Diversity and inclusion: A growing factor in mergers and acquisitions

“Today, deals are getting delayed if certain aspects are not in order. For example, questions about employment benefits, ESG (environment, social, governance) policies, and whether the company has a D&I policy are now standard," a senior partner of a law firm said, adding that people are even asking about policies like POSH (prevention of sexual harassment). “Just a few years ago, no one was asking these questions," the expert said, requesting anonymity.

Failure to meet diversity goals could raise red flags during due diligence, potentially hindering approval for cross-border transactions, according to Kunal Sharma, partner at Singhania & Co. “While the direct impact may be less pronounced, companies involved in cross-border M&A must align with international D&I standards to attract and retain foreign investments," Sharma said.

To be sure, India lacks specific legal mandates requiring diversity considerations in M&A transactions. But experts agree that it is becoming crucial in the decision-making process.

The rising importance of D&I is closely tied to the growing focus on ESG assessments, with many global private equity (PE) funds conducting additional due diligence on D&I criteria. Aparna Mittal, founder of the Samāna Centre for Gender, Policy and Law, explained, “Many global PE funds, especially, conduct additional due diligence on D&I parameters to understand the social impact and governance standards of a company they will invest in."

However, Debjani Aich, employment law partner at IndusLaw, pointed out that while D&I is gaining attention, it is still not a standard part of merger agreements. “There is a marked increase in shareholders considering an equitable workforce in merger decisions, but this is not yet a deal-breaker from a practical perspective," Aich said.

Also read | India Inc's annual legal costs hit ₹40K cr on rising mergers and acquisitions, IP cases

According to a partner of a leading law firm in India, in one recent deal, the law firm was involved in a transaction where an American venture capital investment banking firm sought to invest in an Indian financial advisory company. The lawyer mentioned that while the target company was excited about the investment, the American firm insisted on compliance measures that, though mandatory in the US, were merely guidelines in India.

These requirements included equity in employee ownership, a diverse employment culture, a POSH policy, and separate toilets for female employees. The deal ultimately went through, with the compliance measures met, and the advisory company is now a publicly listed entity.

In another deal, the UK-based investor of an Indian venture capital firm, which was infusing funds into a local company, insisted that the Indian company had to notify the investor of any complaints made against its management. “Both these deals went through, because obviously, the company needs money, so they will agree to any condition. But this just shows the undercurrent," the lawyer cited earlier said, requesting anonymity.

Another senior partner at a law firm, also on the condition of anonymity, mentioned about a recent equity stake transfer involving multinational conglomerate "X" that highlighted the growing importance of D&I. The acquirer's employee policies were found to be male-centric, reflecting its predominantly male workforce.

While the policies included basic benefits for female employees to comply with labour laws, they lacked provisions for a more female-friendly workplace, such as separate washrooms with sanitary napkin vending machines, menstrual leave, and leadership training programs for women—benefits that were provided by the target company, X.

Also read | Reverse mergers gain ground on the expressway to public markets

As a result, some women employees from X were dissatisfied with the equity transfer move and refused to consent for the same. To avoid delays, the acquirer ("Y") quickly overhauled its policies during the diligence phase, ensuring they were inclusive and aligned with the expectations of a more diverse workforce. This proactive response was key to the deal's success, the expert said.

To avoid delays, the acquirer ("Y") quickly overhauled its policies during the diligence phase, ensuring they were inclusive and aligned with the expectations of a more diverse workforce. This proactive response was key to the deal's success, the lawyer said.

Although India lacks a specific legal framework mandating D&I in M&A transactions, experts emphasize that these issues are becoming increasingly relevant in the corporate world.

Anshul Prakash, partner at Khaitan & Co., noted that while no Indian law explicitly governs D&I in M&A transactions, aligning diversity policies during such deals has become standard practice. He stressed that it is vital to empower employees, regardless of gender, sexual orientation, or identity.

Deepti Thakkar, lead of HR and employment laws at Nishith Desai Associates, echoed the sentiment. “Ensuring diversity and inclusion can address cross-cultural integration issues. Reviewing merging entities’ policies and practices should be one of the key considerations in corporate mergers," she said, noting that some Indian businesses are legally required to implement equal opportunity policies, particularly for individuals with disabilities and transgender employees.

Experts also noted that while D&I may not directly influence regulatory approval for mergers in India, its growing significance cannot be ignored. Kailash Lad, partner at Little & Co, observed that the increasing focus on D&I is driven by scrutiny from institutional investors and regulators, especially for companies listed on stock exchanges.

Also read | Company boards set for rejig, ESG, AI skills in demand, Deloitte's Goradia says

As global standards evolve, experts predict that D&I considerations will increasingly become a core part of M&A transactions. Adil Ladha, partner at Saraf & Partners, suggested that a successful M&A integration strategy requires careful planning to preserve and enhance diversity within the combined organization. “Teams and HR heads could develop comprehensive integration plans that would outline the steps each organization will take before, during, and after the reorganization to preserve the diversity and inclusion policies," he said.