Union Budget 2026–27 Changes M&A Deal Structuring Across FEMA, Buybacks & IFSC

Summary: Union Budget 2026–27 contains several changes relevant to M&A lawyers because they affect deal economics, regulatory approvals, diligence and transaction drafting. FEMA changes increase the Portfolio Investment Scheme limit for individual persons resident outside India while creating important questions around holdings crossing the 10% threshold, land-border investment controls, beneficial ownership and the proposed consolidated foreign-investment framework. Buyback proceeds return to capital-gains treatment, although additional promoter taxation, capital-loss set-off, Section 68 limits and transition provisions require transaction-specific analysis. IFSC incentives extend the deduction period to 20 consecutive years out of 25, but conditions relating to demerger and reconstruction may affect businesses proposed to be moved into GIFT City. The Budget’s data-centre and cloud-services incentives similarly depend on transaction structure, including the Indian reseller arrangement, permanent-establishment exposure and related-party safe-harbour conditions. MSME measures involving TReDS, receivables securitisation and the SME Growth Fund create both diligence considerations and potential financing opportunities. Biopharma SHAKTI is principally a sector-development measure, but transactions in the sector must continue to account for FDI conditions, Competition Act thresholds and regulatory milestones. These developments make targeted conditions precedent, indemnities, warranties, covenants and price-adjustment mechanisms increasingly important in M&A documentation.

Union Budget 2026–27: What M&A Lawyers Should Watch Out For

Budget commentary tends to celebrate headline announcements. Deal lawyers should look at what changes in a term sheet, a condition-precedent list or an indemnity schedule. The 1 February 2026 Budget, which became the Finance Act 2026 after assent on 30 March, matters less as a stimulus and more as a set of small shifts in deal economics, approvals and diligence. Each is real and each leaves gaps. This note covers five areas and flags where the drafting or the commentary is still unsettled.

1. FEMA: the liberalisation is in the Budget, but the control tightening is in the Rules

The Budget speech raised the individual limit for persons resident outside India (PROIs) under the Portfolio Investment Scheme from 5% to 10% of a listed company’s equity. It also raised the combined limit for such individuals from 10% to 24%. These headline figures are the least important part for M&A.

The Ministry of Finance implemented the individual-investor change through the FEMA (Non-debt Instruments) Third Amendment Rules, notified on 12 June 2026. Two points matter for deal teams:

• The 10% line is a re-characterisation trap.Where an individual PROI’s aggregate holding exceeds 10%, the investment stops being portfolio investment under Schedule III and must meet FDI requirements. A strategic buyer or family office building a toehold in a listed target should monitor this from the first tranche. Cure periods exist, and the amendment says temporary breaches within the prescribed divestment or reclassification period are not treated as contraventions. The cure period is not a planning tool.
• The control gate has moved.One law-firm analysis reads the May and June 2026 amendments together as embedding the Press Note 3 (2020) land-border regime in the Rules. On that reading, approval is triggered by downstream and indirect changes in beneficial ownership, not only at entry. Beneficial ownership is tested against PMLA control thresholds, and Rules 12 and 13 add an approval gate where control of a listed company passes to a land-border beneficial owner. This is a single practitioner’s reading. Other commentary describes the earlier 2026 amendments as relaxations for land-border investment. The characterisations conflict, so read the notified text before advising.

The draft points the same way. On 21 July 2026 the RBI released draft FEMA (Foreign Investment) Rules, 2026, which would replace the NDI Rules with a consolidated framework and were open for comment until 31 August 2026. The draft does not address valuation of convertible equity instruments or the permissibility of assured returns to non-resident investors. Those two gaps sit at the centre of most structured PE deals.

Doctrinal anchor

Doctrinal anchor: in Vijay Karia v. Prysmian Cavi e Sistemi Srl (2020) 11 SCC 1, the Supreme Court held that a FEMA contravention is compoundable and, without more, does not offend the fundamental policy of Indian law. A breach may therefore expose parties to compounding and delay without necessarily unwinding the transfer. That should shape approval-risk allocation: a long-stop date, price-adjustment or walk-away rights, and a specific indemnity, rather than a generic compliance warranty.

2. Buyback taxation: restored capital-gains treatment, with a promoter surcharge

The 2024 regime taxed buyback proceeds as deemed dividends in shareholders’ hands. The Budget reversed this. Gains from buybacks are again taxed as capital gains, not as income from other sources. The stated rationale was preventing improper use of the buyback route by promoters. So the restoration comes with an additional tax on promoters. This takes their aggregate burden to 22% for promoter domestic companies and 30% for other promoters. The same source records that the additional tax is now confined to buybacks under Section 68 of the Companies Act, 2013, and that a 12% surcharge applies to tax payable under the buyback provisions.

Four points for practitioners

Four points for practitioners:

• Offsetting capital losses is likely to be contested.Commentators expect that tax officers may resist set-off of capital losses against buyback proceeds where other capital gains exist in the same year, because it would reduce the promoter-level additional tax. Any tax opinion supporting a promoter-participating buyback should address this expressly.
• The Section 68 limit creates structuring questions.If the additional tax attaches only to Section 68 buybacks, exits through other routes (open offers, secondary sales, schemes of capital reduction under Section 66) need separate analysis. Regulators and revenue authorities may test them for substance.
• Buybacks are again usable in exit planning.In a PE-backed listed or pre-IPO company, a buyback can again sit alongside a secondary sale. Model the promoter’s incremental tax against the investor’s capital-gains position, and check SEBI’s Buy-Back Regulations, the Companies Act limits (25% of paid-up capital and free reserves, 10% by board resolution, post-buyback debt-equity of 2:1) and any Takeover Code creeping-acquisition effect on remaining holders.
• Transition wording should be checked.Confirm the effective date, April 2026 by most commentary, against each buyback already announced. Straddle deals are where mistakes will happen.

3. IFSC incentives: more generous, but anti-restructuring conditions matter

Section 147 of the Income-tax Act, 2025 now provides a deduction period of 20 consecutive years out of 25 for IFSC units, with business income taxed at 15% after the deduction period expires. That is a sharper long-term proposition for fund managers, treasury centres and reinsurers than the earlier 10-in-15 structure.

For M&A the important detail is the guardrail. New IFSC units commencing after 1 April 2026 qualify for the deduction only if not formed through demerger or reconstruction. Any plan to move an existing business into GIFT City by hive-off, slump sale or scheme will need close analysis under that condition. Treat any secondary source claiming that offshore funds can relocate to IFSC tax-neutrally (there is such a claim in the market) as unverified until you have read the statutory text.

Two gaps remain. First, the MAT credit carry-forward under section 115JD was not aligned with the extended 20-year holiday, and the position for IFSC units after MAT becomes a final tax needs clarification. Second, the treasury-centre and deemed-dividend refinements need a careful read in any group-financing structure.

4. Data centres and AI: a tax holiday that is conditional on structure

The headline item is a tax holiday up to FY 2047 for foreign companies providing cloud services globally using Indian data-centre services, provided Indian customers are served through an Indian reseller entity. The holiday is paired with a 15% cost-based safe harbour for resident entities providing data-centre services to a related foreign cloud company.

The exposure lies in the conditions. As one international firm’s analysis puts it, services to Indian customers must be routed through an Indian subsidiary or reseller, not provided directly by the foreign entity. The same analysis warns that if the foreign entity is found to have a permanent establishment or business connection, the attributable income could be taxed at up to 38.22%. Diligence on a data-centre platform should therefore ask four things:

• Who contracts with Indian customers, and does any personnel or contract structure risk creating a PE?
• Does the related-party arrangement actually fit the safe harbour, or does the target rely on a bespoke arm’s-length study?
• Is any of the target’s value dependent on holiday eligibility that turns on facts (location, data-centre specification) rather than status?
• Will a change of control, or a post-closing reorganisation of the reseller chain, disturb eligibility?

Buyers should get a specific tax indemnity or price-retention mechanism for eligibility risk, plus a covenant not to restructure the Indian-customer channel without seller consent during the survival period. Power and water constraints on hyperscale expansion are a commercial diligence issue, not a tax one, but they affect valuation.

5. MSME liquidity: a diligence item, and a possible new asset class

The Budget mandates TReDS as the settlement platform for CPSE purchases from MSMEs, with payment within 45 days. It also extends credit-guarantee support for TReDS invoice discounting and links GeM to TReDS. It permits securitisation of TReDS receivables to create a secondary market. A dedicated ₹10,000 crore SME Growth Fund provides equity support.

Three points for deal teams

Three points for deal teams:

• Payables diligence for MSME-supplier exposure.For targets with material CPSE or MSME supply chains, TReDS mandates make ageing visible on-platform. Overdue MSME payables already carry statutory consequences under the MSMED Act, 2006 (including compound interest) and the Income-tax deduction rule for delayed payments to micro and small enterprises. Add a specific warranty on MSME payment compliance.
• The securitisation limb needs regulatory follow-through.Pooling receivables into asset-backed securities will need SEBI and RBI framework notifications before it becomes bankable. Do not price a structured product on the announcement alone.
• The Growth Fund is a source of minority capital.Its criteria and operating guidelines are pending. Expect term-sheet issues about investor-rights parity with private investors, and about how any government-linked investor’s information and consent rights interact with a later sale.

6. Bio-pharma: incentives that shape the target pool, not deal mechanics

Biopharma SHAKTI is a ₹10,000 crore, five-year programme for biologics and biosimilars, including three new NIPERs, seven upgraded NIPERs and 1,000 accredited clinical-trial sites. The CDSCO is to be strengthened with a dedicated scientific review cadre. Industry voices have already called the outlay a modest starter kit in a capital-intensive field.

This is a thematic signal, not a fiscal event. The M&A relevance is sector-specific:

• FDI policy. Pharma remains subject to its own sectoral conditions. As I understand the existing policy, greenfield is automatic and brownfield is automatic only up to 74%, with approval above that (verify against the current consolidated FDI policy). Nothing in the Budget changes this, and the land-border approval gate applies on top.
• Competition Act. Since September 2024 the deal-value threshold (₹2,000 crore) can catch biotech and platform acquisitions with low Indian turnover.
• Regulatory-milestone deal structuring. CDSCO timeline improvement is aspirational. Use milestone-based consideration and specific indemnities for regulatory and data-integrity findings. Do not price on assumed faster approvals.