Image Source:

This Article is written by Abhishek Dubey, a 2nd-year law student from Chanderprabhu Jain College of Higher Studies and School of Law. This article discusses how an Indian company can acquire foreign companies and also the procedure, issues & trends of acquiring foreign companies.


Mergers and acquisitions are narrow concepts that require significant knowledge. Concepts such as cross border merger or acquisition require more knowledge and understanding.

‘Inbound merger’ is a part of a ‘cross bound merger’. When an Indian company acquires a foreign company, it is known as an Inbound Merger or Acquisition. In an inbound merger and acquisition, the Indian company is a parent company.

Download Now

The considerations that need to be taken care of in inbound merger and acquisition are:

  • Impact of government regulators in matters of employment law, taxation and licensing, etc.
  • The potential difficulty in a stage of merger and acquisition in both countries.
  • National security between the countries.
  • The cultural difference between the countries.
  • Legal and cultural differences in case of due diligence.
  • Coordination of intellectual property.

There are a lot of things to be taken into consideration. Proper due diligence is required. This is because such tasks are difficult due to the complex procedure and the separate set of laws and significant rules, etc. 

Procedure for an inbound merger or for acquiring a foreign company

Transfer of securities

The issue or transfer of security should be made in accordance with the Foreign Exchange Management Act regulations such as pricing guidelines, entry route, and sectoral caps. Some specified conditions in case of special circumstances include, where the foreign company is a joint venture or wholly or subsidiary owned, the provision contained in Foreign Exchange Management regulations incorporated in the year 2004, should be followed for the transfer and issue of securities.


In the case of borrowing by a foreign company from an Indian company, the Indian company becomes liable. Any borrowing if done overseas, that is borrowing from an Indian company, entering into the books of the resultant company shall conform to external commercial borrowing norms within a period of two years.


The Indian company can acquire the assets of a foreign company under the regulations as specified under FEMA.

Sale of assets

 Where the assets are not permitted to be sold, it shall be sold within a period of two years from the date of sanction of the scheme. The sale should proceed immediately. 


An office that is situated outside India, after being acquired, is to be treated as a branch of the acquiring company i.e., the resultant company may undertake any transaction of that branch under the 2015 regulation of FEMA.

Click Here

Bank account in the country of the transferor entity

The resultant company is permitted to open a bank account in a foreign country for their transaction.

  1. Valuation: The valuation of an Indian company with a foreign company should be in accordance with Rule 25A of Companies Act which provides for accounting standards accepted internationally.
  2. Deemed approval: Prior approval of RBI is necessary according to subsection (2) of 234 which states that foreign companies with the approval of RBI may merge with the Indian company. This is unusual and should be left to the person managing the FEMA Act. 

For Approval by the Reserve bank, the application has to be sent to the following address:

                       The Chief General Manager,

                       Reserve Bank of India,

                       Foreign Exchange Department,

                       Overseas investment Division,

                       Sir P.m Road Floor,

                       Mumbai- 400001

A letter from an Authorised Dealer of IP should mention the following details:

  • Transaction number generated by the overseas investment division.
  • Brief details about Indian entity and foreign entity.
  • Background and details about the transaction.
  • Reason for seeking approval under FEMA regulation.

Observation of the designated Authorised Dealer Bank with respect to the following:

  • Prima facie validity of joint venture/ wholly owned subsidiary outside India.
  • Contribution to external trade and other benefits which will accrue to India.
  • Financial position and intellectual property record of an entity, etc.

Rules applicable under the provisions of Companies Act 2013

General provision of Companies Act 2013

Section 230(2) of the Companies Act 2013 states that when an Indian company wants to acquire a foreign company, the application has to give to the tribunal and the application should also be given to call for the members and creditors of the company for their consent. The company should also disclose the corporate debt structuring to the tribunal.   

Notice to the regulator and the role of Competition Commission of India

Notice to the regulator and other authorities, which are being affected by the merger or acquisition should be given to the Competition Commission of India. They should revert back within 30 days of such notice. There are some rules which are not expressed in the Companies Act 2013 such as sectoral regulation. So, due notice should be given to the Competition Commission of India.

As far as notice is concerned, the provision of the Competition Act 2002 provides for mandatory merger and acquisition under Regulation 2011 (merger control regulations). This regulation provides for mandatory approval of the Competition Commission of India.  

Even High Courts are taking steps with regards to the approval of a merger from the Competition Commission of India, Once the Competition Commission of India does not object or make any representation in front of the tribunal within 30 days, then the tribunal may assume that the Competition Commission of India does not have any objection.

Provision of Section 234 of Companies Act 2013: Progressive or Regressive

The Companies Act 1956 restricted cross border merger. This policy was restricted for the protection of Indian companies only. The Indian government is moving towards an ‘Open Door Policy’. Such a policy is an inbound foreign investment with relaxation on capital account transactions.

It should also be appreciated that such a restrictive protectionist condition is not present in many advanced jurisdictions like USA and UK. Otherwise, the year 2003 amalgamation of Veracity Technology Inc. with MosChip semiconductor technologies ltd. would not have been possible. The introduction of Section 234 is a welcoming step.

Central government forming rules in consultation with the RBI: Sub-section(1) 234 of Companies Act 2013 states that the Central Government may make rules in consultation with the RBI in relation to merger and Acquisition.

Depository receipt as payment of consideration to the shareholders of the merging Company: One radical feature of sub-section(2) of 234 of the Companies Act provides for payment of depository receipts to the shareholders of the merging company. But depository receipts has major issues. If the Indian Depository Receipt has to be made as attractive as the American Depository Receipt and Global Depository Receipts, then effective and simpler policies should be made.

Issues in the case of the Inbound Merger for existing Companies

Wholly owned services and joint venture companies can be the operating entity engaged in trading of goods and services or they can be a manufacturing entity which would not have a significant income. Section 47(6) of the Income Tax Act 1961 treats inbound mergers as tax neutral subject to the condition.

The key issues relating to inbound merger and acquisition are:

The merger of the foreign domiciled holding company

Loans obtained prior to the merger

RBI has permitted Indian companies to take over guarantee and outstanding borrowing which should conform to the norms of “External Commercial Borrowings”. If an Indian company does not borrow from recognized lenders and borrows money from a non-recognized financial lender, then the company is considered a non-recognized borrower.

If the eligible borrower and eligible lender’s conditions are satisfied but the minimum maturity period is not specified in that situation, the Indian party has to renegotiate before the merger within years as per the guidelines issued by ECB.  

Migration of foreign accumulated losses

Section 72A of the Income Tax Act provides for carrying forward and the setting off of accumulated losses in certain cases for companies that fall within the definition of the industrial undertaking. Currently, there is no mechanism in the Income Tax Act to absorb foreign tax losses. 

Another issue is the Minimum Alternate Tax

This provision specifies that the Indian company has to incorporate tax liability of the foreign company which is being amalgamated. 

The merger of operating an overseas Wholly-Owned Subsidiary/ Joint venture

Issues such as foreign accumulated losses and foreign liabilities will be more relevant in cases of a foreign company mergers. 

Additional key considerations in such a scenario would be: 

The merger of overseas Manufacturing entities

As mentioned in the “Foreign Exchange Management Act”, the office of a foreign company would be treated as a branch of an Indian company. In the case of a manufacturing entity, its warehouse and factories would be considered as an office operating outside India. In the case of post-merger, the manufacturing entities would continue its operations, which will lead to establishing permanent business outside India. These could have permanent establishment implications in a foreign country.

Further, such a branch will lead to commercial liabilities such as employee contracts, customer and vendor contracts. Merging a foreign manufacturing entity into an Indian entity will lead to an Indian holding entity that would lead to a commercial reality. Given such implications, the Indian company will choose its wholly-owned subsidiary/ joint venture engaged in a foreign company with its Indian holding company. 

The merger of trading and service sector entities

The Indian company may either propose to bring an end to the wholly-owned subsidiary/ Joint venture company or continue the same, even post the merger. If an Indian company intends to cease its operations, the overseas company has to shut its operation and then merge into an Indian entity.

However, if the intended company continued its operations in case of even post-merger, then the following issues may arise:

Transfer of foreign employees to India

The foreign employees will be transferred to India and the salaries, payroll and provident funds of employees will have to be dealt with accordingly. In the case of post-merger, the employees and overseas branches will form a place of business outside India and will constitute a permanent establishment. In case the foreign employees opted for Employee Stock Option Plan, they will continue to hold in the case of the same post-merger i.e., the acquired company ceases to exist and becomes part of the acquiring company.

Determination of Outward Direct Investment threshold step down subsidiaries

While evaluating in case of an inbound merger, the Indian Company is required to evaluate the net worth of 400 per cent. This is because such an entity will directly become part of the Indian subsidiary company. However, in the case of an outbound merger, it is not required to mention whether the threshold will be determined on the basis of net worth appearing in case of a balance sheet.

Discharge of consideration to joint venture partner under the share swap

Where the company has been merged with an Indian company, a joint venture partner would receive his share of that Indian company on account of such a merger. To this extent, it would be regarded as a share swap under FDI regulation and will not require any permission from the Government. 

Inbound structure of foreign companies

  • Wholly owned subsidiary and joint venture companies: 100% FDI is permitted in a company under automatic route i.e., the fact that no permission is required from the Government in the inbound merger as per the Regulations (schedule 1 20(r)4).
  • Limited Liability Partnership: 100% FDI is permitted in the case of LLP under Schedule 6 of inbound regulation, subject to the conditions of FDI.
  • An Indian company can establish a branch office and liaison office or project office: A foreign company can establish these offices in India under the FEMA Regulation of 22(R)(5) that is under service activity.

Trends of inbound merger and acquisition in India

As per the Hindu report, the inbound merger jumps to 30 per cent while an outbound merger drops down by 35 per cent. This was a research study conducted by ‘Venture Capital Intelligence’ which focuses on merger & acquisition and private equity deals. In 2011, value for inbound deals was announced as $9.99 billion and 50 transactions in the year 2010 were announced for $ 8.4 billion.

The top deals in the year 2011 were Vodafone acquiring Essar Group for $5.46 billion dollars, Tata group acquired Corus for $12.8 billion and Bharti Airtel acquired Zain Africa for 10.8 billion.


The Corporate Sector is moving towards a stage of globalization. Its principle has to be accepted through favourable legislation. Because of the presence of technical legislation, it is impossible to achieve success in one attempt.

Cross Border Merger defines an inbound merger between an Indian company and a foreign company where the resultant company is an Indian company and where there is a takeover of the assets and liabilities of a foreign company. The functional aspect of an inbound merger has been provided in the regulation of the Foreign Exchange Management Act.

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content. 


Please enter your comment!
Please enter your name here