Globalisation has blurred business boundaries. Indian companies today are not just competing internationally but also merging and acquiring entities across borders. However, when corporations operate beyond national limits, the legal complexities multiply — especially under India’s corporate and foreign exchange laws. This blog unpacks the legal framework, regulatory requirements, and Foreign Exchange Management Act (FEMA) implications that shape cross-border mergers in India.
Understanding Cross-Border Mergers
A cross-border merger refers to the amalgamation of an Indian company with a foreign company, or vice versa. In simple terms, it’s a merger that involves the transfer of assets, liabilities, and ownership across national boundaries.
Under Indian law, cross-border mergers are recognised under Section 234 of the Companies Act, 2013. This provision formally allows mergers and amalgamations between Indian companies and companies incorporated in jurisdictions notified by the Central Government.
There are two main types:
- Inbound Merger: A foreign company merges into an Indian company.
- Outbound Merger: An Indian company merges into a foreign company.
Both have distinct legal and FEMA implications.
Legal Framework Governing Cross-Border Mergers
The legal regime for cross-border mergers in India rests on several statutes and regulatory authorities working together.
1. The Companies Act, 2013
- Section 234: Enables mergers between Indian and foreign companies, subject to prior approval by the Reserve Bank of India (RBI).
- Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016: Lays down the procedural framework for such mergers.
- Approval of the National Company Law Tribunal (NCLT) is mandatory.
2. FEMA (Cross Border Merger) Regulations, 2018
Issued by the RBI under the Foreign Exchange Management Act, 1999, these regulations govern the flow of foreign exchange during cross-border mergers.
They ensure that both inbound and outbound mergers comply with India’s foreign exchange and investment policies.
3. Other Relevant Laws
- Income Tax Act, 1961 – governs tax implications, capital gains, and transfer pricing.
- Competition Act, 2002 – checks anti-competitive effects of mergers through the Competition Commission of India (CCI).
- Securities and Exchange Board of India (SEBI) regulations – applicable for listed companies.
- Insolvency and Bankruptcy Code, 2016 (IBC) – relevant if either merging company is under insolvency proceedings.
Understanding FEMA (Cross Border Merger) Regulations, 2018
The FEMA (Cross Border Merger) Regulations, 2018, issued by the RBI, are the cornerstone of India’s framework for managing the foreign exchange aspects of these mergers.
Let’s break them down clearly.
A. For Inbound Mergers (Foreign → Indian Company)
- The resultant Indian company can issue securities to non-resident shareholders of the foreign company under the Foreign Direct Investment (FDI) Policy.
- Assets and liabilities of the foreign company become those of the Indian company. However, the Indian company must ensure:
- Compliance with sectoral caps under FDI.
- Valuation follows internationally accepted principles.
- Borrowings of the foreign company adhere to External Commercial Borrowing (ECB) guidelines or are repaid within two years.
B. For Outbound Mergers (Indian → Foreign Company)
- Indian shareholders can hold foreign securities in compliance with the Liberalised Remittance Scheme (LRS) and Overseas Direct Investment (ODI) rules.
- The resultant foreign company can acquire and hold Indian assets, but such assets must be disposed of within two years, unless RBI allows retention.
- Any liabilities or borrowings in India must be repaid as per Indian regulations within the prescribed time frame.
C. Valuation and Accounting
- Valuation must be done by a recognized valuer as per internationally accepted accounting standards.
- The resultant entity must furnish all necessary filings to the RBI to ensure compliance.
Role of Regulatory Authorities
A cross-border merger doesn’t pass through a single regulator — it requires a multi-agency approval process:
| Authority | Function |
|---|---|
| NCLT | Approves the merger scheme under Companies Act, 2013 |
| RBI | Oversees FEMA compliance and foreign exchange flow |
| CCI | Ensures merger doesn’t harm market competition |
| SEBI | Regulates disclosure and investor protection for listed entities |
| IT Department | Reviews tax and transfer pricing aspects |
Each plays a crucial role in ensuring the merger is both legally sound and economically compliant.
Key Legal and Practical Challenges
While the law allows cross-border mergers, the process remains intricate.
Here are some practical challenges faced by companies:
- Valuation Differences — Indian GAAP vs. IFRS create accounting inconsistencies.
- Taxation Complexities — Identifying capital gains, indirect tax liability, and transfer pricing adjustments.
- Regulatory Delays — Multiple authorities, sequential approvals.
- Compliance with Sectoral Caps — Especially in restricted sectors like defence, telecom, or insurance.
- Cross-Jurisdictional Enforcement — Recognition of NCLT orders abroad can be tricky.
Despite these hurdles, India’s legal environment is progressively liberalizing to attract global mergers and investment.
Recent Developments and Trends
- The RBI has adopted a liberal stance post-2018, simplifying FEMA approvals.
- Permitted jurisdictions now include the USA, UK, Singapore, Japan, and several EU nations.
- Increasing cross-border interest in India’s tech and manufacturing sectors.
- Rise in outbound mergers as Indian conglomerates expand globally.
- Growing importance of ESG (Environmental, Social, and Governance) considerations in merger decisions.
Cross-border mergers mark India’s transition into a truly global economy.
They not only create value and synergy but also test the balance between liberalisation and regulation.
With the Companies Act, 2013 and FEMA (Cross Border Merger) Regulations, 2018, India now offers a clear, structured, and investor-friendly framework for international corporate restructuring.
Yet, success in such mergers demands legal precision, regulatory insight, and strategic foresight.
In essence, cross-border mergers in India are where law, economics, and globalization converge — shaping the next chapter of Indian corporate evolution.
For readers interested in the securities and regulatory framework, the Securities and Exchange Board of India Act, 1992 provides essential insights on investor protection, disclosure requirements, and corporate governance, which are critical in cross-border mergers involving listed companies.
You can access the eBook here: Securities and Exchange Board of India Act, 1992 (EBC)
