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This article has been written by Aditya Kasiraman, pursuing the Diploma Programme in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSIkho.


India has become one of the fastest-growing economies in the world attracting foreign investors around the world promising profit opportunities. The continued liberalization of the legal framework over the past decade has improved the investment climate that has reported a significant increase in direct investment (“FDI”) in the country. The most recently ratified e-commerce deal is the Walmart-Flipkart agreement in which the largest US commercial company acquires 77% of Indian jobs at ~ USD 16 billion. Other important acquisitions include Russia’s Rosneft in Essar Oil, Japan’s largest investment chain in leading consumer internet startups like OYO Rooms, Paytm and Ola Cabs etc. 

The integration and acquisition of cross-border mergers have accelerated rapidly in the reconstruction of the industrial structure at the international level. The cross-border merger means any merger or settlement between an Indian Company and a Foreign Company in accordance with the Companies Act, 2013 and the Companies (Compromises, Arrangements, and Amalgamations) Rules 2016.

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The Department of Coalition introduced Section 234 of the Companies Act, 2013 thus allowing for cross-border mergers from 13 April 2017. Therefore, it was time for the Reserve Bank of India to introduce regulations in order to enforce cross-border mergers. The Ministry of Corporate Affairs (“MCA”) and the Reserve Bank of India (“RBI”), for the first time, have also included provisions that allow for the consolidation of an Indian Company on a Foreign Company. As this article seeks to convey, these provisions may allow for exit meetings in limited circumstances, provided that international companies may restructure their operations in India; however, a more integrated environment is needed to make this program more meaningful.

Control Framework

In India, cross-border mergers are strictly regulated under (i) the Companies Act of 2013; (ii) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011; (iii) Competition Act 2002; (iv) Cash and Expenditure Code 2016; (v) The Income Tax Act of 1961; (vi) Department of Policy and Promotion (DIPP); (vii) Transfer of Property Act 1882; (viii) Indian Stamp Act 1899; (ix) Foreign Financial Management Act 1999 (FEMA) and other related laws as may apply in accordance with the merger framework.

The two relevant regulations under FEMA from the concept of integration are the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (ODI Regulations). In addition, the Reserve Bank of India (RBI) has introduced the Cross-Border Merger Regulations, 2018 under the Foreign Exchange Management Act, 1999 to facilitate merger arrangements, downgrades and consolidation between Indian companies and foreign companies involving Internal and Foreign Investments. This is an important step as there will be a significant increase in foreign direct investment spending without the imposition of new rules and regulations.

Inbound & Outbound Merger

Cross-Border mergers can be inbound/incoming mergers or outbound/outgoing mergers. The incoming merger means a combination of boundaries, in which the company leads an Indian company. The outgoing merger means cross-border mergers where the company to be followed is an overseas company. A successful company means an Indian company or a foreign company that takes over the assets and liabilities of companies involved in a consolidation process.

Key Provisions of the Cross-Border Regulation in the event of Incoming Mergers

Security Release

As envisaged, the Indian company will issue or transfer securities to the shareholders of the transfer agencies which may include both persons residing in India and persons residing outside India. In the case of a person living outside India, the issuance of shares will follow pricing guidelines, sector payments and other applicable guidelines as prescribed under the Cross-Border Regulations. However, if the foreign company is a JV (Joint Venture) / WOS (Wholly Owned Subsidiary) then it will comply with the conditions set out in the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. In addition, if the incorrect combination of JV/WOS results in obtaining one or more downtime JV / WOS services for the Indian group by a Resultant Indian company, in which case such acquisition must comply with Regulations 6 and 7 of the ODI Regulations.

Asset and Liability Audits

Any loans or guarantees of the transferring company will be loans or guarantees of the next company. The two-year term is provided for compliance with foreign trade lending law. Ultimately use limits would not apply in such cases.

Any assets acquired by the following company may be transferred in any way as permitted under the Act or Regulations. Where the goods are not approved, the next company will sell the same within two years from the date of approval of the order by the National Company Law Tribunal (NCLT) and the proceeds will be returned to India immediately via bank channels. Where any debt outside of India is not allowed to be held by the next company, that may be deducted from the proceeds of the sale of such goods overseas for a period of two years.

The remunerative company is allowed to open a bank account in the foreign power to oversee the merger-related transaction for a period of two years from the date of approval of the scheme by the NCLT.


The measurements will be made in accordance with Rule 25A of Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, namely, by Registered Voters who are members of accredited organizations in designated companies of the transfer company.

Key Provisions of the Cross-Border Regulation in the Event of an Outgoing Merger

Security Release

As envisaged, the Foreign Company will issue securities to shareholders in the Indian business which may include both persons residing in India and persons residing outside India. In the event that the shares are acquired by a resident of India, such acquisition will be subject to ODI Regulations as determined by the RBI.

Asset and Liability Audits

The guarantees or loans that will appear will be repaid in accordance with the scheme approved by the NCLT. In addition, they should not receive any debt that does not comply with the Law or Regulations as prescribed. A Certificate of Opposition to this should not be obtained from the Indian creditors of the Indian company.

Any acquired property may be transferred in any way as permitted under the Act or the Regulations below. In cases where it will not be seized or acquired by the next company, it will be sold within two years from the date of approval of the scheme by the NCLT and the proceeds will be returned to India immediately via bank channels. Payment of Indian debts from the sale price of such property or securities within two years will be allowed.

Opening a Bank Account

The tracking company is authorized to open a Special Non-Residential Rupee (SNRR) Account for the purpose of overseeing consolidated transactions for a period of two years from the date of the program ban by NCLT.


Estimates will be made in accordance with Rule 25A of Companies (Compromises, Arrangements, and Amalgamations) Rules 2016, that is, registered registrars who are members of accredited organizations in designated areas of the transferring company and that counts in line with international adoption of financial regulations and accounting.

Other Compatibility

The company to be tracked and/or the companies involved in the merger will be required to submit reports as may be prescribed by the RBI, in consultation with the Government of India, from time to time. At the time of approval of the merger of the foreign transfer company with the Indian transfer company, NCLT will consider the merits of the merger in accordance with the laws of the country in which the foreign body company is incorporated, and any transaction due to cross-border mergers made in accordance with the cross-border merger rules will be considered.

Other Challenges Facing Foreign Companies Operating in India

One of the challenges facing foreign companies under a company established in India is the challenge of recouping the profits made in Indian business. For example, if an Indian company claims a share of its foreign shareholders, it is liable to pay the Dividend Distribution Tax (“DDT”) @ ~ 20% under Section 115-O of the IT Act. Alternatively, an Indian company may consider distributing its accumulated profits to foreign shareholders such as buying back or reducing its share capital. 

In the past, there has been an obligation to repay the Buy Back Tax (“BBT”) (unlisted shares) under Section 115QA @ ~ 23.30% and lastly, DDT has reached the level of revenue collected (whether capitalized or not) and the capital is taxed more than the same. In addition, since these taxes (i.e. DDT or BBT) are borne directly by the Indian Company and not by the receiving shareholders, it may not be possible to obtain a Foreign Tax Credit (“FTC”) in a rural area. This will also lead to double taxation on gross income.

In addition, the heavy requirement to comply with the many annual Indian Company regulations under the Companies Act 2013 makes it even more challenging for Foreign Companies to operate in India. As a result, such issues may be the reason why foreign companies re-visit their group formation in India.

Significant Issues Surrounding the Emerging Integration of Indian Companies and Foreign Organizations

With the introduction of the Outbound Cross Border Merger integrated laws, external MNCs facing challenges (as described above) may explore the potential for internal restructuring under this state. However, there are various problems that can arise from a commercial, tax and regulatory perspective that will make exit border crossings ineffective in most cases. The key issues are outlined below:

There is no Tax Neutrality in the Event of an Exit

Unlike incoming mergers, the existing provisions of Indian tax laws do not provide for the benefit of neutrality in the event of an outgoing merger. Section 47 (vi) and Section 47 (vii) of the IT Act provide for the imposition of a tax exemption on the transfer of joint assets to consolidation only if the payable company is an Indian Company. However, in the event of an outgoing merger, the resulting company will be a Foreign Company and therefore, any transfer of capital assets under this jurisdiction may attract revenue from the hands of foreign companies and shareholders as below:

  • In the hands of old Indian companies: In an exit consolidation, an Indian consortium that is a transfer business may be liable for the income tax on the transfer of its assets by consolidation, up to the date of consolidation. However, one might assume that since the Indian Company did not receive consideration in lieu of consolidation, there may be no cash available in that way.
  • In the hands of Shareholders: Shareholders who receive shares in a Joint Venture Company will also be liable for long-term or short-term income tax.

Unless the above provisions are amended under the IT Act to provide for tax exemptions for outgoing mergers, income tax will be a major obstacle for foreign companies to consider in these cross-border mergers.

Defining Certain Conditions

Let’s take a look at some of the scenarios to see if an outbound merger is possible under such circumstances:

  • Consolidation of Indian WOS – Foreign Company may consider wrapping up its 100% Indian WOS, following which the Indian WOS expires and shares held by the Foreign Company, will be cancelled. While non-disclosure of tax neutrality will continue to be a concern (especially from a shareholder perspective), some important considerations for the outgoing integration of the Indian WOS are described as follows:

WOS involved in Production Activities

In terms of Regulation 5 (3) of Cross-Border Merger, the Indian office shall be deemed to be the LO (Liaison Office) / BO (Branch Office) of the Foreign Company. In terms of FEMA 22 (R), a Foreign Company branch is allowed to perform the following functions:

  • Export / Import;
  • Provide technical or consulting services;
  • Doing research work on where the parent company operates;
  • Promoting technical or financial cooperation between Indian companies and a parent or foreign parent company;
  • Represents a parent company in India and acts as a buying/selling agent in India;
  • Providing services in Information Technology and software development in India;
  • Provide technical assistance on products provided by parent/group companies;
  • Represents airline/shipping company.

FEMA regulations do not allow a Foreign Company BO to perform any manufacturing activities in India. Similarly, in the event that an Indian WOS or JV is involved in production activities prior to the merger, the resulting branch will not be permitted to continue such activities after the merger in addition to ongoing debts such as, commercial loans, employee contracts, retailers’ payments etc. The WOS of India will continue to exist and as a result, will be the debts of the Foreign Company. The resulting branch may not be permitted to provide such loans directly. For these reasons, it is unlikely that the Foreign Company will choose to assemble its arms/production units in India.

WOS involved in Trade or Service Activities

As a Foreign Company branch is permitted to perform commercial or service activities in India, an outgoing Indian WOS’ involvement in such activities with its Foreign Holding Company appears to be ineffective. However, even under such circumstances, the following issues may arise:

a) Permanent Release: In the outgoing consolidation, the assets, liabilities and employees of the Indian Consolidated Company shall be transferred to the resulting Company. As the business would continue with the branch office, such a business location in India would have the potential to be considered as Fixed Place for the consolidated Foreign company. In such cases, the profits made as a result of Indian operations at the India Foreign Company branch may be taxed at a higher rate of 40% (plus taxes and fees). As noted, the branch tax in India does not receive a higher tax rate, but it does have the complexities of compounding the profits, because the Foreign Company is merged in the end, to even elect the India branch office.

b) Transfers of Indian employees in payment to a Foreign Company:

  • Impact on Indian Employees: Employees of an Indian company that would be transferred to existing Foreign Company employees, maybe taxed not only in India but also may receive a tax from the local authority of the Foreign Company thus resulting in a double tax on income (according to FTC in the relevant DTAA).
  • Impact on Foreign Company as an Employer: The Foreign Company being the employer of employees living in India will also be responsible for deducting and paying taxes deducted from any salary payments. In addition, the foreign company will also have to decide whether it would be necessary to make an agreement under various representations on the welfare of Indian workers (such as Payment of Gratuity, Employees Provident Fund, Employees State Insurance etc.)

c) Stamp Work: The stamp duty dispute will be another important consideration for the External Company. Stamp duty is paid for shipments related to corporate mergers and is charged in accordance with state stamp law.

Due to the above issues, it seems that the outgoing combination can only be used in Indian WOS with a very low level set in commercial or service sectors. In some cases, even that may not be possible.

The merger of Unlisted Indian JV 

Issues as mentioned above will continue to persist even in the event that the Indian JV is proposed to merge with a Foreign Company with additional challenges as below:

  • Marketing problem: Exit Indian JV outreach may require significant consultation with an Indian JV partner as well as a detailed evaluation of the exchange rates corresponding to appropriate standards.
  • Legal problem: Regulation 5 (2) of the Cross-Border Merger Regulations, allows a resident to obtain protection outside India within the limit of USD 2,50,000 (~ INR 1.60 crore) according to the Liberalized Remittance Scheme (LRS). Considering a situation where the number of shares issued by a Foreign Company instead of an outgoing joint venture of an Indian Company may exceed the allowable limit of USD 2,50,00,000; such a situation could be opposed by the partner of the Indian JV, thus making the entire agreement invalid.

Consolidation of Indian List of Companies 

Finally, the merger of a registered Indian company with a Foreign Company is unlikely to work for a variety of reasons such as the following:

  • Company Opinion: The listed company in India will have to adhere to as many SEBI rules and regulations that apply to it before the outgoing merger. The process itself can be very complex and have several control challenges. In addition, at present, there are no specific guidelines issued by SEBI that specify the procedure for the consolidation of the business listings in India.
  • Opinion of Indian shareholders: From the perspective of Public Shareholders, outsourcing can be as challenging as below: 
    • Firstly, as a result of this outgoing merger, the Foreign Company will be required to hand over its shares to the shareholders of the Indian Company which may not be in the opinion of the Indian shareholders and may be a problem for SEBI regulation.
    • Secondly, the amount of shares of foreign companies as awarded to Indian promoters or individual shareholders of a registered Indian company, may exceed the allowable limit of USD 2,50,000 according to LRS, which could be another regulatory problem.
    • Even after acquiring shares in a Foreign Company (as above), an Indian shareholder may face challenges by selling such shares to another person and complying with existing FEMA guidelines; hence, it requires some sort of savings.
    • Finally, Indian Institutional shareholders such as asset management companies invest in Indian listed companies regulated by SEBI, Companies Act, RBI, etc. in this regard.

Also, the Indian Listed Company may be a large company. Clearly, even removing the above issues, it seems unthinkable that such a company could cease to exist and become a subsidiary of a Foreign Company.

Sharing the Exchange Made

Under the outgoing joint venture, the Indian Company is finally gone. However, there may be cases where the parties may agree that the consideration to be paid to Indian shareholders may be in the shares of the Foreign Company in the form of a stock exchange, in which case, the Indian Company continues to exist. Under FEMA, such stock exchange transactions are permitted under FDI and ODI regulations; however, even in such cases, there will be major control challenges that can be explored. While such a transaction may be similar to an outgoing merger, but in general, it will not fall under this regime. As a first impression, regulatory bodies may consider trying to create a regulatory framework to enable that transaction that could take place instead of completely eliminating India’s business.


As seen in the above issues, the outbound merger framework will operate in limited cases where Indian organizations are involved in small businesses or service activities and the Parent Foreign Company may wish to undertake similar branch operations, perhaps to a lesser extent. However, even in such cases, the issues that arise after the meeting, can be a barrier to such thinking, making the application of these rules very small. One may have to keep waiting for the regulations to become more widespread to give purpose to that action. The scope of complex issues should be addressed in an effort to successfully complete cross-border integration.

Each combination of parameters is different and the application of these problems will depend largely on the facts, power, scale and scope of both companies. Cross-Border Regulations as being fairly raw, have many real issues which are yet to be identified and will be addressed when met in due course.


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