Business acquisition in India: why due diligence is an essential step

Acquiring a company in India is not without risks, noted Johan de Boer, managing director of KROV. The Dutch manufacturer of train, office and store fittings decided to abandon the acquisition of a manufacturing partner in the Indian city of Bangalore after extensive due diligence.

Have thorough research done before you engage with an Indian partner

"It's not down to the products the Indian company makes," De Boer reflects. "The quality is fine. We offer their products in Europe and they themselves sell directly to customers in America." After the owner indicated a desire to sell the company, De Boer visited the factory in August for an initial thorough inspection. Then began the due diligence process, conducted by an Indian accountant and a local lawyer. In December, they delivered their report with the advice: don't do it.

Both financially and legally, the producer was found not to have its affairs in order. Those figures did not match the reporting. That was surmountable, according to De Boer, but the findings of the lawyer were less innocent. The company turned out to be incorrectly registered, irregularities regarding personnel contracts came to light, and the administration and payment of social security contributions were not in order. "That not only carries hefty fines, as an owner you can even end up in jail for that," he said.

Work with local advisors

For De Boer, this experience reaffirms the importance of recruiting good local consultants in India. "If we had conducted this process independently, we might not have been able to bring this to the surface. Then you are suddenly liable for a company in which things are not properly arranged. Afterwards, you can't fix that. The consequences, financial or worse, are then yours." To put it mildly, the current owner was not happy that De Boer renounced the deal. "He still tried to tone down the irregularities, but I didn't hire advisors for nothing. It would be stupid to go against their advice."

Still, De Boer remains interested in the Indian producer. "I know that this factory in India delivers quality and the relatively low production costs are of course attractive. That is why we have now discussed an alternative route. If the Indian owner liquidates the company, we would then like to take over the factory premises, machinery and some of the employees. That would remove the legal risks for us. The current owner is keen on this. We have agreed to discuss this further in the coming year."

Producing in India has interesting advantages

De Boer has another reason for wanting to manufacture in India. "KROV has a good reputation worldwide as a supplier of train equipment, such as tables, chairs and backrests. India has the ambition to build a nationwide network of high-speed trains and we are already in talks about this through main manufacturer Kawasaki. Our position is stronger when we have a production facility in India, because the Indian government would like to create as many jobs in India as possible. So an Indian plant would also be interesting with a view to sales there."

Do you want to enter the Indian market, but are unsure what is the best first step for your business? Or are you looking for a local party to conduct market research or due diligence for you?

How to avoid a business conflict in India

India offers enormous business opportunities for Dutch companies, but entrepreneurs need to be well prepared. Five tips to avoid business failures and conflicts.

Photo: By

1. Know who you are doing business with
It is advisable to conduct thorough background research on the party you want to do business with in India. What is their reputation in the market? Who are their key customers? What does the management team look like? Does it include the shareholders? Are there any lawsuits open or is the company being sued? Have there been any legal conflicts in the past? This information is publicly available and can be made insightful by specialized Indian parties.

2. Check the experiences of international customers
The question you should always ask Indian customers as an exporter is whether they do business with international (Western) companies more often. This says something about the mentality and professionalism of the company. Don't take the Indian party's word for it, but also check with the Western party whether it is true and how the cooperation went.

3. Engage an Indian lawyer in a timely manner
Make sure you have cooperation documents drafted and reviewed by a specialized Indian lawyer. Do not wait for a contract proposal from the Indian party, but draw up your own contract together with an Indian lawyer. Then have your Indian business partner look at it and make any changes together in a second round of review. Such a thorough approach ensures involvement of both parties and produces an agreement that takes into account the Indian context.

4. Intellectual Property
India has very comprehensive intellectual property legislation. This includes all aspects that entrepreneurs may have to deal with: from copyright and trademarks to industrial design and trade and brand names. For Dutch entrepreneurs there are numerous possibilities to protect their intellectual property in India. Make sure you always have good contract templates with strong clauses that address and protect intellectual property (IP). Proper preparation and contractual protection of your intellectual property helps tremendously in case of escalation.

5. Relationship, relationship, relationship
Finally - in addition to the formal protective measures you should take - there is no more effective way for preventing business conflicts than to create a good, personal business relationship. When you have a good relationship with your Indian business partner, conflicts will rarely escalate through formal routes.

Have you run into a problem with an Indian customer or partner and the situation remains unresolved? Or would you prefer to have a background check performed? Our legal experts are ready to answer your questions.

Joint venture in India: how to do it

Starting with a partner can be smart in a country like India. Despite the fact that the rapidly growing Indian economy offers opportunities for companies in every sector and industryIndia is also a country where you need to have good connections and really understand the market in order to succeed. As a newcomer to the Indian market, starting a joint venture brings a lot of advantages. You can rely on the market knowledge and extensive network of your Indian partner and you share the risks. But there are also examples of joint ventures in India that failed due to cultural differences and a lack of leadership, such as McDonalds happened to McDonalds.

Memorandum of Understanding

A joint venture almost always involves the creation of a new company owned by two or more partners. A joint venture is often set up for a special project and is usually not intended to be a long-term business connection. The partners contribute their assets (people, machinery, capital and knowledge) for a specific purpose and for a limited time, but remain completely separate companies while the joint venture forms a new company.

Before setting up a new entity as a foreign company with an Indian partner, it is highly recommended that due diligence be performed, just like any other business transaction. In addition, drafting a memorandum of understanding (MOU) is very common in India. Such an MOU ensures that all parties fully understand and agree on the purpose, responsibilities and risks of the joint venture. It is a short document without much legal jargon, which states the roles of both parties and establishes a roadmap for the future on the parties' intentions, management structure and cost allocation.

Articles of Association

Most joint ventures in India are structured in the form of private limited companies, the equivalent of the Dutch BV. It is mandatory for a private limited to have at least two directors and at least one director who is resident in India, that is, someone who has resided in India for a period of at least 182 days in the previous calendar year. So this does not necessarily have to be an Indian. In a private limited, the Articles of Association (AoA) are a very important document. The AoA are a requirement while incorporating a private limited in India and contain regulations for the internal management of the company.

The Companies Act 2013 gives companies the freedom to determine the content of the AoA. For example, the AoA contains a clause on the steps to be taken in the event of conflict or termination of a joint venture in the event of an impasse. It is therefore advisable to devote time and attention when drafting the AoA and not depend on a standard off-the-shelf concept. The Companies Act, 2013 requires every company to have an MOU and AoA. The MOU and AoA are the charter documents of the company. As such, both must be filed with the Registrar of Companies (the Indian Chamber of Commerce) of the province in which the foreign company wishes to establish itself.

Joint Venture Agreement

Once the MOU and the AoA have been drafted, the foundation for the joint venture has been laid and the Joint Venture Agreement (JV Agreement) can be drafted. This is a working document that explicitly focuses on what decisions the partners can and may make about the shares, management structure, withdrawal rights, competition issues, dispute resolution, intellectual property rights and any guarantees. The JV Agreement is not a binding document and is drafted purely to define the cooperation between and responsibilities of the partners. Indian law provides sufficient flexibility for the parties to set out their own arrangements in a final agreement.

The JV Agreement or other agreements related to the joint venture necessarily require skill in drafting the documents without room for ambiguity. Complicated and vague documentation can be fatal to the joint venture and impede the interest of the parties. One of the things that requires expertise is the exit strategy. The JV Agreement establishing a joint venture should also include a planned exit strategy so that all parties are protected once the partnership has reached its goal. 

Most joint ventures are dissolved through a partner buyout. It is advisable to include clear terms for terminating a JV in the agreement. Once the parties have determined the key points for the JV Agreement, it is wise to turn the matter over to a lawyer in India. Taking into account Indian laws and regulations, he or she can convert the key points into the official Joint Venture Agreement document.

Local support in setting up joint venture

So setting up a joint venture offers you, as an international company and newcomer to the Indian market, interesting advantages. No long start-up time in which you have to build a network, find the right distributor and acquire customers. For all this you can rely on your Indian partner. But the responsibility of setting up the joint venture itself does rest on your shoulders, of course. Local knowledge and support is no luxury in that process. Do you want to do all the preparatory work for the joint venture in a sound manner and start off with the right documents in your pocket? We have a team of local experts ready to make your start as smooth as possible.