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Over the last several years, India has emerged as a credible and attractive jurisdiction for Japanese corporate and financial sponsors pursuing cross- border M&A opportunities, as evidenced by recent marquee transactions such as Mitsui’s investment in Bharat Insecticides and Hayashi Telempu Corporation’s joint venture with NDR Auto Components. This trend is underpinned by two critical factors:
From the Japanese perspective, cross-border M&A involving Japan has also been steadily expanding. Looking ahead, as India’s economy continues to grow, we expect India-to-Japan investment to become increasingly active, in light of several tailwinds that are at work:
Even though the legal and regulatory framework underpinning the two countries' transaction ecosystems is aligned on several vital aspects, there are significant practical and cultural differences in deal and contract practice between the two jurisdictions. As an example, while deal structuring in India requires careful alignment with the country’s foreign investment regime, exchange control framework, and corporate and securities law requirements, Japan’s foreign investment and exchange-control regimes are comparatively stable and not unexpectedly stringent.
Earnouts1 and holdbacks2 are common mechanisms in cross-border M&A transactions to bridge valuation gaps, incentivise sellers, and protect buyers from post-completion risks. While we have seen these frequently in India-Japan cross-border M&A transactions, it is vital to note that these structures are subject to exchange control regulations in India, under the Foreign Exchange Management Act, 1999 (FEMA). Key negotiating points are as follows: Staggered payments: When staggered consideration payments are envisaged under the transaction documents, FEMA requires that the pricing of shares between a resident and a non-resident is to be determined upfront, with payments made within a stipulated period of time. The Reserve Bank of India (RBI), the Indian financial sector regulator, allows deferred consideration of up to 25% of the total purchase price, payable within a period of 18 months from the effective date of the Securities Purchase Agreement (SPA).
From a transaction lawyer’s perspective, the following aspects typically require significant negotiations between parties:
This note offers practical insights – from both an Indian and a Japanese POV – for effectively managing deal risks and helping counterparties navigate matters that most often affect timelines, valuation, and risk allocation in Indo-Japanese M&A.
Earnouts3 and holdbacks4 are common mechanisms in cross-border M&A transactions to bridge valuation gaps, incentivise sellers, and protect buyers from post-completion risks. While we have seen these frequently in India-Japan cross-border M&A transactions, it is vital to note that these structures are subject to exchange control regulations in India, under the Foreign Exchange Management Act, 1999 (FEMA).
Key negotiating points are as follows:
Practical deal structuring must ensure the following:
Press Note 3 (2020 Series), issued by India’s Department for Promotion of Industry and Internal Trade (DPIIT) requires that any investment by entities from countries sharing a land border with India, or where beneficial ownership of the investment lies in such entities, can only be made under the Government approval route. This is implemented through FEMA.
Press Note 3 has had a profound impact on how cross-border deals are structured, particularly where investors may have direct or indirect links to restricted jurisdictions. While Japan as a jurisdiction is not directly impacted under Press Note 3, there can be issues around an indirect impact, where a shareholder or the Ultimate Beneficial Owner (UBO) can be from a restricted territory, which includes China, Hong Kong, and Taiwan. Therefore, even investors (not directly from such restricted territories) may be subject to scrutiny if there is indirect beneficial ownership by restricted-country entities, triggering a complex chain-of-ownership review.
This can result in the following potential impacts:
Recent news reports suggest that the Indian Government is considering easing certain restrictions prescribed under Press Note 3. If implemented, such relaxations could streamline the investment approval process and provide additional comfort to foreign investors, including Japanese counterparties, in structuring and closing transactions in India.
In cross-border transactions, specific warranties under the SPA are often tailored to address risks identified in diligence. Sellers frequently seek to qualify indemnity obligations by proposing that liability be severable and proportionate to their respective shareholding percentages.
Purchasers, however, typically prefer joint and several liability, at least for fundamental matters, to ensure enforceability and recovery certainty.
In one recent transaction, the seller proposed joint and several liability only for operational warranties, while excluding fundamental matters (e.g., title, authority, capitalisation) on the basis that not all shareholders were part of the promoter family. Purchasers often push back on such carve-outs, given the centrality of fundamental warranties to the deal. A related point of contention concerns indemnity scope for tax claims. Sellers often resist uncapped liability and seek alignment with agreed basket and de minimis thresholds. Buyers, however, frequently argue for standalone indemnity protection for tax matters given the long-tail risk involved.
While drafting representations, warranties, and indemnities in India-Japan transactions, we have noted that the following areas are particularly sensitive:
Fundamental representations and warranties (e.g., organisation, authority, capitalisation, transfer of title free of encumbrances, taxes, employee obligations, environmental matters) are typically required to be absolutely accurate. Other representations and warranties are subject to materiality or knowledge qualifiers. In Indo- Japanese deals, we see a more risk-averse buyer approach, with Japanese acquirers often insisting on joint and several liability for warranties across all sellers, regardless of shareholding percentages. This stems from a preference for enforceability and predictability rather than reliance on proportional recovery.
Sellers in India frequently negotiate to align liability with shareholding percentages, and a compromise often emerges where:
Compared with US/European practice, where basket and de minimis structures are heavily relied upon, Japanese buyers tend to seek ber indemnity backstops and fewer knowledge/materiality qualifiers, reflecting a conservative stance towards undisclosed risks.
In inbound M&A transactions involving Japanese target companies, the purpose of the representations and warranties provisions is essentially the same as discussed above.
Key negotiation points typically are:
Legal due diligence is a critical component in cross-border M&A deals – such diligence is usually undertaken to identify potential legal, regulatory, and contractual risks associated with the target company. The objective is to provide the acquirer with a clear understanding of the target company’s legal standing, uncover any liabilities or non-compliances, and assess the conditions precedent, representations, warranties, and indemnities to be incorporated into the transaction documents.
A well-conducted due diligence exercise mitigates legal risks, facilitates informed decision-making, and strengthens negotiation on valuation and deal terms. The legal diligence exercise undertaken is usually robust and often involves a confirmatory legal due diligence, in cases where there is a significant time lag between execution and closing of the transaction documents. Therefore, the role of condition precedents, warranties and indemnities becomes critical.
In our experience, Japanese investors tend to be more exacting in their approach to legal due diligence compared to other foreign investors, particularly when evaluating Indian target companies. They place a heightened emphasis on the legal due diligence exercise, often seeking granular clarity on regulatory compliance, title to assets, litigation exposure, and contractual commitments. This rigorous stance is reflective of their conservative investment philosophy and the importance they attach to risk mitigation. In fact, in one of our recent transactions, the parties went beyond the standard diligence process and undertook a full-fledged confirmatory legal due diligence before closing, underscoring the weight placed by Japanese investors on thorough verification.
In M&A transactions involving Japanese target companies, the purpose and importance of conducting due diligence are essentially the same as discussed above.
In general, Japanese companies tend to conduct full-scope due diligence, covering a broad range of areas and requiring detailed reporting. In contrast, foreign acquirers, including Indian companies, often prefer a limited-scope, ‘red- flag’ approach, in which the scope of the review is predefined and only issues that could constitute material obstacles to the completion of the transaction or have a significant impact on valuation are reported. In our experience, when we were engaged by foreign clients to conduct legal due diligence on Japanese companies, we were sometimes instructed to prepare our reports in a prescribed red-flag format designated by the client. Since due diligence is conducted for the purpose of facilitating the execution of an M&A transaction, the red-flag approach - focusing only on matters material to the deal - is a rational and efficient method. However, because the red-flag approach may result in the omission of issues that are important from the client’s own perspective, there remains a concern that certain matters of significance may not be reported. For this reason, when Japanese companies engage counsel to perform legal due diligence, they often continue to request a full-scope review to ensure that all potentially relevant risks are identified and assessed.
Issues identified during legal due diligence are typically addressed and rectified as closing conditions (also referred to as Conditions Precedent or CP). In transactions involving Japanese investors, we have observed that the acquirer often retains the right to waive, in whole or in part, the fulfilment of any CPs at its sole discretion by delivering notice to the seller and the target company. Sellers, however, generally seek to make the waiver of CPs a mutual right, to avoid a scenario where the purchaser unilaterally waives a seller obligation that would otherwise be required under applicable law or contract. The seller’s argument is that such unilateral waivers could expose them to compliance or contractual breaches without their consent.
Another common area of negotiation concerns overbroad and subjective CP items. For instance, in one SPA, a CP required that ‘the purchaser be satisfied that the assets of the target are sufficient, and that the target has adequate qualified employees to run the business.’ Such conditions are inherently subjective and can create uncertainty.
As a general principle, CPs should be limited to specific, objective, and actionable items that can be satisfied within the interim period between signing and closing.
The purchaser’s underlying concern is that, given the time gap between due diligence and completion, the target’s asset base and employee strength should not materially change before closing. Sellers, however, resist subjective CPs and usually agree that such assurances can instead be provided in the form of appropriately tailored warranties relating to the company’s assets and business.
While this compromise is generally acceptable, purchasers often resist warranties being overly qualified by knowledge, materiality, or other limiting criteria, since they require commercial comfort that the business fundamentals remain intact at closing. Sellers, on the other hand, are typically willing to bear the cost of satisfying CPs to the extent they relate to actions within their control, while pushing back on open-ended or subjective CP formulations.
In Indo-Japanese cross-border M&A transactions, we often see a more conservative approach to CPs compared to US or European practice. Japanese acquirers tend to place a higher emphasis on ensuring that all identified diligence issues are formally cured before completion, rather than relying solely on warranties and indemnities. This reflects a cultural and commercial preference for certainty and risk minimisation.
In M&A transactions involving Japanese target companies, the purpose and necessity of setting CPs are essentially the same as discussed above. However, while in Indian practice sellers often resist allowing unilateral waivers of CP by purchasers - primarily for compliance reasons or to avoid potential contractual breaches - under Japanese practice, it is generally more common for purchasers to retain the right to unilaterally waive CP. In many cases, the seller’s primary concern is the receipt of the purchase price, and therefore, the scope and content of CP tend to be relatively standardised across transactions.
As Indo-Japanese cross-border M&A continues to gain momentum, the interplay of commercial interests and regulatory frameworks will remain central to deal execution. Japanese investors, guided by their cultural preference for certainty and risk minimisation, often adopt a more conservative stance on issues such as indemnities, CPs, and compliance checks. Indian sellers, by contrast, typically seek flexibility through proportional liability, narrowed warranties, and resistance to subjective CPs. Bridging these divergent approaches requires careful structuring, bespoke drafting, and a pragmatic allocation of risk.
Going forward, sectors such as manufacturing, clean energy, digital infrastructure, and mobility are expected to anchor Indo–Japanese deal flow, driven by India’s market scale and Japan’s appetite for diversification beyond traditional geographies. While regulatory considerations under FEMA, Press Note 3, and India’s corporate and securities laws will continue to shape negotiations, dealmakers who can anticipate these friction points and craft balanced solutions will be best positioned to unlock value.
From a Japanese perspective, when Indian companies acquire Japanese targets, the regulatory hurdles are generally modest; save for sanctions-related and economic-security screening, there is no near-term expectation of material tightening in Japan’s inbound investment regime.
Ultimately, the success of Indo–Japanese transactions will hinge on combining Japan’s emphasis on enforceability and predictability with India’s evolving regulatory and commercial realities. Those who navigate this balance effectively will not only ensure smoother closings but also lay the foundation for durable, long-term partnerships between Indian and Japanese businesses and investors.
Founded in 1968, Chuo Sogo LPC is one of Japan’s leading mid-sized law firms, headquartered in Osaka with offices in Tokyo and Kyoto, providing comprehensive legal services to both domestic and international clients. The firm has over 80 attorneys, in addition to two foreign- registered lawyers and one foreign attorney. With lawyers fluent in English, the firm is well equipped to effectively handle matters for overseas clients. With more than half a century of experience, the firm has earned a reputation for deep legal expertise, responsive service, and global reach.
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Footnotes:
1 An earnout is a contingent, future payment based on the business hitting specific performance metrics (e.g., revenue or EBITDA targets).
2 A holdback is a portion of the purchase price withheld in escrow to cover potential post-closing liabilities or breaches of contract.
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