M&A Outlook Post General Elections In India

While the new government has just come into power after an intense election campaigning, the upcoming main budget this month and measures taken by the government in the coming quarter will be crucial to set the stage for economic and M&A outlook for India.

After a record high in the year 2022, M&A activity in India saw a three-year low in 2023 owing to numerous factors such as growing interest rates, global economic slowdown and geopolitical risks. In 2023, M&A activities in India saw a substantial drop in terms of deal value and deal volume, in comparison to 2022. In light of the global funding winter, M&A activities for start-ups and PE-VC participation was also subdued. Whilst the retail and consumer sector were frontrunners for deal volume with deals such as acquisition of controlling stake in Ed-a-Mamma by Reliance Retail Ventures Limited¹ and acquisition of controlling stake by Aditya Birla Fashion Retail Ltd in TCNS Clothing²; other sectors such as financial services, healthcare and power dominated the market in terms of deal value with deals such as merger of IDFC Ltd and IDFC First Bank³, funding of Avaada Group by REC Limited⁴ and GCQ Partners’ investment across portfolio of Adani companies (Adani Ports and Special Economic Zone Limited, Adani Green Energy Limited, Adani Transmission Limited and Adani Enterprises Limited)⁵. India has, in the previous financial year received close to USD 71 billion worth of gross foreign direct investment.⁶ The production linked incentive scheme (“PLI”) of the Government of India (“GoI”) led to an increase in foreign investment in the manufacturing sector. As a result, Micron Technology, one of the world’s largest semiconductor companies, initiated construction of a new assembly and test facility in Gujarat.

In comparison to the previous year, 2024 has been a more promising year witnessing large deals, such as Reliance and Disney joint venture worth USD 8.5 billion⁷, acquisition of India business of American Tower Corporation by an affiliate of Brookfield Asset Management⁸, acquisition of highway assets by Highways Infrastructure Trust⁹ and further investment by the Adani family through warrant subscription to increase stake in Ambuja Cements Limited to 70.3%¹⁰.

Interim Budget 2024 and its impact on M&A activity

In line with the practice adopted in previous election years, the GoI came up with an interim budget on February 1, 2024, and the main budget is expected to be presented later this month. In the interim budget, whilst no major policy changes were announced, it focused on infrastructure and investment, inclusive development, innovation and sustainable development. In the interim budget, the GoI proposed initiatives for improving e-vehicle ecosystem by supporting manufacturing and charging, rooftop solarization, providing viability gap funding for development of wind energy, financial assistance for procurement of biomass aggregation machinery and improving railway and aviation infrastructure. Further, the GoI raised the PLI distribution limit for the Ministry of Electronics and Information Technology. It also announced an increase in revenue allocation by 130% for a scheme to support semiconductor and display manufacturing¹¹. Whilst the interim budget did not seem to have any immediate impact on the M&A activity in India given that most deals that closed in the first quarter of 2024 were already under negotiations when the interim budget was announced, it highlighted the intent of the GoI to boost investment in these sectors and invite more sector focused foreign investment. On the back of initiatives announced in the interim budget, we expect more collaborations particularly in the electric vehicles, healthcare, semiconductor and renewable energy sectors, to take advantage of the regulatory incentives and growth opportunities in this space. It is also expected that the main budget will provide further impetus to start-ups by increasing the allocation for schemes related to start-ups and introducing dedicated policy for deep tech start-ups to promote innovation, relaxation on taxes for employee stock options, increased focus on generation of employment and expansion of PLI scheme to encompass more sectors.

Pre poll caution and post poll trends in deal activity

While the 1st quarter of 2024 started on a positive note with the announcement of 3 big ticket deals for combined value of approximately USD 12 billion¹², most of the pre-poll M&A focused on consolidation and strategic investment by Indian companies. The foreign PE players and corporates had adopted a ‘wait and watch’ approach and avoided making any big moves before the election.

The election results were contrary to general perception of a BJP majority, leading to the stock markets falling at its lowest level since the Covid-19 pandemic. However, since Prime Minister Modi will continue to lead the new coalition government, consistency of policies and economic initiatives is expected to pave way for growth and development. There is an expectation that the new coalition government will continue to push for more economic and regulatory reforms. This along with the already positive growth outlook for India, is likely to result in more M&A activity in the latter half of the year. It is likely that this phase of M&A will be led by PE players, foreign investors, large corporates and multinationals looking to expand their footprint in India. Focus on sectors such as infrastructure, manufacturing, renewable energy, healthcare and defence is expected to drive deals in the coming quarters.

It is expected that the GoI will aim to promote the manufacturing sector with tax reforms, new incentives and duty reforms to attract foreign investment. Further, it is likely that the GoI will push through with legislative reforms aimed at streamlining the insolvency law and liberalizing the insurance sector which were put on the back burner due to elections. The GoI may also focus on land reforms by prioritizing digitization of land records to streamline land acquisition and enhance accessibility. A Bill is expected to be introduced in the Parliament for creation of national financial information registry to ensure that relevant financial information is readily available to lenders thereby reducing the cost of credit. Further, with the Medical Devices and Cosmetics Bill, 2023 and the Digital Personal Data Act, 2023 being in the pipeline, it is expected that the same are likely to be notified.

The disinvestment policy of the GoI will continue, and it is expected that the government will continue privatization of public sector undertakings especially in the banking sector which will lead to a likely to spur M&A activities in this sector. In terms of policy, we expect the GoI to refocus on generation of employment in rural areas over and above the Mahatma Gandhi National Rural Employment Guarantee Act 2005, reduction of taxes on fuel, small-scale industries and cross border trade (which has been impacted by the global wars and India-China tensions).

What to look forward to

Considering the overall sentiment around the Indian economy and its geopolitical stability, it is considered as a preferred destination for foreign players to invest, as is apparent from the surge in the foreign portfolio investments in India to USD 41.6 billion in in 2023-24.¹³ India also stands to benefit from changes in global trade patterns and it can play an important role in global supply chain diversification. Overall, there is continued optimism around the economic outlook for the country in 2024 and the real gross domestic production growth for 2024-25 is projected at 7.2%.¹⁴ India’s large consumer base, skilled workforce, young population and political stability paves way for making big bets in India, which will drive M&A across sectors including FMCG, manufacturing, healthcare, technology, infrastructure, finance and banking. Increase in participation from foreign PE players and foreign investors is expected to result in an increase in inbound M&A in the second half of 2024. While the new government has just come into power after an intense election campaigning, the upcoming main budget this month and measures taken by the government in the coming quarter will be crucial to set the stage for economic and M&A outlook for India.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.