Navigating the legal terrain private equity investments in India F&B sector

Mitali Mehta

The Food and Beverage (F&B) sector in India has recently emerged as an attractive destination for private equity (PE) investors, and has experienced exponential growth. Such growth has been driven by rising affluence, aspiration, and improved accessibility to F&B products. The impact of digitization and quick commerce in this sector has hugely benefited accessibility for rural consumers as well, fuelling the rise of new products and brands.

To add to this, innovations and investments have aided the introduction of numerous brands that cater to fitness enthusiasts specifically within the Indian market. Additionally, social Media presence is nudging the F&B business owners to establish its presence online and connect directly with their end customers.

It is anticipated that the Indian F&B industry is likely to reach $504.92 billion by 2027, attracting significant investments in organized retail, cloud kitchens, and branded products to cater to the evolving preferences of the growing middle class[1].

PE investors venturing into India's F&B sector, navigating the legal landscape of this dynamic and evolving industry require a comprehensive understanding of various regulatory, contractual, and intellectual property considerations

REGULATORY COMPLIANCE

India's F&B sector is subject to a myriad of regulations covering extant foreign exchange regulations (for non-residents) to the applicability of food safety standards to import-export policies. Key heads covering regulatory compliance requirements include:

-Food Safety and Standards Authority of India Regulations[1] - which provides for compliance to ensure food safety and quality control.

• Foreign Exchange Regulations - For non-resident investors, compliance with the NDI Rules[2] including sectoral caps, pricing guidelines and other applicable conditionalities would be imperative. These would be relevant for inter alia transaction structuring.
• Licensing Regimes - In addition to FSSAI, there would be compliance with licensing requirements for labelling, packaging, liquor licenses, import-export licensing and potentially pharmaceutical and drug licensing (depending on the nature of the food products).

Additionally, investors should be mindful of local (including state and district level) laws governing manufacturing practices, distribution, and taxation to mitigate regulatory risks.

INTELLECTUAL PROPERTY (IP) PROTECTION & BRANDING

F&B sector being a consumer-centric centre thrives on its brand building, making the intellectual property, brand and goodwill attached to it, the most relevant piece of its business. IP assets, (encompassing trademarks, patents, copyrights, and trade secrets) play a critical role in the success of F&B businesses. The key considerations to factor in include:

• Trademark Protection - Securing trademarks for brand names, logos, and products and registering trademarks in relevant product classes and jurisdictions to prevent unauthorized use by competitors.
• Brand Licensing - Water-tight agreements for brand and IP licensing, especially to franchisees and distributors, outlining usage rights and quality control measures, which can prevent unauthorized or wrongful use of the IP.

.CONSUMER PROTECTION LAWS

With the advent of social media and quick commerce today, the common consumer today is aware - aware of his rights and outspoken for enforcing such rights. This awareness, coupled with regulatory scrutiny can make or break an F&B business and therefore compliance with consumer protection laws is non-negotiable. PE investors should ensure that the target company strictly adheres to advertising standards, product quality and labelling requirements, and other consumer safety regulations.

Non-compliance with consumer protection laws can lead to reputational damage, legal liabilities, and financial repercussions.

DUE DILIGENCE

An extensive due diligence into the operations of the target F&B company is of paramount importance for PE investors to assess the viability and risks associated with potential investments in the F&B sector. This would include scrutinizing the target company's financial health, operational capabilities, supply chain, and compliance with regulatory requirements.

PE investors are encouraged to conduct comprehensive due diligence on the IP of the target company to assess its IP portfolio, and implement strategies to mitigate the risk of infringement or dilution of the brand value.

CONTRACTUAL SAFEGUARDS

Drafting robust legal agreements is essential to protect the interests of PE investors in making their investments. Key contractual provisions include adding definitive non-binding warranties, indemnities, defining ownership and management rights, exit mechanisms, mechanisms to address defaults and dispute resolution mechanisms. An exit strategy would also be included through the transaction documentation as it would be a guardrail built in while anticipating potential challenges and devising contingency plans to maximize returns and mitigate risks.

Additionally, investors should incorporate protective covenants to safeguard against potential risks such as intellectual property infringement, supply chain disruptions, and changes in the regulatory landscape.

While PE investments in India's F&B sector offer lucrative opportunities for investors seeking high-growth prospects, proactive addressing and meticulous attention to legal and regulatory considerations can help the investors mitigate risks and unlock the full potential of their investments in India's thriving F&B landscape