Cross Border Mergers

1.Foreign Exchange Management Act, 1999

•The Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 and Foreign Exchange Management (Overseas Investment) Rules, 2022 & Regulations, 2022 are extremely important pieces of legislation for allowing foreign investment in India and The Regulations govern acquisition/transfer of equity instruments by non-residents and overseas investments by Indian residents, thereby, directly impacting the structuring of cross-border mergers.

•In addition to this, the Reserve Bank of India (the RBI) has notified Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 under the Foreign Exchange Management Act, 1999. These Regulations specifically deal with cross border mergers and contain provisions pertaining to mergers, demergers, amalgamations and arrangements between Indian companies and foreign companies. These regulations also discuss the concepts of inbound and outbound investments.

•If the foreign company is a JV/WOS of an Indian Company, then it is required to adhere to the conditions mentioned in (Overseas Investment) Rules & Regulations, 2022. Further, if the inbound merger of the JV/WOS leads to the acquisition of a subsidiary of the JV/WOS, then it is required to comply with the ODI Regulations, specifically regulations 6 and 7. If in an outbound merger, shares are being acquired by a person resident in India, then such acquisition becomes subject to the ODI Regulations as prescribed by the RBI.

2.The Competition Act, 2002:

•The Competition Commission of India (CCI) regulates the mergers in order to prevent the rise of monopolistic mergers. While mergers help in creating economies of scale and lead to increase in profits, they may also contribute to the creation of monopolistic structure. CCI examines combinations that may cause an appreciable adverse effect on competition (AAEC). Hence, mergers are made subject to the competition laws of the country.

•The CCI has to assess and inquire into any merger which may have an adverse impact on the healthy competition in the market. While making such assessment as to the adverse effects the commission takes account of a number of factors such as actual and potential level of competition through imports in the market, extent of barriers to entry into the market, level of combination in the market etc.

•Even a likelihood of causing of adverse impact is adequate for the competition commission to rule that the merger is creating an adverse impact. If the merged enterprise created post a cross-border merger possesses assets worth more than US $ 1 bn, or turnover more than US $ 3 bn; or the group to which the merged enterprise belongs possesses assets worth more than US $ 4 billion, or turnover more than US $ 12 billion then the competition commission is required to examine such combination.

•Conflict of Jurisdictions is another such problem wherein whether or not the merger would affect the competition in the market positively or negatively would depend on the market situation which is unique to every country.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2A(i) (Syllabus 2022).

Rule 25A of Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 mentioned states merger or amalgamation of a foreign company with a Company and vice versa. It provides that:

(1)A foreign company incorporated outside India may merge with an Indian company after obtaining prior approval of Reserve Bank of India and after complying with the provisions of sections 230 to 232 of the Act and these rules.

(2)(a) A company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure B after obtaining prior approval of the Reserve Bank of India and after complying with provisions of sections 230 to 232 of the Act and these rules.

(b)The transferee company shall ensure that valuation is conducted by valuers who are

members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under clause (a) of this sub-rule.

(3)The concerned company shall file an application before the Tribunal as per provisions of section 230 to section 232 of the Act and these rules after obtaining approvals specified in sub-rule (1) and sub-rule (2), as the case may be.

(4)Notwithstanding anything contained in sub-rule (3), in case of a compromise or an arrangement or merger or demerger between an Indian company and a company or body corporate which has been incorporated in a country which shares land border with India, a declaration in Form No. CAA-16 shall be required at the stage of submission of application under section 230 of the Act.

(5)Where the transferor foreign company incorporated outside India being a holding company and the transferee Indian company being a wholly owned subsidiary company incorporated in India, enter into merger or amalgamation, –

(i)both the companies shall obtain the prior approval of the Reserve Bank of India;

(ii)the transferee Indian company shall comply with the provisions of section 233;

(iii)the application shall be made by the transferee Indian company to the Central Government under section 233 of the Act and provisions of rule 25 shall apply to such application; and

(iv)the declaration referred to in sub-rule (4) shall be made at the stage of making application under section 233 of the Act.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 2(a) (Syllabus 2017).

The concept of inbound mergers was introduced in the Companies Act, 2013 as part of Section 234 of the Companies Act, 2013. Following are the key regulations which need to be followed during an inbound merger:

(i)Transfer of Securities

Typically, the resultant company of the cross-border merger can transfer any security including a foreign security to a person resident outside India in accordance with the provisions of Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instrument) Regulations, 2019. However, where the foreign company is a joint venture/ wholly owned subsidiary of an Indian company, such foreign company is required to comply with the provisions of Foreign Exchange Management (Overseas Investment) Rules, 2022.

(ii)Branch/Office outside India

An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India for in accordance with the Foreign Exchange Management. In case of transfer of securities both Buyer as well as Target can use the service of a Tripartite whose job is to have Securities in the Books and doing all back-office operations (including valuation of the Securities).

(iii)Borrowings

The borrowings of the transferor company would become the borrowings of the resulting company. The Merger Regulations has provided a period of 2 years to comply with the requirements under the External Commercial Borrowings (ECB) regime. The end use restrictions are not applicable here. Cross Border Mergers require hedging of External Commercial Borrowings (ECB) as well. An External Commercial Borrowings (ECB) is an arrangement between Indian Buyer and Foreign Bank whereby Foreign Bank is funding to Indian Corporate via Foreign Currency Loan having specific amount, tenor. Foreign Exchange Management Act, 1999 does permit hedging of loan taken from outside Bank in Indian Books.

(iv)Transfer of Assets

Assets acquired by the resulting company can be transferred in accordance with the Companies Act, 2013 or any regulations framed thereunder for this purpose. If any asset is not permitted to be acquired, the same shall be sold within two years from the date when the National Company Law Tribunal (NCLT) had given sanction. The proceeds of such sale shall be repatriated to India.

(v)Opening of overseas bank accounts for resultant company

The resultant company is allowed to open a bank account in foreign currency in the overseas jurisdiction for a maximum period of 2 years in order to carry out transactions pertinent to the cross-border merger.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 2A(iv) (Syllabus 2022).

The trend of cross border mergers increased recently. Cross border mergers have opened up vistas of opportunities. It enables an Indian company to utilise sophisticated levels of technical knowhow offered by the foreign collaborator whereas enables the latter to utilise the large market and resources of India.

The benefits anticipated are:

•Expansion of markets

•Geographic and industrial diversification

•Technology transfer

•Avoiding entry barriers

•Industry consolidation

•Tax planning and benefits

•Foreign exchange earnings

•Accelerating growth

•Utilisation of material and labour at lower costs

•Increased customers base

•Competitive advantage.

And Challenges are -

•the risks regarding Tax implications

•Regulatory Landscape and

•Political scenario is to be tackled with confidence.

•Technological difference

•Strategic issues

•Overpayment in the deal

•Failure to integrate

•HR challenges.

•Legal issues in different countries

•Accounting challenges

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(d) (Syllabus 2017).

To

Xxxxx

Frugal Industries Limited

Dear Sir,

This is to advice that under scheme of arrangement, either in the nature of merger or demerger the Frugal Industries demerged company has to comply with Section 230 to 234 of Companies Act, 2013, international laws applicable to company, such as Swedish Laws, USA laws, RBI, FEMA, Income Tax Act, Compliance with Sectoral Regulations as applicable to the company alongwith SEBI Compliances etc.

While going through the provisions of Section 234 it is evident that same applies to cross border mergers of Indian companies with foreign companies and vice versa and the provisions mention only about the words “Merger” and/ or “Amalgamation” so the Section 234 do not provide for or rather restrict the demerger of the Indian Companies with foreign company.

In addition to the above, Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 is silent on ‘Demergers’ and mentions only ‘Mergers’ and ‘Amalgamations’. Moreover, Foreign Exchange Management (Cross Border Merger) Regulations, 2018 are applicable to the mergers and amalgamations of the Indian companies with the foreign companies only.

For obtention of Prior approval of RBI for undertaking any cross-border merger, the transferee entity to ensure valuation by a valuer and a declaration is required to be submitted by the transferee company along with the application to RBI for obtaining its approval for the merger.

Procedure as specified in Section 230-232 of the Act are to be undertaken (like as applicable to a domestic merger. In case of outbound merger, foreign entity involved should be from a permitted jurisdiction.

In the Sun Pharma’s Scheme of Arrangement NCLT Ahmedabad stated that the Rule 25A is silent on “demergers”. The Procedure mentioned in Rule 25A is for Inbound as well as Outbound merger. In absence of clarity over the permissibility of a foreign company demerging its business undertaking to an Indian company or vice versa under the Act, one should not follow the same procedure for cross border demergers.

RBI Foreign Exchange Management (Cross Border Merger) Regulations, 2018 defines Cross Border Merger as:

‘Cross border merger’ means any merger, amalgamation or arrangement between an Indian company and foreign company in accordance with Companies (Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act, 2013; Interestingly, the notified FEMA Regulations, 2018 has not included word “Demerger” in the definition of Cross Border Merger. Thus, the NCLT rejected the scheme.

Section 2(19AA) of the Income Tax Act defines the term demerger as “the transfer of one or more undertakings by a demerged company to another company.” One of the conditions of section 2(19AA) is the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger. This section is violated as demerger scheme was approved by majority of equity shareholders. Therefore, taxation benefits available to demerged companies under the Income Tax Act will not be available in this case.

Yours Sincerely

XXKKXXXXX

Company Secretary

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 2A(ii) (Syllabus 2022).

An ‘Earnout’ is a contingent consideration whereby Buyer of the Target would decide an amount which is to be paid provided certain contingent considerations to happen. Cross Border Mergers specially covering Information Technology (IT), Technological Mergers, Banking Mergers are subject to Contingent Considerations. Earnouts are divided into below 3 types:

•Cash Earnouts

•Equity Earnouts

•Stock Compensation Earnouts

A Carveout is a Potential divestiture of a business unit in which a parent company sells minority interest of a Child Company to outside Investors. A Carveout allows a company to capitalize on a business segment that many not be part of its core operations. A carve-out effectively separates a subsidiary or business unit from its parent as a standalone company. The new organization has its own board of directors and financial statements. However, the parent company usually retains a controlling interest in the new company and offers strategic support and resources to help the business succeed. Unlike a spin-off, the parent company generally receives a cash inflow through a carve-out.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(b) (Syllabus 2017).

Cross border mergers can be truly assessed only by evaluating the post-merger performance of the merged entities.

The following parameters may be used to assess the post-merger performance:

•Returns: A comparative analysis of the returns being generated by the entity pre- and post-merger should

be carried out. If the merged entity is earning significantly higher returns than the merger is deemed successful.

•Cash flow and operational efficiency: If post-merger the cash flow increases significantly and this

increased cash flow is put to use to obtain operational efficiency, this too shows that the newly created entity is performing well.

•Stock market reaction: If the stock market reaction to the announcement of merger is positive then the

merger appears to be a positive step.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 1(c) (Syllabus 2017).

An Inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed. An outbound merger is one where an Indian company merges with a foreign company resulting in a foreign company being formed. Accordingly, all properties, assets liabilities and employees of the Indian company will be transferred to the foreign company.

Inbound merger score over outbound merger for the following reasons: inflow of foreign direct investment, technology, widening the national market to international level, improving operational standards and human relations at global level apart from the elevation of brand globally.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2023, Q. 3(d) (Syllabus 2017).

A company may merge with a foreign company incorporated in any of the jurisdiction specified in Rule 25A(2)(a) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 after obtaining prior approval of the Reserve Bank of India and after complying with provisions of Sections 230 to 232 of the Companies Act, 2013 and these rules.

The Transferee Company shall ensure that valuation is conducted by valuers who are members of a recognized professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation.

A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under Rule 25A (2) (a).

The concerned company shall file an application before the Tribunal as per provisions of section 230 to section 232 of the Act and these rules after obtaining specified approvals.

Jurisdictions specified are as under:

(i)whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with SEBI, or

(ii)whose central bank is a member of Bank for International Settlements (BIS), and

(iii)a jurisdiction, which is not identified in the public statement of Financial Action Task Force (FATF) as:

(a)a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or

(b)a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2022, Q. 1(b) (Syllabus 2017).

Outbound Merger' is one where an Indian company has merged with a foreign company. Accordingly, all properties, assets, liabilities and employees of the Indian company will be transferred to the foreign company. In an outbound merger or acquisition, a domestic company purchases or merges with one in another country.

On the other hand “Inbound Merger” refers to merging a foreign entity with a domestic company such as Tata's acquiring Corus and Jaguar.

In bound merger scores over outbound merger for the reasons inflow of foreign direct investment, technology, widening the national market to international level, improved operational standards, improving human relations at a global level apart from the elevation of prestige globally.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(a) (Syllabus 2017).

Cross-border mergers do have practical difficulties hence certain practicalities need to be kept in mind. They are as under: Companies involved in the cross boarder merger shall answer that Regulatory actions, if any, prior to the merger with respect to non-compliance, contravention, violation as the case may be of any Act, Rules and Regulation made thereunder. Due diligence on the target firm, risk-benefit analysis and valuation of both sides to assess the compatibility. Ensure that the other company is within the prescribed jurisdiction mostly in case of a outbound merger and also get familiarized with the regulatory and political landscape of the other company across the border.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 3(e) (Syllabus 2017).

(i)Section 234 of the Companies Act, 2013 enables merger or amalgamation with a foreign company.

(ii)All the provisions relating to merger or amalgamation as in the case of domestic companies shall apply with required modifications.

(iii)A foreign company may be a company or body corporate incorporated outside India irrespective whether a place of business in India.

(iv)A foreign company incorporated outside India can be merged with in India only with prior permission from Reserve Bank of India (RBI).

Thus in the instant case the prior permission of RBI is required for merging the business entity of Michelle Inc with Ganga Infrastructure Ltd.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2020, Q. 6(b) (Syllabus 2017).

An inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed. An outbound merger is one where an Indian company merges with a foreign company resulting in a foreign company being formed.

The following Acts/laws govern cross border mergers in India:

1.Companies Act, 2013

2.SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

3.Foreign Exchange Management (Cross Border Merger) Regulations, 2018

4.Competition Act, 2002

5.Insolvency and Bankruptcy Code, 2016

6.Income Tax Act, 1961

7.Department for Promotion of Industry and Internal Trade (DPIIT)

8.Transfer of Property Act, 1882

9.Indian Stamp Act, 1899

10.Foreign Exchange Management Act, 1999 (FEMA)

11.IFRS 3 Business Combinations

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2019, Q. 2(b) (Syllabus 2017).

Inbound and outbound merger as defined in the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 are explained hereunder:

Inbound Merger

An inbound merger is one where a foreign company merges with an Indian company (or domestic company) resulting in an Indian company being formed. Following are the key aspects which need to be followed during an inbound merger:

1.The resultant company post cross-border merger can transfer any security including a foreign security to a person resident outside India.

2.An office/ branch outside India of the foreign company shall be deemed to be the resultant company's office outside India.

3.The borrowings of the transferor company would become the borrowings of the resulting company.

4.Assets acquired by the resulting company can be transferred in accordance with the provisions of the Companies Act, 2013 or any regulations framed thereunder for this purpose.

5.The resultant company is allowed to open a bank account in foreign currency in the overseas jurisdiction.

Outbound Merger

An outbound merger is one where an Indian company (or domestic company) merges with a foreign company resulting in a foreign company being formed. The following are the key aspects governing an outbound merger:

1.The securities issued by a foreign company to the Indian company, may be issued to both, persons resident in and outside India.

2.An office of the Indian company in India may be treated as the branch office of the resultant company in India.

3.The borrowings of the resultant company shall be repaid in accordance with the sanctioned scheme.

4.Assets which cannot be acquired or held by the resultant company should be sold within a period of two years.

5.The resultant company can now open a Special Non-Resident Rupee Account.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2A(ii) (Old syllabus).

‘Outbound merger’ means a cross border merger where the resultant company is a foreign company. In terms of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018, GKL Ltd. and PS International Ltd. have to take care of the following provisions in this regard:

(i)A person resident in India may acquire or hold securities of the resultant company in accordance with the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.

(ii)A resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme laid down in the Act or rules or regulations framed thereunder.

(iii)An office in India of the Indian company, pursuant to sanction of the Scheme of cross border merger, may be deemed to be a branch office in India of the resultant company in accordance with the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. Accordingly, the resultant company may undertake any transaction as permitted to a branch office under the aforesaid Regulations.

(iv)The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant company shall be repaid as per the Scheme sanctioned by the National Company Law Tribunal (NCLT) in terms of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

The resultant company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with the FEMA or rules or regulations framed thereunder. A no-objection certificate to this effect should be obtained from the lenders in India of the Indian company.

(v)The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the provisions of the Foreign Exchange Management Act, 1999, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the said Act or rules or regulations thereunder.

(vi)Where the asset or security in India cannot be acquired or held by the resultant company under the Foreign Exchange Management Act, 1999, rules or regulations made thereunder, the resultant company shall sell such asset or security within a period of two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of two years shall be permissible.

(vii)The resultant company may open a Special Non-Resident Rupee Account (SNRR Account) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of putting through transactions under these regulations. The account shall run for a maximum period of two years from the date of sanction of the Scheme by NCLT.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 2(a) (Syllabus 2017).

As per section 234(1) of the Companies Act, 2013, the provisions of cross border merger are subject to every other law specifically providing for any restriction.

A company may merge with a foreign company incorporated in any of the jurisdictions specified in Annexure B under Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 after obtaining prior approval of the Reserve Bank of India and after complying with provisions of sections 230 to 232 of the Companies Act, 2013 and these rules. It is to be ensured that while entering into an outbound merger, it is with a company from one of the specified jurisdictions.

Some of the risks associated with cross border mergers are:

1.Taxation : Despite Double Tax Avoidance Agreements, the tax implications in the host countries may prove to be complex and tedious. This may increase the costs as a local professional is required to be hired.

2.Regulatory landscape : The laws and regulations in the host country would be different and may be difficult to comply. An unsuitable regulatory landscape may pose risks to a cross border merger.

3.Political scenario : It is essential to assess the political situation of the country before one enters into a merger with an entity belonging to that country. Unstable political situation may lead to difficulties in carrying out business.

4.Valuation : Valuation is one factor which changes with countries due to changes in exchange rate, stock market transactions and other macroeconomic developments.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2019, Q. 3(e) (Syllabus 2017).

Since the matter involved pertains to cross border merger of companies, it is necessary to comply with the procedure as per rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 inserted since 13th April 2017. In accordance with said rule, a foreign company incorporated outside India may merge with an Indian Company by filing petition with National Company Law Tribunal in terms of sections 230 to 232 of the Companies Act, 2013.

It is also necessary to obtain prior approval from Reserve Bank of India (RBI). RBI has also issued Foreign Exchange Management (Cross Border Merger) Regulations, 2018 for ease of doing compliance. Merger is generally permitted with companies incorporated in foreign countries whose securities regulator is a member of Organization of Securities Commission's Multilateral Memorandum of Understanding, Central Bank is enrolled with Bank of International Settlements (BIS) and identified with Financial Action Task Force.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2018, Q. 1(c) (Old syllabus).