Unstable government policies like retrospective tax on transactions, slower economic growth and fight between investors and promoters on corporate governance will slow down merger and acquisitions, private equity investments and companies’ ability to raise money by selling shares to qualified institutional investors.

?India has taken a major beating in the areas for which is was popular like economic growth, rule of law, stability of the government and corporate governance,? says Harminder Sahni, MD of advisory and consulting firm Wazir Advisors. ?Issues like Lilliput have made investors realise that corporate governance in India is far behind expectation.?

The volume of M&A, PE and QIP deals dipped 3% in the first three months of the calendar 2012 to $20.4 billion even as number of transactions rose to 297 from 219 in the same period previous year, a study by M&A Advisory and PE consulting firm Grant Thornton shows.

The volume for first three months in the previous year stood at $21billion. Inbound deals were the worst casualty with volumes of overseas companies purchasing Indian companies falling by 90% to $1.3 billion in 36 transactions from $13.8 billion in 26 deals in the same period previous year.

Consultants and bankers say anti-investors policies have created a fear among sellers and purchasers. ?The policy paralysis of the last year has started to hurt us and the tax and regulatory space is risky,? says Sanjeev Krishnan, executive director at consulting and audit firm Pricewaterhouse Coopers. “Investors see retrospective taxation as a risky thing,? says Krishnan. ?2012 will be a challenge in terms of inbound deals.”

The Budget proposal to tax acquisitions retrospectively will deter overseas investors. ?The recent Budget amendments proposed on the Vodafone issue is likely to impact deal sentiments and may potentially lead to re-pricing of deals and delay in deal closures, especially, larger deals,? says the Grant Thornton report.

Outbound deals where Indian companies purchase overseas companies also declined by 60% to $700 million in 26 deals from $1.7 billion in 34 deals. ?Outbound deals in India were always driven by the large corporates that are very few,? says Sahni of Wazir Advisors. ?Companies like Reliance Industries, with a cash pile of over $25 billion, have not been able to find a good target company in the outside market despite near distress situation.?

Access to funds also forced Indian companies to stay away from deals. ?As the banking sector is under pressure, finance for acquisition in not easily available,? says Krishnan of PwC. ?Also, barring the large business groups, Indian companies have lost the appetite for acquisitions and want to focus on their domestic business model.?

But Indian companies were active in buying and selling companies, selling or purchasing stakes. The volume rose to $16.3 billion in 115 deals compared to $2.4 billion in 82 deals. ?The point to note is a lot of this (domestic deals) comes from restructuring within the group,? says Harish V, partner, India leadership team at Grant Thornton.

?There is an internal performance pressure on everybody,? says Sahni of Wazir Advisors. ?People are waiting for the 2014 elections and it would be ideal to have elections by the year-end so that things are sorted out.?

He adds: ?There will be a further rise in the internal restructuring in near future.? ?Promoters are now looking at focusing on managing their bottomline and doing away with non-core assets or entities,? Krishnan of PwC points out.