“The economic fallout as a result of US-imposed tariffs is paving the way for Distressed Acquisitions in India, as multiple exporters face reduced demand, liquidity strain, and compliance burdens. This analysis aims to identify legal and regulatory pitfalls that buyers must be aware of when acquiring distressed entities.”
The United States has recently imposed a 50 percent tariff on Indian imports, a measure framed under the slogan “Make America Great Again.” The objective is to raise the cost of foreign goods relative to domestic products, with the stated goal of reclaiming economic advantages perceived to have been lost through global trade practices.
From an Indian perspective, the implications are significant. The immediate impact is already visible in Tamil Nadu’s textile hub in Tirupur, which has been a major exporter to the U.S. market. India’s largest footwear manufacturer, the Farida Group, which generates nearly 60 percent of its business from U.S. buyers, had been evaluating a major expansion project worth $ 10 Bn, in southern Tamil Nadu. With the announcement of tariffs, new orders froze and the $ 10 Bn worth project was stalled.
Distressed Acquisitions: Legal Hurdles
Tariff-induced disruptions can create contractual, compliance, and regulatory challenges, significantly altering the risk profile of an acquisition. For example, cancelled U.S. orders may give rise to claims for breach of supply obligations or disputes over termination clauses.
In India, force majeure provisions rarely cover trade policy changes, and the legal position is unsettled. In Alopi Parshad and Sons Limited v. Union of India, the Supreme Court held that price fluctuations or unforeseen circumstances do not, by themselves, frustrate a contract.
While acquirers may be drawn to established businesses at discounted valuations, such targets may carry latent liabilities from supply contract disputes. Due diligence in Distressed Acquisitions should therefore focus on reviewing standard supply contracts, assessing indemnity coverage, and identifying risks linked to policy-driven disruptions.
Exporters often rely on government incentive schemes such as the Remission of Duties and Taxes on Export Products (RoDTEP), which reimburses duties and taxes incurred during production and distribution, subject to minimum export volume thresholds. Tariff-driven reductions in export volumes may disqualify exporters from these benefits or require refunds to the government.
Such liabilities may not be reflected on the balance sheet but can crystallise post-acquisition. It is therefore advisable to conduct a compliance audit of incentive claims and ensure that any exposure is backed by seller indemnities in Distressed Acquisitions.
Distressed exporters may attempt to re-route goods through third countries to bypass tariffs, a commercially expedient but legally risky practice. For example, when the U.S. imposed an export ban on certain AI-capable processors to China, imports were routed via the UAE. Such practices can expose sellers to anti-circumvention investigations, customs penalties, and potentially criminal liability. It is recommended to review customs filings, conduct trade compliance diligence, and include specific warranties addressing misdeclarations in the acquisition agreement.
With factory closures and retrenchments, buyers should anticipate significant employee-related claims, including gratuity, provident fund arrears, and retrenchment compensation. In certain states, failure to meet these obligations may also trigger the recall of subsidies or tax incentives. These liabilities rank high in insolvency proceedings and should be explicitly considered in the deal structure. It is therefore recommended to conduct thorough employment-linked due diligence and quantify all outstanding claims, including potential recalls of incentives, to ensure that these obligations are properly accounted for in the Distressed Acquisitions.
Distressed Acquisitions: Way Forward
Acquiring a distressed business can appear attractive due to discounted valuations, but without careful structuring, such deals can backfire on the buyer. Distressed acquisitions often carry hidden compliance and regulatory burdens that may not be immediately apparent. In India, the Competition Commission (CCI) does not currently consider tariff shocks as a factor in merger reviews, creating a regulatory gap. Transactions may proceed without initial scrutiny, but there is a heightened risk of future intervention if the acquisition is later found to have an appreciable adverse effect on competition.
While tariff-induced distress may make a target more appealing, potential acquirers often prefer an acquisition under the Insolvency and Bankruptcy Code (IBC), which provides a cleaner title and extinguishes pre-existing liabilities, rather than engaging in a private distressed sale with lingering compliance and contractual risks.
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