Japan–India M&A: Legal Trends Shaping The Strategic Corridor
Japan–India M&A: Legal Trends Shaping The Strategic Corridor
Economic collaboration between the countries continues to be driven by complementary strengths, geopolitical alignment, and shared goals under the Indo-Pacific vision
The Japan–India corridor has seen an influx of activity, with more Japanese corporations identifying India as a strategic destination. Per surveys by JETRO and JBIC, India tops the expansion plans of Japanese corporations for the next 2-3 years and has emerged as the number one promising destination for Japanese manufacturers.
Investments from Japan into India remained robust in 2024 and jumped by 30% from the previous year. The past decade has seen 343 inbound deals from Japan into India, resulting in investments of USD 62.35 billion. There are various reasons for Japan’s increased interest in India, including India’s market size, human resources, and diversified but dependable supply chains. Further, the Indian government’s continued efforts to simplify regulations and streamline processes have boosted Japanese interest. Several Japanese companies have benefitted from the PLI schemes introduced by the Indian government for 14 sectors.
Economic collaboration between the countries continues to be driven by complementary strengths, geopolitical alignment, and shared goals under the Indo-Pacific vision. During the bilateral summit held in India in March 2022, PM Kishida and PM Modi expressed satisfaction that the investment target announced in 2014 had been achieved. The countries expressed their shared intention to realise JPY 5 trillion in public and private investment and financing from Japan to India in the next five years for projects of mutual interest. In 2023, JICA extended its largest single global ODA loan (400 billion yen) for the fifth phase of construction of the Mumbai–Ahmedabad High-Speed Rail project.
The Indian market poses its own challenges for Japanese investors. Some concerns include high labour costs, rising employee turnover, and a cumbersome tax regime, which remains a stumbling block for foreign multinationals. Japanese companies also face hurdles from the delayed timelines and increased transaction costs caused by the complex regulatory environment. Another common issue in M&A transactions is the lack of sufficient and accurate information flow in due diligence and risk assessment. Negotiations with Indian counterparties are often protracted due to cultural nuances, resulting in delays and increased costs. Post-integration issues continue to range from corporate governance, cultural differences in decision-making, Indian players adjusting to stricter Japanese compliance norms, and production quality issues.
Some concerns include high labour costs, rising employee turnover, and a cumbersome tax regime, which remains a stumbling block for foreign multinationals.
Market Trends
Sectoral interest: While traditional sectors such as manufacturing (especially automotive) continue to attract interest, sectors such as infrastructure, pharmaceutical/healthcare, retail and e-commerce, and real estate have seen increased activity. Banking, financial services, and insurance (BFSI) have emerged as a hot sector, with increased interaction and advocacy between regulators, including through G2G channels from the Modi–Abe era, which remain strong.
IPO boom: India’s capital markets have matured significantly, offering compelling opportunities for global investors. In 2024, India’s stock market surged past the USD 4 trillion mark in market capitalisation. The IPO boom reflects investor confidence and enables strategic exits and listings for foreign investors. Activity in 2025 is expected to remain strong, with the growing popularity of reverse flip structures and mandatory IPOs for upper-layer non-banking financial companies. Japanese investors have increasingly backed companies on the IPO path (marking a shift from historically smaller stakes in IPO-bound companies), with some even listing their Indian subsidiaries. There is heightened emphasis on navigating SEBI regulations, particularly around disclosure norms, promoter lock-ins, MPS and MTO obligations, and treatment of special rights post-listing.
Antitrust developments: The 2024 amendments to the Competition Act, 2002 introduced a deal value threshold of INR 2,000 crores (~USD 238 million) for transactions involving targets with substantial business operations in India. The substantial business operations test is based on the target’s turnover or gross merchandise volume and, for businesses engaged in digital services, if 10% of their annual global business users or end users are in India. The number of notifiable transactions is expected to surge, increasing deal closure timelines in the short term. In the eyes of Japanese investors, Indian CCI filings are burdensome compared to other jurisdictions and tend to lengthen deal closure timelines in global transactions.
Dematerialisation of shares: To improve the ease of doing business, enhance transparency, and simplify transactions, the Indian government has mandated dematerialisation of shares for all companies, including private ones, in a phased manner. However, paperwork and KYC checks required to open a demat account in India are extensive and complex, increasing short-term administrative burdens for Japanese investors. Given the significant delays in processing by depositaries, the Ministry of Corporate Affairs extended the compliance deadline to June 2025. Simplifying demat account opening procedures will help reduce the administrative burden on depositaries, Indian companies, and foreign investors.
Significant beneficial ownership: The Indian Registrar of Companies is enforcing stricter compliance for significant beneficial ownership disclosure norms. Companies failing to identify and disclose ultimate beneficial owners—regardless of whether professionally managed—have been subjected to significant fines. This creates compliance challenges for large global institutions, ultimate parent companies, and officials, who have limited operational control or influence over Indian subsidiaries. PN 3 of 2020, which requires prior approval for investments by a person/entity (or beneficial owner) situated in a country sharing a land border with India, continues to be a concern for Japanese investors that may have the indirect presence of Chinese shareholders, especially if listed on the Tokyo Stock Exchange. With no prescribed definition of ‘beneficial ownership’, Indian entities seek representations and indemnities from Japanese investors, leading to this becoming a critical negotiation point.
W&I insurance: The Indian market is seeing increased use of warranty and indemnity insurance as a substitute for traditional escrow and holdback mechanisms. Insurers are showing greater risk appetite, particularly in providing title, anti-bribery, and money laundering coverage. While tax liability insurance is also on the rise on account of the high taxation risk in India, Japanese investors cannot obtain the same due to insurance underwriting regulatory hurdles in Japan, and requires complex structuring, resulting in increased costs.
Dispute resolution: Indian transactions continue to be governed by Indian law, with arbitration remaining the preferred mechanism for dispute resolution. The Singapore International Arbitration Centre and Singapore seat remain the forums of choice for Japan–India cross-border deals. Based on our experience, there are nearly ten arbitrations involving Indian and Japanese parties per year.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
