Doing M&A in India requires knowledge of the family way

By Santosh Pai and Vikas Kumar, D.H. Law Associates

According to some estimates, almost 90% of businesses in India are family owned. These are also often family managed. Such an overlap between ownership and management roles fuels the popular misconception that family businesses are tainted by a lack of professionalism, nepotism and mismanagement. However, in reality, family businesses worldwide often outperform non-family-owned businesses.

Most Indian family businesses are known to be flexible, agile and frugal. They are dependable and relationship-oriented, since their family reputations are at stake. They are highly efficient, as they make do with limited resources and are averse to risks. More importantly they have a vigilant management style, which allows them to identify and solve problems at an early stage.

Despite this, from a legal perspective, acquiring control over a family-owned business in India is fraught with challenges.

Santosh Pai D. H.律师事务所 合伙人 Partner D.H. Law Associates
Santosh Pai
D. H.律师事务所
D.H. Law Associates


The family will most likely have an overly optimistic view about their business, which will surpass the value calculated through conventional valuation methods. For instance, valuation expectation for a loss making target might exceed the value of its assets or present value of future cash flows. The family might expect a premium for their commitment and effort in building the business in a challenging market like India, or have a predetermined monetary goal to secure their retirement and inheritance for the next generation.

In the face of such diverse considerations, a Chinese acquirer must remember that the discounted cash flow method (DCF) is the only valuation method for private companies acceptable to the Reserve Bank of India (RBI), India’s foreign exchange regulator. Any purchase consideration negotiated below the DCF value will be considered inadequate. As such, it makes sense to commence price negotiations keeping this rule in mind. In any event, the DCF valuation report will need to be filed with the RBI after the transaction is completed. Of course any consideration payable above the “floor price” determined through DCF can be structured in a variety of ways to ensure compliance and optimise taxes.

Deferred consideration

Family businesses often come with a lot of goodwill attached. It might be difficult for a Chinese acquirer to estimate the value of such goodwill, which is often in the form of personal relationships with key customers or suppliers.

In view of these challenges, both parties are likely to agree on deferring a portion of the purchase consideration to subsequent years. Then comes the difficult part. Under Indian foreign exchange laws, it is not possible for a foreign acquirer to defer a portion of the consideration beyond the completion date on which shares in the target are acquired.

At most, an escrow mechanism for six months is permitted to reconcile due diligence findings. Such a regulatory hurdle can seriously impede the Chinese acquirer’s ability to close the deal, despite having arrived at an agreed valuation and payment schedule with the family owners.

However, it is possible to structure various alternative payment structures to account for valuation adjustments and deferred payment of consideration. This requires both parties to examine and appreciate the regulatory position on post-completion valuation adjustment or earn-outs from an early stage in the price negotiation process.

Vikas Kumar D. H.律师事务所 合伙人 Partner D.H. Law Associates
Vikas Kumar
D. H.律师事务所
D.H. Law Associates

Decision making

Most first-generation family businesses in India are managed by a karta, the patriarchal head. The shareholding might be confined within his immediate family members. In second or third-generation businesses the ownership will most likely be dispersed among members of the extended family, and might even include a family trust with multiple beneficiaries.

A comprehensive list of beneficial owners might not be forthcoming. There might also be existing disputes within the family relating to inheritance, property, etc., which might encompass the target’s business too. There might also be formal or informal versions of tag along, drag along and other preemptive rights that confer a say in the ownership issues upon various members of the extended family.

In such circumstances, the foremost challenge facing a potential Chinese acquirer will be to identify and engage with family members through a single representative to ensure that they are speaking in a single voice at all times. It is advisable to obtain a formal undertaking along these lines at the outset to ensure that no time and effort spent in negotiations are wasted.

Pre-due diligence

Family businesses tend to maintain minimal records. Board minutes might be worded frugally and contracts with key customers might not be comprehensive. In addition to this, financial and taxation issues will often be intermingled with the personal finances of the family members. Minor licences and registrations might not have been renewed in a timely manner. Key management personnel might be retained on informal terms with ad hoc compensation structures.

These factors make it difficult for a Chinese acquirer to obtain a true and accurate view of the business operations. Often the target will need to undergo an extensive “grooming” exercise before any meaningful legal due diligence by an acquirer can take place. Such an exercise needs to be supervised by the acquirer’s legal counsel to ensure satisfactory compliance is achieved before the transaction is completed. Since this might require interfacing with multiple government agencies, the timeline for the transaction might be seriously impacted if pre-due diligence screening is not initiated at an early stage.


Finally, overdependence of the target’s business on family members makes the post-acquisition transition very difficult for foreign acquirers in India. A family member with only managerial responsibility and no ownership stake might be difficult to motivate. As such, it is crucial to envisage and implement a post-acquisition retention mechanism to keep key management personnel motivated.

In conclusion, it is true that families occupy a prominent place in both Indian and Chinese societies, so there is bound to be a strong sense of empathy among Chinese managers when they deal with Indian family-owned businesses. Given this, if Chinese companies take adequate preparatory steps to overcome the challenges described above they are very likely to be successful with their Indian acquisitions.

Santosh Pai and Vikas Kumar are partners at D H Law Associates. D H Law Associates is the only full-service Indian law firm with an active China practice since 2010

(D.H. Law Associates)

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