Cross-border diligence: why deals fall on clearances, not interest

• The Khaitan partner on approvals says cross-border deals in India mostly fall on missed or late clearances, and checks them in three steps: permissions, prudence and path.
• A second Khaitan partner says legal diligence should start before the term sheet, with public searches on litigation, regulatory actions, directors and foreign exchange violations.
• The EY partner warns that many mid-size foreign targets have no statutory audit or keep cash-based books, so their numbers often do not compare with Indian accounts.
• Data protection rules mean employee data often arrives summarised, jumbled or sampled, so the panel adds SFTP transfers, clean rooms, aggregated data and redaction to the data room.
• Late finds, from per-store foreign investment caps to asbestos factory roofs, cost weeks or months, and in one case ended the deal.
• The EY partner says that on a multinational target, once the 80/20 diligence plan is set, almost 60% of the diligence is done.

Cross-border deals rarely die because nobody wants them. One Khaitan & Co partner, the panel's voice on approvals and foreign investment, says deals into India mostly fall because of lack of clearance: an approval nobody spotted, or one thrown up at the last stage. His picture of the difference: if a domestic deal is a 400 metre race, cross-border is a relay, with customs in between to create the hoops. That sets the tone for this M&A Masters webinar from the Indian law firm.

“I feel deals don't fall because of lack of interest. They mostly fall because of lack of clearance.”

Partner (approvals and foreign investment), Khaitan & Co

Sameer Sah, a corporate M&A partner at Khaitan, moderates two of his corporate M&A partners and a partner in strategy and transactions at EY. The EY partner, who says he has done cross-border deals in technology, media and telecoms for 12 years, sorts the differences into buckets: culture, accounting standards, currency and foreign exchange gains and losses, employment law and tax. Employment law changes how a deal is structured and valued, he says, down to pensions and benefit plans. A second Khaitan partner adds the legal system itself. Not every country is common law, so you need a local expert on enforcement and regulation.

“If one were to consider it as a 400 metre race, cross-border is really a relay, with customs coming in between to create the hoops.”

Partner (approvals and foreign investment), Khaitan & Co

When should legal diligence start? As soon as possible, that second Khaitan partner says, before the term sheet (around 15:50). Public sources already tell you about regulatory actions, known litigation, where the target's directors and key managers also sit, credit scores, foreign exchange violations, wilful defaulters, patent suits on the core product and murmurs of financial distress in some remote corner of the business. That homework, he says, sets your expectations and the depth of the diligence. He also wants every workstream, legal, financial, technical and commercial, given one common briefing on why the buyer wants the deal, whether that is property, resources or a particular patent.

“They provide you adequate restrictions as a seller and adequate access as a buyer to go through documentation, raise Q&A and provide some structure to the madness, specifically in a multinational and a multifaceted deal.”

Partner, strategy and transactions, EY

The approvals partner works from a checklist of three Ps (around 19:30). Permissions: foreign exchange rules under FEMA, the competition regulator with its thresholds, deal value test and gun jumping, open offer and insider trading rules for listed targets, and sector regulators such as RBI for financial services, insurance and telecom. Prudence: sanctions, ultimate beneficial ownership and Press Note 3 origin checks, which he says do not come up front, so you have to dig them out. Path: the sequence from term sheet through approvals to closing filings and post-close reports. His test for any structure: if you can't draw it on a piece of paper, you can't really close it.

“Now I think one word of caution that we can't entirely rely on the output that is delivered to you. There will have to be checks and balances. There will have to be revalidation.”

Second partner on the panel, Khaitan & Co

The stories show what late discovery costs. On a Southeast Asian retail chain, the approvals partner's team learned near the end that foreign investment there is linked to each store the company operates, so past investment had to be checked against store openings; it took almost a week to bring everyone round (around 14:00). On a joint venture in Oceania, a familiar name on the cap table turned out to hold a passport from a country neighbouring India, which took a couple of months to restructure. The second Khaitan partner tells of a European buyer's technical team finding asbestos roofs on three Indian factories after a clean diligence. The replacement cost made the deal unviable, and it was called off.

The EY partner's financial red flags start with audits (around 25:40). Outbound investors may assume the target's financials are audited, but he says several jurisdictions have no statutory audit requirement for mid-size companies, some up to 100 to 200 million dollars, or only a special-purpose audit. Lease rentals are accounted differently under IFRS and Ind AS than under local GAAP in the Netherlands, Singapore or the US. Some companies keep cash-based or hybrid books, so a jump in deal-year revenue may not be sustainable. On inbound deals, investors want to know how much profit is real performance and how much is rupee depreciation. The second Khaitan partner adds related-party leakage in family-run groups and IP licensed across the group.

Then the data itself. The approvals partner calls information asymmetry a challenge: one jurisdiction won't share salary data up front, another says everything is in the data room, you figure it out. Asked about virtual data rooms in the Q&A (around 54:00), the EY partner says modern ones have similar functionality, Datasite or another, and give structure to the madness. The harder part is local data protection law. Employee data often comes summarised, jumbled or sampled, and his team has used an SFTP server, or separate clean rooms for advisers when the two businesses compete. The second Khaitan partner says anonymised or aggregated data and redaction work well early; identities come at the definitive documents stage.

On a multinational target you have to pick your battles. The EY partner uses an 80/20 rule and says that once the plan is made, almost 60% of the diligence is done (around 49:00). His order: basic financial, tax and legal hygiene, then what drives revenue and margins, then how risky the balance sheet is, with legal counsel deciding what can be protected in the documents and what needs a value adjustment. In an auction he reprioritises. The approvals partner says the findings must land somewhere: an India-focused deal leans on indemnities, US and European deals take different approaches, and a finding with no deal impact is more like a Wikipedia or trivia for everyone to read.

The panel ends on AI. The approvals partner says a 500-page diligence report whose issues sit in 20 pages should be curated for the client, and AI helps with both reading and presenting. The EY partner says his firm's internal tools get the team to issues faster, which matters in an auction with five bidders, and translate documents on internal servers instead of sending them into the public domain. The second Khaitan partner's caution: you can't entirely rely on the output, so there have to be checks, balances and revalidation.

If your deal crosses a border, plan the data room around local privacy rules from the start: expect employee data to arrive aggregated or redacted, and budget for a clean room or a separate secure transfer. Map the approvals before the term sheet, because a late clearance costs more than most findings.

0:15 Very warm welcome ladies and gentlemen. Thank you for taking the time to be with us today and I would like to welcome you to another webinar in our M&A masters series. This is the ninth webinar in our 2025 series. My name is Samir Sha and I'm a partner in Kathan's corporate M&A group and we look forward to today's webinar with all of you whether you're listening in live or you're accessing the recording which will be available on YouTube. A quick introduction on the program. The program itself was designed to provide all of our listeners and our audience information on contemporary M&A issues so that they gather a peak into a sophisticated set of instruction. and this is obviously useful for experienced corporate executives, in-house legal teams, investment banks and any other intermediaries or market participants who are interested in M&A in India.

1:13 Our subject today will be M&A crossber due diligence and on the slide in front of you you have the agenda for today's webinar. If you do have any questions please submit them using the facility provided in the webinar portal. We've of course received quite a few questions as a part of our registration and have woven them into the panel discussion. Of course, whatever questions we cannot cover today, we will respond offline by email after the webinar. Please note that summary notes of today's panel discussion and a recording of this webinar will also be sent to you after the webinar as a matter of course to quickly talk about the topic and why we've chosen this. Essentially, as a firm, we've increasingly observed that crossber transactions are becoming complex and due diligence has moved beyond a simple tick the box compliance exercise to a very critical component of deal strategy and deal success.

2:16 Effective diligence today requires not only identifying legal, financial, tax or regulatory risks but also assessing how those risks impact valuation, deal structure or for that matter post merger integration. In the discussion today, I will invite our panelists to explore from their experience how deal teams can conduct due diligence that is more commercially focused, crossf functional, but eventually outcomedriven. We will be discussing key focus areas on crossber transactions including how to manage information flow coordination across jurisdictions and translating diligence outcomes into deal value and integration readiness.

3:02 With that, let me introduce our panel today. Everyone who has registered for this webinar should have received by email a summary of the speakers and their credentials. Suffice to say that they are all experts in their subject matter and immensely qualified to express their views and opinions on the subject matter. Today to begin with we have Mr. Siddhhat Gupta who is a partner with for strategy and transactions at EY. Along with him are my partners Sharanka and Kartik Praash. both of whom are also part of our corporate M&A practice and between the three of them they bring immense experience to this panel. So with that let's start with our discussion and to kick things off perhaps I will invite all three Shhat Siddhant and Kartiker to express their views one by one on what in their experience are the key differences when it comes to conducting let's say crossber due diligence or for that matter conducting domestic due diligence in a purely domestic scenario. Why don't

4:06 we start with Sidhhat and maybe I can request Shah after that and then Karthik Sedhhat you're on mute apologies for that thanks I mean thanks for the introduction and it's a pleasure to be a part of this webinar series with Kan and company you know I've been involved in several crossber transactions over the last 12 years focused on technology techology, media, telecommunications as a segment and you know doing crossber transactions both outbound and inbound is power for course. key differences with respect to inbound transactions outbound transactions versus a domestic transaction you know while the obvious ones would be it's a different legal jurisdiction and a different regulatory framework. I can bucket the key differences to be in four or five key areas. one the culture of the company and the target which you're kind of looking at would be different compared to the people who are

5:09 evaluating there would be nuances with respect to a difference in accounting policies and accounting standards some companies follow US GAP Euro would follow their own local GAP versus India follows an Indian gap and NAS which would have differences very obviously there would be differences and complexities compared to a domestic transaction action with respect to currency, currency fluctuations. There would be in you know foreign exchange gains and losses which needs to be treated accordingly and to a very large extent two buckets which comes to my mind would be employment laws. Employment laws in different jurisdictions are to be treated very differently. They have different implications in terms of how the deal needs to be structured. deal value as well as treatment of several items be it pensions be it benefit plans be it you know any other retirement policies as well as this the another bucket is taxation given local jurisdiction tax laws are fairly different and at

6:13 times we'll have to kind of go and involve our local tax colleagues in different offices across the globe to get to the right aspects but you know taxation is another area which needs to be deep dived Given in a crossber transaction there would be areas of residents transacting and non-residents transacting from different jurisdictions which just adds to a to the complexity of the transaction. I'll just pause here and hand over to other colleagues of mine. >> Yeah, thanks that was that was quite a comprehensive list of things. So you know the entire theory of diligence starts with buyer be beware. There is there are very few laws at least in India which casts a duty to have a diligence before you get into a transaction. But obviously in in all significant commercial transactions diligence becomes quite imminent and essential. So one of the things that is

7:18 that becomes very critical is that when while you have different teams, different firms, different you know workflows for legal, financial, technical, commercial, cultural when all these teams are really doing their diligence activities, there should be a common briefing to all because in every transaction you there is some you know one or more focus areas for the proposed transaction what is the prime really motivator for undertaking or considering a transaction so whether it is property whether it's business whether it's resources whether it's IP a particular patent you know there can be a different reason why an acquirer is is really looking at a potential transaction so giving a common briefing will give them that one single direction so that they they remain focused U so in terms of key differences I think one of the critical legal difference

8:20 arises from the fact that each country has a very different legal system. So not that every every country has an Anglo-Saxon or a common law there are also some mixed jurisdictions. So understanding the legal framework, how the legal system works can be one of the big differences because you know all of us come from a typical traditional our own domestic backgrounds and understanding as to how the legal systems work. So I I think one of the biggest issues that we have to deal with is to look for a local expert who will be really be able to guide you through the the nuances of the local laws enforcement what are the mechanisms what are the regulations. So the other thing that that has of course in many many sectors very critical on one hand we talk about you know many countries

9:24 have full capital account convertibility and at the same time I think there are almost all countries foreign investments and transfers of capital instruments is clearly subjected to scrutiny regulation and at times even prior approvals from the on it. So when it when we talk about you know potential transactions I think the what are the regulatory roadblocks or process elements that become very crucial. there are certain sectors which are obviously more critical. say for example aerospace, technology, atomic energy, defense. These are very core sectors where each jurisdiction may have their own sensitivity and therefore very you know peculiar regulations carved out for that sector. So awareness of those sectoral guidelines, sectoral

10:30 requirements and even primarily even before you get into a term sheet I think whether such a foreign investment is permissible and if so to to what extent subject to what conditions I think that awareness becomes very crucial. Sid you also talked about cultural fit and alignment absolutely bang on because you know every targets corporate culture and management style is very different. So it's quite possible that from initial meeting from the target stock management and general reputation across the markets it's possible that you notice some dramatic cultural changes or differences and management styles. So even at the stage of term sheet or even pre-term sheet it's quite possible how do we address the management retention integration plans governance structures crosscultural communications now these become very very crucial for potential successful

11:35 transaction so I'll stop there Karthik please feel free to add your issues >> thank you thank you Shah and Samir very very very valid point and I think whilst sedant and shared has kind of covered I think if I need to summarize it I would say let's say a domestic deal and a domestic deal focused diligence if one were to consider it as a 400 meter race crossber is really a relay okay and and with with customs coming in between to create the hoops and I think the entire trick is is what actually shad mentioned and I'll use the word the designing the layout for the diligence or or in another way choreography of the diligence story. So it's a multiple laws periphery but the story remains same that's one story ultimately the deal has to go through. So I think of course I mean the the cultural fit to have the one theme in every lawyer or every

12:37 jurisdiction council mind to go through the deal is of course the story but I mean just to add two three more bullets on this another big point which come across these deals is the information asymmetry. So different jurisdiction different nature and custom of flowing the information. some developed jurisdiction will say hey look I can't share the salary data up front. That's the second layer. Somebody would say okay fine everything is here in the data room. You figure it out. So information symmetry is another challenge especially when you are dealing into a multi-jurisdictional crossber deal. of course regulatory part and restrictions the way Shahad indicated I have a interesting story. I'll just come to that but before that of course that's a part and I think the second one is which is also very critical what's really the impact which you started the webinar with that ultimately this exercise has to have a meaning so what's really the papering impact of this exercise is I mean a India focused deal a lot more

13:39 will go into indemnity a US focused deal will have a different approach a European focused deal will be a very different approach altogether so when you are dealing into a crossber order or multi-jurisdictional target or as a acquirer you are dealing into these jurisdiction what's the underlying theme where all of this intel get folded in otherwise I mean if there's no real impact of the diligence finding then it's more like a Wikipedia or more like a trivia for everyone to read so that really becomes a interesting point on this I mean just one example I know we are beling on the point one itself and there's lot more to cover but very quickly very interesting we were dealing with a retail business in a Southeast Asian country. it's it's more like a retail shop chain in that country with a structure which involved of course Singapore and one of the countries in Europe as well. and we were running that deal. I mean not really so much of a India connection but as a as a lead council project council and we of course wrote in councils

14:44 from all three jurisdictions. And the very interesting thing during almost towards the end of the diligence we got to know and and perhaps I mean my learning was that should have been thrown to us in the very beginning that in that Southeast Asian country the foreign investment is linked to each store that company can operate. So very interesting I mean India we have sectoral cap we are aware of pricing but we always see it as a entity level demark a marker we never see it a store level. So if you have 100 store each store can perhaps attract 5 million so you can raise up to I mean x amount of foreign investment and similarly that becomes the check for the past investments that if you have raised those money have you used it to open this store or not that came in quite late of course I mean we had the wherewithal to get the check done and all but that became one of the perhaps a weak point which took almost a week for everybody to deliberate bring everyone around that point. So I mean I I'll take a pause on this one. Samir over to you.

15:47 >> I think that's that's great. I think that's a fantastic starting point and maybe what I will do is my next question is to Shhat and Sharat you spoke about buyer beware and and that's really the genesis of this entire exercise. When in the entire process because it's a process when in the entire process should legal due diligence be commenced? What's the right time? in your experience. >> So I would say ASAP because if you have identified any potential target even before you sign a term sheet I think there is a huge public domain databases who are which are available. I think that scrutiny is very critical for you to at least assertain whether you want to go ahead even with the term sheet. So let me explain a few you know directional searches that we can definitely do.

16:40 There can be searches for regulatory actions. There can be a lot of early warning signals kind of searches that are there reputational issues, are there legal issues, are there publicly known litigations? you know most of the you know directors or KMPs who are officiating on the on the target where else are they directors where else are they officiating in what capacity are there cross investments by the target entity? there could be data relating to credit scores. There could be data publicly available about foreign exchange violations. There could be data about willful defaulters. So I think all of that information must be gathered well upfront. There may be suits relating to say patent infringement which is for the core product that the company has. there could be some murmurss of

17:44 financial distress in some remote corner of that company's you know overall business. So all these can definitely facilitate not just a decision whether a party is is the right target but also to customize you know your expectations and the depth of the diligence which particular area you will focus deeper so that you get the right answers and then take it forward but I I would say as soon as possible I mean whenever you even think that there is a potential potential target do your homework before you even start that initial discussion.

18:28 >> Perfect. And Karthik, you gave a very interesting example of how it could be entity specific or location specific. Let's say if you were to advise on a crossber transaction involving an Indian target or an Indian investor whichever way you look at it what are the common regulatory approvals which you feel impact crossber M&A and therefore need to be a focal point early on in the due diligence process for an acquirer. >> No very valid question Samir. I think I I'll pick up the inbound India deal as an example. I mean we are India practicing lawyer. I'll first focus on that bit and and you're right I think this question get asked every time you do a crossber deal in some shape and form perhaps not so vocally but underlying I mean this is the theme so I I'll put like this I think a crossber deal in India and again I'm perhaps I'm using a summarized sentence but I feel deals don't fall because of lack of interest okay they

19:32 they they mostly fall because of lack of clearance and and clearance I mean whether it came on time whether they were aware whether it thrown at the last stage all those will lead to so that that that the clearance or the the thought around the approval become the key point to determine the deal success now when it comes into a council's domain or as an adviser to navigate this I would simplify I mean Indian thankfully thankfully with with now almost three decades of work the foreign investment and and the regulations around it has liberalized significantly in India. The ease of business has gone up. I mean a lot of good capital has come in. Companies are doing really well with all that theme and how it has I mean come up on the surface. I think if one were to really look there are basic three P's rule and when I use the word three Ps I will call the first P as permissions, the second as prudence and third as the path. And when I get into the permissions perhaps I'll break it further into the kind

20:36 of the key regulators we get to interact on most of these deals or where the foreign investments are in flowing in abundance. And the first of course will be the foreign exchange regulation and FEMA and the underlying regulators and there I think the checks are fairly straightforward. If you know the business, you know the target, you know the buyer or investor, then the idea about route checking, the instrument or the way the transaction is structured or the pricing or the reporting for the past investments all that come within the same periphery and you have to look at it holistically that whether it has been in line with what the law required it to be and whether it would be in line for the upcoming investment. So FEMA as one bucket then of course competition regulator antitrust regulator become another one and again the test will be very fairly simple I mean you of course have to start from the exemption thresholds deal value DBT thereafter gun jumping I mean if it is more systemic and and and

21:39 you are getting into the same domain and then how you navigate around it I mean of course right now in the market I mean unfortunately if there's any investigations going on how would you tackle those those becomes addition additional key questions and and a tricky one to navigate on these deals but I mean those are those are more situation specific so I'm keeping it aside third of course will be your I mean had it been I mean if we are talking about a listed or or or or semi-regulated entities then then that becomes another complexity on open office I mean insider trading how you conduct your diligence those become that relevant pointer and accordingly the permissions which it will throw for you to consider in the and and and the last bucket perhaps into it will be sectoral regulator of course RBI1 becoming for financial services for insurance and insurance tech companies similarly for telecom there are certain things in a transaction which would warrant your approvals so you get to see those so I mean if if holistically I look last few years of

22:42 deals I mean these primarily will be the regulators where they are touch points and you need to evaluate so that's really the part of the permissions I've come across when I say prudence my thought is so one is I mean whenever you are doing a deal you are looking okay whether these apply and whether you are looking for approval or not the second is you also do some sanity checks around it you do the sanctions you do the ultimate beneficial ownership check you do the PN PN3 origin checks whether your buyer seller or any any interest on that is triggering any of these requirement any other security overlays in sensitive sectors is there anything else which is required those does not come up front. You have to actually take the prudent path to go and dig it out. So that's the second bit and the third is the path which is more around sequencing the entire deal. I would say from signing to closing the typical order I mean okay whether you are signing the term sheet documentation then sectoral or CCI or or the relevant approval then getting into the closing closing will entail certain

23:45 filings then the annual filing postc close reports and all those sort of thing so I mean that's really broadly I mean the three Ps permission prudence and path and I I'll take 30 more seconds Samir I think one more interesting story again very thoughtprovoking we were doing a deal with a Oshinian company. It's a Greenfield JV in a very emerging sector and of course the target was sitting in the Oshinia. and the diligence was done by a local law firm and we were sitting negotiating the final JV dog and then the question came up that hey I mean one of the names sound very familiar and a Southeast Asian name actually I would say a Indian subcontinent name and I mean in I mean just a general reference we asked that whether this guy is connected to us and and then we got to know that while the gentleman was always I mean build the business and empire in Mushinia he has a dual passport from one the neighboring countries in India and that discovery on that almost finalized st of documentation

24:48 took almost couple of months to navigate through it structure through it of course a PN3 approval would have taken much more but to to address that bet so that was quite thoughtprovoking for us to see the real impact and and there's no way the Indian lawyers could have gotten to know it up front till the cap table got texted in the in the JV document Yeah, over to you. >> That's a that's a great story and I must say Karthik is quite the storyteller ladies and gentlemen. I do encourage you to interact with him offline. He he tends to pull these out from somewhere to illustrate his point really beautifully. With that over to you Siddhan just a question now Shah spoke about when to start. Kartik gave some examples from his experience. I'd love to hear from your experience as to what let's say if you had to pick the top three or top five red flags that you see most commonly occurring from such diligences. What is it that you see?

25:43 >> Sure. So, you know, from a from a diligence perspective, you know, most most of the issues would depend in terms of what kind of asset and target you are really evaluating. so apart from the sectoral specific issues which would be different the most common issues from a crossber diligence would basically arise because of you know few specific buckets one you know most of these assets specifically multinationals would be into different accounting regimes they are into different jurisdictions so like in India you would understand that most of the corporates acquire an audit ing which is a mandatory requirement both from a tax and a company law perspective but several jurisdictions across the globe do not have this requirement. So when you're doing an outbound transactions, you know, the the investors may assume that the financials are audited, which may not be the case and sometimes the audit requirement is not even there for some some of the midsize companies which may

26:46 go up to a 100 $200 million requirements where there is no statutory requirement but they may have you know done the audits based on a special purpose. So it becomes important to understand you know how those audits have been done. Are the financial numbers really kosher? and what accounting gap have they used? Because you know what you see domestically versus to an outbound transaction, you know, the numbers may not kind of reflect the same level of [snorts] accounting and and a financial stack and and hence may not be comparable. a very simple example like in IFRS and NDAS which is the global accounting standard and the Indian accounting standard lease rentals which are premise and facility rentals would be accounted differently compared to you know what you would see in a local gap in Netherlands or Singapore or even for that matter a US gap. So you know the comparability of numbers becomes difficult and hence you know that should be the first red flag. second, you know, it depends on the size of the target which

27:50 you're evaluating outside. several of the jurisdictions allow companies to kind of maintain nonacrrual based financials. So you know se several of them would be doing accounting based on cash basis or the hybrid of cash and acral which again renders you know from a financial and tax perspective. You know some of these financial numbers non-readable. So they may show a lot of fluctuation year on year and hence you know in the deal year if you're kind of picking up a lot of variation in revenue increased profitability that may not be this most sustainable performance and hence you know it has to be kind of looked at from that lens. so you know these two important aspects are there.

28:36 Apart from that from a crossber diligence it always becomes important how as I touched upon earlier you know how currency losses and currency treatments are being treated. if you're looking at an inbound transaction you know several investors would be apprehensive that with depreciating rupee versus you know British pound or US dollar how that is impacting financial performance and to what extent the increased profitability of the company or you know what component of the profits are really arising out of just simply a forex depreciation versus the real performance of the business. So the right treatment to forex gains and losses and currency movements becomes very very paramount given it will have a direct impact in terms of how several investors both in an outbound versus an inbound deal would be valuing the the the target. apart from that you know whenever you are doing a multinational evaluating a multinational target you know several of the entities may have an

29:39 opaque corporate structure and we of course as financial and tax diligence advisers you know along with a you know legal council fence you know do evaluate in terms of you know how the money flow has happened u are the entities being structured in a manner where the transaction would go through successfully there we need to be apprehensive of you know where there could be potential tax leakages. if where the cash buildup is happening across the globe in in a specifically in a multinational scenario which country is accumulating cash versus which country is the more cash spender and accordingly you know the deal needs to be structured in a particular manner so that the deal becomes more success rather than kind of doing diligence and not really reaching to a conclusion.

30:26 So I I think I would I would probably keep it here that these are some of the common issues which we would typically see in a in a crossber and a multinational sort of scenario. Sorry I was on mute. No, that that's that's interesting Sat and while I wasn't originally planning to bring in Shahad and Kartik on this, but I'm just wondering if I throw the same question to them and Sharat Kartik take a take a short pause each. What what are your sort of most common red flags you see in your crossber due diligence for inbound? I think the inbound and outbound particularly when the ownership structures are family driven. I think those structures possibility of related party transactions and leakages incidentally hidden unemployment is not only in India. It is quite all over the place and therefore whether

31:30 your profitability statements are really justifiable that's a that's a serious exercise. sometimes any pending investigations for fraud or any dubious transaction any regulatory actions that we have seen as a as a very common ground for red flagging. IP ownership at times becomes a big challenge because the IP ownership may be concentrated in either individuals or group of individuals or a different entity and then it gets licensed all across the group. So whether they are appropriately documented whether they are appropriately remunerated for those kind of licensing that is again a fairly common problem. the whether in different jurisdictions there is adequate on the right to operate the patent or right to operate the IP is something

32:33 which we need to at time get into that exercise during the diligence to make sure that it's all good and fine. I think the last item on my list on red flags would be some of the HR practices. We have already seen at least for the inbound the different interpretation that that were prevalent on what is the basic salary and we we all know what happened after the Supreme Court judgment as to restructuring of those pay packages and the the mandatory employee related benefits how that changed the entire economics at times of the whole transaction.

33:20 the last one when on the on the diligence very interesting things can happen. We were doing a diligence and all the environmental licenses were absolutely fine. So there was no problem and we had a call with the technical team and technical team said that how on earth can you approve this transaction and we were you know we were quite non plus we said what happened they said no there there may be a environmental approval for this particular emission mast but clearly it is only 60 ft tall and I don't think it is technically you know advisable to have anything less than 100 ft tall masks. So when you have these you know contrast between what the technical team is going to conclude and what the legal team is going to conclude that can be a you know throw a different challenge to you altogether.

34:22 I I mean just just to continue karthik storytelling we had completed almost all sorts of due diligences and there was no issue and the technical team of the acquirer came in they were Europeans they came into India they they looked at the entire facility and then we had a suddenly a cozy meeting called to say that you know what we have absolutely nothing against the target we have absolutely nothing to comment on the outcome of the diligence but we have an issue and the issue is your entire manufacturing facility all of them and they were three of them the roofing of that factory in those days I'm talking about quite some years back this was entirely using asbistos and they said no way we will allow our factories to be roofed using asbestos that's a clear environmental no no for us and if we were to even think about a replacement cost that would make the

35:27 entire transaction unviable and that's where the transaction act actually was called off. So there can be very different red flags coming even from environmental issues and that can happen even at the last moment because of a technical observation. over to you Karthik. >> Oh, I think you and Sedat had covered most of it. Samir were putting me on a spot every time after these two gentlemen. [laughter] But but coming back, I think you have good stories. >> Find that story. You have to find that story. >> No, I have to >> I can I can add a story for this one maybe Karthik if you allow. So we we were going through a transaction which is an outbound transaction with an Indian investor investing into a French asset. It's a it's an M&A between two strategic players and [snorts] you know both of them are into technology services and software. very different the genes but very

36:32 different very similar sort of businesses. you know one is an Indian business which is catering to Indian and US customers while the European business the French business was catering to Europe and again US customers. So there was a several pieces of familiarity and you know different regimes and of course we came across towards the end that you know the while the costs and there was no financial issue from a financial diligence perspective. We identified that you know the target in fans has been using a lot of contractors and because you know they were similar businesses you know the data flow was a bit more dispected given confidentiality norms and you know commercial sensitivity that you know both are similar businesses and you may have access to each other's customers.

37:21 So while the information came in a limited manner use of contacttors become a big issue. the way the the contractors contracts subcontractor agreements were drafted they were probably not up to mark wherein there could be a large chunk of liability which may entail on the company just because of employment rights and employment rights in France as when we kind of reached out to a foreign legal council we understood that it they are fairly strict and lost and bypassing them could could be a difficult task and it took us at least a few months to align in terms of what would be the revised structure of employment, how many people would be regularized, what's the corresponding cost and valuation impact u and then kind of you know we proceeded with the deal but yeah some of these nuances would largely be jurisdiction specific and sector specific as you know Shah mentioned in his example with respect to

38:24 a manufacturing unit where environment al issues became a last moment deal breaker. So over to you Sam. >> so I think I mean if we have one more minute I think a new trend >> on these yeah and I I know I mean I I'll still contribute on this point. I think what we are seeing I mean of course I mean all the key regular red flags we see I think has been covered and of course few new things which I'm seeing in last couple of years and also it's a quality of money which is flowing into India perhaps it's it's doing of that as well one of course is I mean little more on a regular side data localization gaps that has become for certain kind of sectors that has become a very prickly point ESG which of course sharat picked the example but overall ESG compliance have become slightly more mainstream. But jumping from these two, not really a Indian law but the kind of investor we see regularly now in India the American law around banking holdings lot of those private equity and venture

39:28 capital funds which has the BHCA mandate those also becomes a loop and you need to I mean I mean a handful of people who do that regularly aware of it and then thereafter you navigate that so it's not really a diligence on the target per se but it becomes one of the critical point to navigate through the deal and thereafter how it plays out. Similarly, I mean you have money flowing from pension fund. they have their own restriction in terms of what percentage threshold for what sort of a right on governance they can take into the targets and that has also become kind of frequent into Indian inbound stories and again whether you are the target or whether you are providing them a exit or you are really representing them in all three scenario this becomes again another more like a most deliberated points nowadays whether we call it a red flag or not but it's certainly a key crit critical item does not warrant a very new sort of a structuring around it but it requires understanding and a a kosher navigation around this point I think worthy of factoring it

40:32 into the deal timeline as well Samir over to you >> understood so maybe why don't we continue kartik with you and really the theme from what you said earlier and foreign investment laws I I think India is one of the few Shahan made the point of capital account convertability India is still one of those countries that practices exchange control and particularly on foreign investment several other countries have now introduced foreign investment caps somewhere around covid and and so on as national interest is taking precedence so in your experience karthik how how should transaction teams handle foreign investment laws and sectoral caps whether it's India or otherwise >> so I think I think you're right Samir I think that also becomes a point which which comes up almost every time when the deal is happening and I think a a basic theme is I mean the way I see it I see that if you can't draw this structure on a piece of paper you can't really close it if you yourself are finding it too difficult to draw I mean that becomes really a point to

41:34 deliberate on these structures but but for the team for the team which is getting engaged on the diligence part I'll simplify it I think you start with a cap table a structure chart and if you are able to put everything on a piece of paper then the things are much here. Okay. Again, I mean, if I were to perhaps put down a formula to it, I would I would use a formula called capped. Okay. I would I would look into the sectoral caps. I I'll look into the attribution whether it's a direct indirect flowing through FOCC, IOC, front, back, what you are doing. So, the attribution of the capital then u perhaps I'll look into pricing the cap. E would be your really the exception to the rules where you can find and again and the local sourcing and all those conditionalities around the sector. What are the exception can you really fall B2B and and whatever you works you have available and the D is again the downstream and related bank.

42:32 So the moment I think you follow cap and you keep your eye on the same first three principle I narrated permission prudence and path to check for the target targets business seller or promoter whosoever and the investor and and the entire theme around those three people here and the business along with the cap principle I think you will be able to navigate and and figure out at least the foreign exchange compliance very clearly. Of course the filing reporting all those comes into play and things happen. a couple of interesting thing we started seeing and again not one example two example on this front but I'll simplify it in my way. there have been deals where you would find form FCGPR or FEMA filings have been missed out in the past. Okay.

43:20 I think back in the day there were a lot of deliberation. Now we all understand it's a procedural lapse. Regulator has been very kind. They provided LSF I mean late filing and and all those opportunities but those go back only for certain years back right I mean you can't really look for something which has been a decade old or so on so forth then compounding is a path that is also perhaps okay regulator is very sensible and they understand what is a real miss what is a non-deliberate miss and all that the challenge start to come in when you will find situation when the banks which were the ad or who allow allowed you to remit the the money back in the time they don't really operate in India anymore and then to do a basic KYC because the whole principle of compounding is that now you clear it so you need to file a form FCGPR now you need to get a KYC done at times I mean it's also unfortunate that those buyers are no no more I mean they are alive and and then the transmission has happened and you people they are struggling with KYC's and all these processes really become a roadblock if it is for a

44:25 strategic buyer it's okay because then they have time to clear it out. If it is for a private equity or a focused investor financial sponsor then they are looking for exit in next few years and then if these things are not cleaned up it becomes a big hoop and a roadblock for them. So that's another one. I mean we faced one deal which got kind of delayed for a good six months owing to one of the situation. A famous bank which was used to operate in the first decade of this century wrapped up its business and there was no KYC but but yeah I think this is this is how I would perceive Samir over to you. >> Understood. And if I were to just bring in shhat and shhat sectoral caps, sectors all of that Karthik has spoke of. Now depending on each different jurisdictions priorities and each different jurisdictions geopolitical circumstances they have certain sensitive sectors. particularly in the context of India, I would say defense, I would say telecom, media, there are certain parts of fintech, all

45:27 of these tend to be very sensitive sectors. What do you do differently when you're diligencing a target in these sectors? >> I think first and foremost you need an expert whether you are doing an inbound or outbound. we have been very lucky that we have you know in-house specialists within the firm. But when you are looking at outbound clearly sectors not just like telecom, aviation, defense, aerospace, satellite technology, artificial intelligence, pharma, healthcare, these are all you know significantly regulated and restricted sectors. So unless you have a specialist in that jurisdiction who can tell you all sorts of nuances of that investment. I think that that would be really my my first activity if I'm looking at it you know sequentially you have to pay attention to say licensing conditions are there local partner requirements are there residency

46:32 or nationality requirement for any of the KMPs are there requirements like some of the African jurisdictions do require the black mo empowerment entities to continue to hold a minority stake some of the Middle East jurisdictions require government approvals for transfer of even a minority stake. So all of that we you will have to really factor in in you know delay in clearances is something which can become unpredictable. So in terms of inbound it's not it's not you encounter that only for outbound but it is quite likely that in sectors like mining the licenses and your you know permissions to operate businesses like mining these are not transferable technically these are new licenses need to be applied for it's a full thorough scrutiny of the acquirer right from scratch and all of that can can derail

47:38 the process in terms of closing of a transaction. In some jurisdiction of course merger control filings although it sounds procedural but it can it can raise some important issues before the competition authority. So those are I mean some of the examples the management structure approvals as as I told you that that can lead to if you need pre clearances for appointment of key managerial people and without that you can't can't just step in into the management control those are some of the examples which I have seen in in real practice. Okay.

48:21 >> Understood. Understood. and and let's say if the target I'm just wondering if the target is not in one jurisdiction it's across jurisdictions you also have to then pick your battles because at the end of the day the dean has a certain timeline parties want to function to a certain timetable so sat in your experience if if there's a multinational target which is spread across different geographies how building some semblance of priority >> you see digital ing a multinational target different jurisdictional presence you know is always difficult but for any large engagement and and for for that matter you know any other large work you will have to do some prioritization in terms of where you want to focus versus not typically you know the rules which we use like an 8020 rule we'll identify what the priority areas are and a very large role which goes in terms of identifying

49:24 the priorities would be interacting with your client, identifying what the deal dynamics are, what the deal objectives are. why is it that we are really evaluating the target and you know what's kind of going to do a value impact versus you know deal impact. understanding those and then identifying in terms of you know what are the jurisdictions which are slightly more risky. identifying the critical assets which are there within the within the company which you are evaluating and the multinational you're evaluating and laying down the plan in fact I would say once we have created a plan you know almost 60% of the diligence is kind of done as you have identified focus areas and typical focus areas in in majority of these multinational transactions would would originate into into four or five buckets you From a from a finance and legal and and and tax point of view, we'll identify in terms of what are the key value drivers which would impact the the

50:29 valuation almost on an immediate basis and what are the commercially impacting matters which will impact the deal. whether the assets and the client's decision to kind of go or no go with the asset would would get impacted apart from the value. and these would largely being folded into identifying you know what are the financial and accounting hygiins and tax and legal compliances. So I would put that as one bucket which is very very basic and has to be done in potentially all the deals. U so that becomes one priority. the second priority at least from a finance and tax point of view becomes you know understanding how the revenue and margins have played out. you know identifying what have been the key drivers to revenue, what contributes to the growth of the business. is it customers? Is it new jurisdictions? Is it new products? are they entering into new margin profiles? and breaking it down you know for the deal evaluators from a at the client side

51:33 and laying it down clearly in terms of you know what contributes to to what aspects of growth so that you know the growth can be deciphered and then kind of moving into the other parts. moving into balance sheet items identifying how risky the assets are, are they collectible, are they legit? you know focusing there to identify to what extent there are risk areas identified and working back with the legal council to understand to what extent they can be protected through documentation through transaction documentation and versus you know value adjustment given u so having said that another very important aspect is whether the deal is competitive or not in a highly competitive deal which are auction scenarios We'll have to again rep prioritize certain areas to to understand in in a multinational scenario where to focus first versus versus versus differently. and hence you know some of the the the

52:36 requirements would be tweaked and the prioritization would would again be tweaked to that extent. >> I think >> yeah go ahead. >> Go ahead. Sorry. Go ahead. No, no. So these are the these are the matters from a you know from where where you would prioritize from a tax perspective you know identifying you know how the deal structure would flow which are the investor entities and the investy entities and identifying the correct structure so as to kind of minimize tax and cash leakages. I think that would be one of the priority questions or the priority areas which we would focus on.

53:20 Understood. Thank you very much. And I'm just conscious of time and the chat box has been buzzing with questions. So maybe what I will do is I will flip now. we we end the panel discussion here. We did have a couple of other subjects to discuss but it's been such an engaging discussion. we've obviously overshot time but nonetheless let's come to Q&A and I'll I'll try and pepper each one of you with some of these questions. I request you to try and address as many of those as you can. So maybe Why don't we start with let's say some good practices and Siddhant one question to you would be there's an interesting question on any suggestions on good practices on virtual data rooms that you've seen in your experience. I think that's something which we'd love to hear from you.

54:07 >> I think most of the data rooms which are available in today's modern modern day practices are all valid. they have almost similar functionality be it a data site versus you know any other data room which you use. They provide you adequate u you know restrictions as a seller and adequate access as a buyer to kind of go through documentation raise Q&A and provide some structure to the madness specifically in a multinational and a multifetated deal. having said that Sam what could be challenging in a multi- crossber diligence is in terms of how data would be shared. Some of the jurisdictions they would have restrictions in terms of sharing information due to data protection laws. at several places we find challenges with respect to sharing of employee related data. where you know either we'll get only summarized information or you know kind of jumbled information or sampled information so that while we can still make commercial

55:09 and economic sense out of it but we'll we'll probably not be shared information. So in such cases we have to kind of resort to alternative means in terms of setting up an SF SFTP server to to securely transfer what is kind of required not reaching local data sensitivity matters while kind of still proceeding with the deals. we have also seen with respect to commercial matters, commercially sensitive matters, there could be instances where you know like I in my earlier example or the story I kind of quoted with two similar businesses coming together there could be commercial sensitivities where for the advisers you may have to kind of set up separate clean rooms but again there are there are several issues and several matters which can be settled through those.

55:56 I'm glad you picked those points up sir because there were questions on clean teams, there were questions on data privacy. So I'm glad you sort of rolled all of that up. But Sh there's an interesting one which I'd love to hear your perspective on. Let's say if there's a target which is not willing to share information due to secrecy laws. I wonder maybe in public procurement or other similar sectors. How do we deal with that? Let's say if you're diligencing a target of that later. So I I think for making a decision of you know whether to proceed do we have enough data. So I think identification so I have not seen particularly secrecy law but I let's talk about pure confidentiality that nobody wants to really share the names of say top five customers or top five suppliers or you know any details of employees. what I've talked about. I guess at least to begin with a anonymized or aggregated data has definitely worked because you

57:00 are you are looking at the financial modeling of or the credibility of the potential transaction. You are not at least at some in the initial phases of diligence until you come up with a definitive document. you may not be looking at identities of specific customers, suppliers, employees and so on. but beyond a point I think these will have to be disclosed once you get into a definitive documentation at the initial in information sharing. I think redaction has worked very well. I think that that's a great practice. It has been done in several several jurisdictions. So I don't think that's a it's it's not a stopping your exercise but you may have questions which you may want to wait until a more definitive stage in the entire negotiation has come up.

58:02 >> Understood. So maybe now there's flavor of the season is of course tech and AI tech and AI artificial intelligence generative AI and its applications and there's different questions on that but if I have to try and sort of bundle all of them up and I'd love to hear Karthik your thoughts and maybe even followed up with Shahadan Siddhan because this is something which impacts everybody. How are we currently using generative AI to make diligence more meaningful and and wholesome and what are the additional applications that you see in your experience or in your sort of thinking where either tech or artificial intelligence can really be useful. So Kartik and then after that sad.

58:46 >> So Samir I think I mean tech and AI and I'll keep tech out. I mean I'm simply using AI which encompasses tech as well is anyway part of our I mean daily routine I guess. and anyone who is running it today or doing a a fairly decent size operations practice they would be using it otherwise they're not relevant. So I I'll start from a very abinio stage. Yeah, the very first time you get to hear about and very interestingly the secrecy act or let's say a sector which is like defense is booming up a lot of transaction there you are to do a diligence on a particular sector you have not interacted it's open up recently I mean the first step will be to understand the peers industry the risks what are there everything can come up through AI general no name search so that's first one and it's not only about the leaders on the deal or the advisers on the deal I mean the advisor team also comprises of all level of you know people who will support the deal but people to have a macro level of understanding about the target or the

59:49 deal helps you navigate very well. So I think if this AI tool or AI in general is available to your organization or your advisor's organization, the entire team which is working on the transaction will become much more advanced and well understood in terms of the macro picture of the deal versus I mean I mean the back in the day I mean when one person knows the entire story and rest are only knowing the hands and legs. So that's that's simple part one and and then we'll come to I mean the advent of kira and and thereafter to legora to harvest to to to several other including in-house aski and others where you can put in the document what you can get out what you can't how much you can rely all those are very you know I mean differ from organization nature of document you are pumping in there what you want to get out of it but I'm saying generally the role of AI would not only be to empower enlighten But also I mean the way the diligence reports are being prepared and and given to the client. I mean one can prepare

1:00:51 500 pager diligence report while issues lies between 20 pager and they they are just spending nights reading it. You can curate it. I think back in the day we curate it and I think that would have been one of the question if not already that how you really transpose the DD finding into a document. I mean ultimately everything has an impact. You curate it so simply for the client so that they understand especially the one who do it I mean like day in day out on these front if this be the issue this would probably be the ask from the buyer whether it's adjustment a specific indemnity warranty or tomorrow even if you go for a warranty indemnity insurance so your data room everything so I'm saying the AI is not helping you understand the issue it also helping you how to present and in between the process of the lawyering time being reduced through AI that's a subjective discussion I think one may argue it's conclusive it's non-conclusive one may argue no it is really good but that's just the journey it has started few I mean perhaps a year down the line or so

1:01:55 we will have we'll be in a better position to really give a conclusive thought on that bit but I'm saying the beginning and the end is certainly impacted by this tech and and and the process itself will get impacted it is being impacted today but in a better down the line. That's my take. >> Thank you Karthik. Quick word shhat and then quick quick words. >> So AI tools like Karthik said I I think we have to work with all the AI tools whatever is available. Now I think one word of caution that we can't entirely rely on the output that is that is delivered to you. There will have to be checks and balances. There will have to be revalidation. Although you may give instruction no hallucination whether the data mining has given you accurate outcomes accurate details say for example there are litigations or there are you know notices issued by regulatory authorities. once these kind of at least directional outcomes

1:03:00 are shown to you then you know where to deep dive and do a a deeper research. But I think AI is a fantastic tool to give you a crystallized in a very summarized form. But it will need a lot of human intervention to interpret what you have and then apply it for a transaction. You can't just rely on the output as is. >> Perfect. Sedant over to you and that will be the final word on this. >> Sure. No, it's a very interesting topic Sami. you know we have come a long way and you know kind of progressing very fast on AI. and you know the way at least at EY we have been using of course both internal and external tools.

1:03:45 One it is becoming a lot more faster for us to go back to the client navigate through the deal faster because we go to the issues a bit faster compared to you know earlier and of course you know our clients expect to use the available technology to do that. so it's it's helping us kind of easing out the timelines with the client because in a specifically in an auction scenario where you have say five biders and you need to kind of be the first one to kind of show steady pace on the deal I think AI is definitely helping and supporting us to do that and navigating through issues and and the deals faster in fact the entire advisory team's time is becoming far more relevant because you know some of the process related jobs is something which the AI and our internal tools are taken care of and we are going back to our clients with some more relevant insights and what matters on the deal rather than kind of as you know Karthik mentioned and you know Shan mentioned Wikipedia related stuff you know it's not no longer FYI and hence you know it's more insightful and

1:04:48 specifically in a multinational multi-country scenario it helps decode through languages it's becoming far more easier to kind of sit in India sit over here and kind of do outbound deals because you know the documents gets translated you know several of the larger players and larger advisers have their own internal tools and internal servers which means you're no longer kind of taking these documents to public domain for conversions and hence you know both from a data secrecy and you know speed perspective it's becoming far more meaner and sleeker I think it's it's you know a lot more to do on AI but I think we have we are seeing a good momentum in terms of how it's kind of adding to the worth of advisers specifically in an M&A and a transaction scenario.

1:05:34 >> I think fantastic and thank you very much to all of you for concluding that part. We we're quite a bit of in in terms of time overshooting. so with that thank you everybody who ever participated in the poll and without a doubt I would like to thank all of our panelists today for sharing their expertise and their experience. I I would say each one of you was outstanding and and I'm sorry we we fell short of time but ladies and gentlemen their contact details are available to you if you'd like to set up a separate conversation they'd love to talk you through any other questions you may have and this is such a vast field that is really impossible to summarize anything and everything that that can be of relevance. but once again many thanks to our audience for your attention, your questions, incredibly participative webinar. This one was and we really do hope that you found this webinar interesting and engaging and it it really is a pleasure and a privilege to bring such webinars to you. please do separately respond

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