How Can a Foreign Company Acquire an Indian Business Through a Share Purchase or Business Transfer?

Indian Business Acquisition can be structured in two main ways: a foreign company can purchase shares in an existing Indian company or acquire its business through an asset purchase or transfer of an undertaking. Both structures can provide access to the Indian market, customers, employees, technology and established operations. However, they have different legal, regulatory, tax and commercial consequences.

The right structure depends on the business being acquired, the buyer’s investment eligibility, the liabilities involved and the parties’ commercial objectives. Before proceeding, a foreign buyer should assess India’s foreign direct investment rules, conduct legal and financial due diligence, examine tax implications and plan the transfer of contracts, employees and assets.

1. What Is the Difference Between a Share Purchase and a Business Transfer?

In a share purchase, the foreign buyer acquires shares in an existing Indian company. The company continues to own its assets, employ its staff and hold its contracts. The main change is in its ownership and, potentially, its management and control.

This structure can be useful where the buyer wants to acquire an established business with existing licences, customer relationships, intellectual property and operational systems. However, the buyer also acquires exposure to the company’s existing liabilities, including potential tax disputes, employment claims and regulatory non compliance.

A business transfer involves acquiring specified assets, operations or an undertaking from the seller. Depending on the structure, the buyer may acquire machinery, inventory, intellectual property, contracts, employees and other business assets without purchasing the shares of the company owning them.

A transfer may be structured as an itemised asset sale or as a transfer of an undertaking for a lump sum consideration. The legal and tax treatment depends on the transaction documents and the substance of the arrangement.

Neither structure is automatically better. A share purchase may preserve business continuity, while an asset acquisition may allow the buyer to select the assets and operations it wishes to acquire. The buyer must still assess which liabilities, contracts and regulatory obligations will follow the transaction.

2. Check Whether Foreign Investment Is Permitted in the Sector

Before negotiating an acquisition, the buyer should identify the Indian company’s business activities and determine the applicable foreign direct investment (FDI) conditions.

India permits foreign investment through the automatic route in eligible sectors, while other sectors require prior Government approval. Some activities are subject to sectoral caps, operating conditions or restrictions. Certain activities are prohibited for foreign investment.

The buyer should examine the relevant sectoral policy, the proposed ownership percentage and whether the acquisition would result in a change of control. A transaction involving a regulated business may require approval or notification to the relevant regulator, even where foreign investment is generally permitted.

The parties must also examine beneficial ownership. Restrictions concerning investors from countries sharing a land border with India can affect the acquisition, including certain changes in the beneficial ownership of an existing Indian investment. The applicable rules and any current exceptions should be checked against the buyer’s ownership structure.

The National Single Window System provides access to information about Government approvals and investment related processes. The buyer should use the relevant official guidance to identify approval requirements before committing to completion.

3. Conduct Legal Due Diligence Before Agreeing the Purchase

Legal due diligence helps the buyer understand what it is acquiring and identify risks that could affect the purchase price or transaction structure.

For a share purchase, the review should cover the company’s incorporation records, shareholding, constitutional documents, shareholder agreements, board approvals and existing charges over assets. The buyer should also examine material contracts, litigation, tax disputes, regulatory filings, intellectual property rights and compliance with applicable laws.

For a business transfer, due diligence should focus on the assets and operations being transferred. The buyer should verify ownership of the assets, identify any mortgages or security interests, check whether key contracts can be assigned and establish whether licences can be transferred or must be obtained afresh.

Employment matters also require attention. The parties should assess employee entitlements, accrued benefits, pending disputes and the process for transferring or offering employment to staff. The treatment of employees can differ according to the transfer structure and applicable employment laws.

The findings should inform the acquisition agreement. Material risks may justify specific warranties, indemnities, price adjustments, conditions precedent or an escrow arrangement. A buyer should not rely solely on the seller’s assurances without checking the underlying records.

4. Review Pricing, Valuation and Payment Requirements

A foreign company acquiring shares in an Indian company must consider the pricing rules applicable under India’s foreign investment framework.

The relevant requirements depend on the type of securities, whether the company is listed or unlisted, the residence status of the parties and the transaction structure. A valuation report may be required to support compliance with applicable pricing guidelines.

The buyer should also confirm the permitted payment route and ensure the transaction consideration is properly documented. Where consideration includes deferred payments, indemnity holdbacks, escrow arrangements or non cash elements, the parties should examine whether the proposed terms comply with applicable foreign exchange rules.

An asset or undertaking transfer requires a separate analysis. The parties should identify the assets being sold, the allocation of consideration and any applicable stamp duty or registration requirements. The tax treatment may depend on whether individual assets are transferred separately or an undertaking is transferred as a going concern under a qualifying structure.

Valuation is not merely a negotiation tool. It can affect regulatory compliance, tax calculations and the evidence required by banks or authorities.

5. Assess the Tax Consequences of Each Structure

Tax can materially affect the overall cost of an Indian business acquisition. The buyer and seller should model the likely tax consequences before deciding between a share purchase and a business transfer.

In a share purchase, the seller may incur tax on gains arising from the transfer of shares. The treatment depends on factors such as the nature of the shares, holding period, seller’s status, applicable exemptions and the tax law relevant to the transaction. The buyer should also consider withholding obligations where applicable.

In a business transfer, the tax outcome depends on the assets transferred and the legal structure used. A transfer of an undertaking for a lump sum may qualify for special treatment if it satisfies the statutory definition of a slump sale. An itemised asset sale may produce different results for different asset categories.

India’s Income Tax Act, 2025 came into effect on 1 April 2026. Transactions and tax periods must be analysed under the legislation applicable to the relevant period, including any transitional provisions. The Income Tax Department provides official tax legislation and guidance.

The parties should also consider indirect taxes, stamp duty, tax losses, carried forward credits and the availability of tax depreciation. The correct analysis depends on the precise transaction and should be completed before the purchase price is finalised.

6. Examine Contracts, Licences and Intellectual Property

An acquisition may be commercially attractive because of its existing contracts, licences, technology or customer relationships. However, these rights do not always transfer automatically.

In a share purchase, the company generally remains the same contracting entity. Even so, contracts may contain change of control clauses requiring consent or allowing termination when ownership changes. Regulatory licences may also impose conditions concerning ownership or management.

In a business transfer, the buyer must identify which contracts, permits and intellectual property rights can be assigned. Some contracts require the counterparty’s consent, while certain licences may be personal to the existing business and cannot simply be transferred.

Intellectual property due diligence should confirm ownership of trademarks, patents, software, designs, domain names and other material rights. The buyer should also examine employee and contractor agreements to confirm the business has the necessary rights to use and commercialise its technology.

The acquisition agreement should clearly identify which rights are included, which consents are required and who is responsible for obtaining them.

7. Prepare the Acquisition Agreement and Completion Conditions

The acquisition agreement should reflect the chosen structure and allocate the principal commercial and legal risks.

A share purchase agreement normally sets out the shares being sold, consideration, completion mechanics, warranties, indemnities and conditions precedent. It may also contain provisions concerning interim business conduct, restrictions on competing activities and post completion cooperation.

A business transfer agreement should identify the assets and liabilities included in the transaction, the consideration, the treatment of employees, contract assignments and the transfer of relevant records. The agreement should clearly distinguish assumed liabilities from those retained by the seller, subject to applicable law.

Conditions precedent may include regulatory approvals, third party consents, lender releases, satisfactory due diligence and corporate authorisations. The parties should agree what happens if a required approval is delayed or refused.

Where the acquisition involves an Indian company, the relevant corporate approvals and share transfer formalities must also be completed. Depending on the structure, additional filings, registrations or notifications may be required after completion.

8. Plan the Post Acquisition Integration

Legal completion is only one part of a successful acquisition. The buyer should prepare a plan for management transition, financial controls, employee communication, contract continuity and regulatory compliance.

For a share purchase, the buyer may need to appoint directors, update governance arrangements and implement new reporting systems. The company’s existing obligations remain in place, so outstanding filings and compliance issues should be addressed promptly.

For a business transfer, the buyer should confirm the assets have been delivered, relevant contracts have taken effect and any required registrations or licences are in place. The parties should also ensure employees, customers and suppliers understand the operational changes.

Sound business investment planning helps the buyer coordinate legal, financial and operational workstreams, rather than treating the acquisition as a single signing event.

A foreign company entering India for the first time should also consider whether it needs an Indian subsidiary, branch or another permitted business presence. The appropriate structure depends on its intended activities and the rules governing foreign entities in India. The decision to register a company is separate from the decision to acquire an existing Indian business, although both may form part of a broader market entry strategy.

Conclusion

A foreign company can acquire an Indian business through a share purchase or a business transfer, but the choice requires careful legal, regulatory, tax and commercial analysis. The buyer should confirm foreign investment eligibility, conduct due diligence, assess valuation and tax consequences, obtain necessary approvals and document the transaction properly.

Early planning helps identify risks before they affect the price or completion timetable. A structure designed around the buyer’s commercial objectives and India’s regulatory requirements provides a stronger foundation for a successful acquisition

Frequently Asked Questions

Can a foreign company directly acquire an Indian business?

Yes, subject to the applicable FDI rules, sectoral conditions, approvals and other legal requirements. The appropriate acquisition structure depends on the business and the buyer’s eligibility.

Is a share purchase better than a business transfer?

Neither is universally better. A share purchase preserves the existing company but exposes the buyer to its liabilities. A business transfer can allow the buyer to select assets and operations, but transferring contracts, licences and employees may require additional steps.

Does every foreign acquisition require Government approval?

No. Many investments fall under the automatic route. Approval may be required for specified sectors, investors or ownership structures. The applicable rules should be checked before completion.

What due diligence is required before acquiring an Indian company?

The review commonly covers corporate records, ownership, contracts, tax, litigation, licences, employees, intellectual property, assets, liabilities and regulatory compliance. The scope should reflect the transaction’s size, sector and risk profile.

What taxes apply to an Indian business acquisition?

The tax outcome depends on whether the transaction involves shares, individual assets or an undertaking, as well as the parties’ circumstances and applicable tax law. Tax advice should be obtained before agreeing the final structure and consideration.

Can the buyer choose which liabilities to acquire?

In an asset or business transfer, the parties can define the liabilities assumed under the agreement, subject to applicable law. In a share purchase, the company retains its liabilities because the company itself remains the same legal entity.

This update was released on 13 Nov 2026.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
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