchaser to the sellers. In such case, a secondary unwinding transaction would not be possible and therefore, parties would have to explore a buyback / capital reduction route as mentioned above. However, in both these cases, the question would be whether such buyback / capital reduction can be set-off against transfer of the shares earlier acquired by the purchaser. |
|
Live Case Study: Unwinding of the proposed Share Swap Deal of Vikas Ecotech Limited and Shamli Steels Private Limited
While we have discussed the theoretical considerations of unwinding various kind of transactions, there are also real-life situations wherein an unwinding was warranted. In this Deal Talk, we also analyse a live case study wherein the parties had to unwind a fully consummated transaction.
Background
On January 22, 2024, Vikas Ecotech Limited (“VEL”) signed a share purchase agreement with the shareholders of Shamli Steels Private Limited (“SSPL”) to acquire 100% of SSPL’s shares. The acquisition was structured as a share swap, where VEL issued 20 of its own shares for every 1 share of SSPL, valuing the transaction at an enterprise value of INR 160 crores. Based on this structure, VEL allotted 38,03,50,000 equity shares at an issue price of INR 4.20 per share (referred to as the “Swap”).
Alongside the Swap, VEL also provided working capital support of INR 150 million to SSPL and had committed to infuse an additional INR 350 – 500 million over the next 3 – 6 months to meet ongoing operational needs after taking over the plant.
Following the completion of the Swap, both parties began performing their respective obligations under the agreement. However, during the handover process, VEL’s management conducted a due diligence exercise on SSPL and discovered several issues – including financial irregularities, unreported tax demands, and misdeeds by SSPL’s erstwhile promoters and shareholders.
Despite repeated follow-ups, these issues remained unresolved. As a result, VEL initiated legal proceedings before the Delhi High Court against the promoters and erstwhile shareholders of SSPL. While the court granted interim relief in VEL’s favour, the parties eventually reached an amicable resolution and entered into a Termination cum Settlement Agreement (“TSA”). This agreement was intended to undo the transaction and restore both sides to the position they were in before signing the original share purchase agreement, effectively treating the deal as if it had never happened.
The TSA outlined the following terms for cancellation of the deal –
- Cancellation / extinguishment of shares of VEL that were allotted to the erstwhile shareholders of SSPL in May 2024;
- Reversal of ownership of shares in SSPL from VEL to the erstwhile shareholders of SSPL;
- Handover of possession of the SSPL factory premises to the erstwhile management;
- Resignation of nominee directors on the board of SSPL;
- Withdrawal of all complaints, litigations and claims instituted by the parties against one another.
Additionally, it also noted that until the SSPL erstwhile shareholders’ shares held in VEL are not cancelled / reversed by VEL, they will continue to hold the same, in trust, but will have no ownership rights over the “Retained Assets” contemplated in the TSA (which include the shares, benefits and certain other specified assets).
Filing of petition with National Company Law Tribunal (“NCLT”).
The TSA was subsequently filed with the Delhi High Court, and it noted that in order to effectuate this reversal, VEL was required to reduce its share capital by the previously allotted 38,03,50,000 equity shares. This was followed by an order of the Delhi High Court on January 31, 2025, which recorded the aforementioned settlement terms.
Following approval from its board3 and 99.91% of its shareholders4, VEL filed a capital reduction scheme with the NCLT under Section 66 of the CA 2013. The scheme sought to cancel 38,03,50,000 equity shares of VEL and make a corresponding reversal of approximately INR 121.71 crores from VEL’s securities premium account.
In parallel, VEL is also pursuing separate actions to recover the working capital funds it had extended to SSPL.5 Once the NCLT approves the capital reduction scheme, SSPL will no longer be included in VEL’s consolidated financial statements going forward.
This scheme is currently pending approval of the NCLT. It will be interesting to witness the practical implementation of the capital reduction thereafter.
Conclusion
Unwinding an M&A transaction is rarely straightforward. It is a delicate exercise that requires balancing commercial realities with legal, regulatory, and tax frameworks that were never designed for reverse execution. While the instinctive response may be to mirror the original deal in reverse, the legal landscape often necessitates bespoke solutions involving capital reduction, buybacks, fresh regulatory approvals, and intricate tax planning.
The Vikas Ecotech–Shamli Steels case illustrates that while unwinding is possible, it is fraught with operational complexity and prolonged timelines. Parties contemplating an unwind must therefore account for potential friction points, including but not limited to valuation mismatches and holding period resets to procedural hurdles with regulators and courts.
Looking ahead, there is merit in discussing a structured exit and unwinding framework within M&A documentation at the negotiation stage itself. While such clauses may not entirely remove the inherent challenges, they can provide a degree of contractual certainty and reduce the risk of contentious disputes. Ultimately, successful unwinding demands foresight, collaboration, and a pragmatic approach, recognising that in the world of M&A (much like marriages), even a “happily ever after” may need a contingency plan.
Authors
- Nishchal Joshipura, Parina Muchhala and Anurag Shah
You can direct your queries or comments to the relevant member.
1Please refer to our previous Deal Talk on this topic, available at: https://www.nishithdesai.com/fileadmin/user_upload/Html/Hotline/Deal_Talk_Mar1925-M.html.
2Applicable only to shares of Indian unlisted companies, as clarified in Circular No. 13 of 2021.
3Board Meeting dated March 7, 2025 pursuant to Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
4Voting Result of Extra Ordinary General Meeting along with Scrutinizer’s Report dated March 29, 2025.
5Point d, Report Adopted by the Audit Committee of Vikas Ecotech Limited at its Meeting held on Friday, March 7, 2025, Recommending the Draft Scheme of Capital Reduction Of The Company with its Specified Shareholders.
Disclaimer
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