In April 2025, the United States announced it was imposing tariffs against more than 180 countries and territories worldwide. India is set to face reciprocal levies of 26% and countries like China, may face even higher rates of duty.
Tariffs are generally defined as additional duties or taxes imposed by a government on the goods or services imported into or exported from a country. Similarly, reciprocal tariffs are those imposed by one country against another in response to tariffs previously imposed by the other country. Usually, imposts are levied with the intention of increasing the prices of foreign products. Such goods become less attractive and domestic industries get a boost. However, such tariffs often increase inflation. This is because import costs increase in situations when domestic industries cannot supply alternatives to imports.
Realising this, the US relaxed tariffs on critical manufacturing, including pharmaceuticals, semiconductors, copper and energy. Such inconsistent policies have compelled businesses to adopt a wait-and-see approach, looking for further clarity. The US stance on tariffs and their implementation continues to develop. As it stands today, top economies, including India, are negotiating trade agreements with the US, and we hope the tariffs settle to moderate levels soon.
In the context of the Indian economy, the US was the largest destination for the export of its goods during the year 2023-2024. It is likely numerous Indian companies will feel the adverse effects of US tariffs, including cash-strapped start-ups and other businesses with razor-thin profit margins.
Investors looking to put their assets into India or any other country affected by the tariffs must consider widening the scope of their diligence beyond past performance and company growth projections. They also have to conduct extensive research into such areas as product supply chains, the origins of raw materials, target markets, profit margins and company production costs, to assess the direct as well as indirect impact on margins and resultant valuations of target companies.
Although some may consider the tariff imposition a force majeure event for the purpose of commercial contracts, courts, as in Alopi Parshad and Sons Limited v Union of India, have generally held that price fluctuations and unforeseen circumstances are not sufficient to frustrate a contract. Further, force majeure clauses are not common in M&A transaction documents. For this reason, it is now advisable that investors critically review and, where appropriate, amend material adverse effect (MAE) provisions in their commercial agreements. This will ensure that they can terminate, reprice or restructure such contracts should tariffs or other levies be raised significantly. MAE clauses have to be broadly drafted to take into account direct and indirect tariff consequences after the execution of the agreement.
International investors may be able to restructure their transactions and complete the acquisitions from tariff-efficient jurisdictions. They should ensure that contracts allow for the assignment of the benefit of the agreement to a group entity without requiring the consent or approval of the sellers or the target.
The tariffs may obstruct the exit plans and returns of investors. Investors, especially those who are looking to exit within a particular time frame, must ensure they accurately negotiate their exit waterfall to guarantee that tariffs do not derail their timely exits. Transaction documents should be drafted to enable investors to renegotiate exit terms should tariffs be levied after the completion of the transaction. In addition, investors should consider incorporating rights such as put options to allow for their exit by selling to the promoters. This would be in the event that tariffs are imposed after execution and adversely affect investor returns.
US tariffs have caused a great deal of doubt and uncertainty about cross-border M&A transactions. Although it may be too soon to know how Indian industries have to evolve to overcome these hurdles, experience has shown that marquee investors often take advantage of such situations by investing in uncertain economies at attractive valuations. However, tariffs are likely to exert a long-term effect during the period when relevant countries are negotiating trade agreements. Investors should therefore remain vigilant and cautious when tracking developments involving US tariffs.
Bharucha & Partners – Parag Bhide, Vanshika Deora and Shaam Thelapilly