Cross Border Mergers in India: A Step Towards Globalisation

Falguni Shah, M&A Tax Partner, PwC India

With globalisation of the world economy, the trend of cross border transactions has accelerated. To invite greater foreign direct investment and provide Indian companies an opportunity to expand globally, the Central Government has paved the way for cross border mergers. Recently, the Reserve Bank of India (RBI) notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (FEMA Merger Regulations), streamlining the procedure for cross border mergers.

The Ministry of Corporate Affairs had already notified section 234 of the Companies Act, 2013 (Cos Act), earlier in April 2017. This was followed by the issuance of Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017 (CAA Rules) to operationalize section 234 of the Cos Act. Section 234 provides for cross border merger of Indian and foreign companies and states that a prior RBI approval is necessary for such mergers.

The FEMA Merger Regulations cover both inbound and outbound mergers. An inbound cross border merger refers to any merger, demerger, arrangement between an Indian Company and a Foreign Company where the resultant company is an Indian Company, whereas in an outbound cross border merger, the resultant company is a Foreign Company. In line with the amended CAA Rules, the FEMA Merger Regulations state that the resultant Foreign Company should be incorporated only in jurisdictions that satisfy conditions in the Cos Act. Countries such as Mauritius, USA, Netherlands, Singapore, UAE, UK, etc., would likely fall under the specified jurisdictions.

Inbound Mergers

For all inbound mergers, the issuance of security to a person resident outside India by the resultant Indian Company should be in accordance with Indian foreign exchange regulations concerning inbound investments, including pricing guidelines, entry routes, sectoral caps, reporting requirements, etc.

Similarly, the guarantees or borrowings of a foreign transferor company from overseas sources, which shall become the borrowing of the resultant Indian company, shall conform, within a period of two years, to the External Commercial Borrowing (ECB) or Trade Credit norms or any other Indian foreign exchange regulations as applicable. If within two years, the company is unable to fulfil the criteria, the borrowings may be paid off, first using the sale proceeds of foreign assets that an Indian company is not permitted to hold as per the Indian foreign exchange regulations, and the balance, if any, may be paid off by the resulting Indian Company.

Outbound Mergers

A person resident in India may acquire or hold securities of the resultant Foreign Company in accordance with the Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004 (ODI Regulations). In case the shareholder of the transferor Indian company is a resident individual, the fair market value of foreign securities should be within the limits prescribed under the Liberalised Remittance Scheme (LRS). If the fair value of shares received by an Indian resident individual, which exceeds the limit prescribed under the LRS, it may trigger the prior approval of RBI.

Further, the resultant Foreign Company may hold or transfer any asset or security and any guarantee/ borrowings in India subject to the provisions of the relevant Indian foreign exchange regulations.

A cross border merger undertaken in accordance with above specified conditions shall be deemed to have the prior approval of the RBI, as required under the CAA Rules, and hence, no separate approval will be required. This will immensely influence the timeliness of cross border M&As. In other cases, cross border merger transactions should require prior RBI approval. 


While the notification of the FEMA merger regulations is the last piece in the puzzle for implementation of cross border merger, some areas of concern remain unaddressed.

In a situation where a company is unable to comply with the ECB norms, FDI regulations or ODI regulations in the two-year window, there seems to be a lacuna as to whether the transaction would have to be reversed or the company will have to apply for RBI approval. In addition, in general, there is no clarity on timing for making an application for RBI approval— does the requirement for RBI approval kick in at the end of two years, when the company is unable to comply with the Indian foreign exchange regulations or when the Foreign Company actually merges with the Indian Company?

In case of inbound merger, for complying with the ECB and Trade Credit norms, certain concerns may arise, such as the average maturity period to be considered from which date or what will be the impact for interest on the expired tenure of borrowing that does not comply with ECB norms?

The dilemma does not end here. This is only one of the many issues that may hamper cross border mergers.

An Indian Party is permitted to write off capital (equity/ preference shares) and other receivables in respect of the Foreign JV/ WOS, subject to certain conditions. Pursuant to an outbound merger of an Indian Company with its Foreign JV/WOS, whether the cancellation of investment in shares of JV/ WOS by an Indian Company up to 100% would be permissible, is a subject that requires clarification.

If on merger, a Foreign Company holds interest in an Indian Limited Liability Partnership (LLP) and does not comply with the conditions of 100% FDI in LLP under the automatic route; whether the Foreign company holding interest in such LLP needs to apply for RBI approval or will it have to dispose the interest in such LLP.

While there are various such unanswered questions that pose practical difficulties, other issues require realignment and harmonisation of certain laws to make cross border mergers a success.

Presently, the Income-tax Act, 1961 (IT Act) provides for tax neutrality in case of inbound mergers, subject to certain conditions. For instance, the merger of Mauritius Company (M Co) with Indian Company (I Co) shall be tax neutral, subject to the transfer of all assets and liabilities of M Co to I Co and at least 75% shareholders of M Co continue to be shareholders in I Co. Further, no tax implications in the hands of M Co or its shareholders, as section 47(vi) and section 47(vii) of the IT Act exempts from tax any transfer of capital assets by a transferor company or shares by the shareholders through a scheme of amalgamation, if the amalgamated company is an Indian company.

Although the inbound merger shall be tax neutral, there is no clarity on carry forward and utilisation of losses of the transferor company, i.e., M Co to I Co, considering that the companies are in two different jurisdictions. This would also stand true for an outbound merger.

In the absence of tax neutrality exemption for outbound mergers, all outbound mergers would be taxable in the hands of the Indian transferor company and its shareholders.

Given the complexities involved, from the perspective of a cross border transaction, the merger route may be overlooked. A simpler route of acquiring the target through shares or asset acquisition may be preferred. Hence, for smooth and successful implementation, it is imperative for the Government of India to bring in requisite amendments or clarifications in all laws and regulation governing cross border merger transactions.


Closing Line: Views expressed are personal to the author. Article includes inputs from Siddhi Udani, Manager – M&A Tax, PwC India and Urvashi Ojha, Associate – M&A Tax, PwC India 



Disclaimer: Above expressed are the personal views of the author, and the publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it.