Outbound merger
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This article is written by Aura Das, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.


The present legal news comprises a lot of merger deals taking place in and around the world. Merger can be said as nothing but amalgamation of two companies, wherein the assets of two or more companies vests in one company. The amalgamating companies lose their identity and the shareholders of the amalgamating companies become the shareholders of the new company or amalgamated entity. Various group companies or companies in the same industry are merged for internal structuring or to expand their business.

What is a cross border merger

A cross border merger can be any merger, amalgamation or arrangement between an Indian and foreign company. The Companies Act, 1956 limited the scope of cross border mergers to only inbound mergers, where the resultant company is an Indian company. But the amended Companies Act, 2013 (“Act”) has extended the scope of cross border mergers to outbound mergers as well. Subsequently, the Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 were enacted so as to facilitate the process of inbound and outbound merger and other arrangements before the NCLT. To deal with specific issues related to cross border mergers, the RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (CMR). The said regulations were released to harmonize the scope of cross-border mergers with exchange control laws in India. As per Sec 234 of the Act, foreign companies from only certain jurisdictions as notified by the Indian government can be Transferee Companies.

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FEMA Regulations for Outbound Merger 

As per the Cross Border Merger Regulations notified by RBI, an outbound merger would be a cross border merger wherein the resultant company would be a foreign company. In accordance with the provisions of ODI Regulations, an Indian resident may acquire or hold securities of the resultant foreign company. In case of an outbound merger, an Indian company would lose its existence when merged with a foreign company and the shareholders of the Indian company would be allotted shares of the foreign company or the merged company.

Regulation 5 of the Cross Border Merger Regulations lay down the conditions for an outbound merger. As per Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004, a resident of India may acquire or hold securities of the resultant company. In accordance with the fair market value of securities as prescribed in the Liberalized Remittance scheme laid down under the FEMA Act, an Indian resident may acquire securities outside India. Any office in India of the Indian company shall be deemed to be a branch office in India of the resultant company in accordance with the Foreign Exchange Management Regulations, 2016. A foreign entity would generally apply to an authorized bank for approval to set up a branch office. Under Foreign Exchange Management (Cross Border Merger) Regulations, 2018, the concerned branch shall have to comply with all the compliances under the regulations. Any transaction by the resultant company shall be done with the branch office if such transaction is related to any business activity in India as per the sanctioned scheme of cross border merger. 

As per the scheme sanctioned by NCLT in accordance with Companies (Compromises, Arrangement and Amalgamation) Rules, 2016, any outstanding borrowings or guarantees of the Indian company which later become the liabilities of the resultant company shall be repaid by the resultant company. Any liability which is not in conformity with the Act or the Rules or the Regulations shall not be acquired by the resultant company. Any asset which is liable to be acquired by a foreign company under the Act, Rules or Regulations may be acquired by the resultant company by the way of a transaction in a manner permissible under the Act, rules or regulations. In the case the asset is not liable to be acquired by a foreign company, such asset or security shall be sold within two years of the date of sanction of the Scheme by NCLT, and the sale proceeds shall be repatriated outside India through banking channels.

Most of the foreign investment in India takes place under the ’automatic route’, wherein no prior permission is required. When the investment is beyond the permitted scope, government approval is essential in certain sectors. Every company before a cross border merger must take prior approval of RBI before filing of applications before NCLT as per Section 234 of the Companies Act, 2013 read with Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. The CMR has now replaced the mandate of RBI with deemed approval. This means that any cross-border merger which complies with the CMR will be deemed to be approved by RBI. RBI’s approval will be necessary if the merger does not comply with the provisions of CMR. In this way, the enactment of CMR helps in expediting the merger process by replacing the mandate of RBI with deemed approval.[1]

Compliances under Companies Act for Outbound Merger

The Companies Act, 2013 provides Section 234 which specifically deals with cross border mergers of an Indian company with a foreign entity and vice versa. Under the 1956 Act, an Indian company was prohibited to merge with a foreign company, though the reverse could be done. This prohibition for an Indian company was because of the restrictive definition of ‘transferee company’ under Section 394(4)(b) of the 1956 Act which stipulated that the transferee company must be a company incorporated under the Companies Act, 1956. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 were amended to insert Rules 25-A, which lays down the scope of application of Section 234 for cross-border mergers.

Section 234 of the Companies Act, 2013 lays down certain conditions for cross border merger. There is a requirement of prior approval in cross-border mergers by RBI to ensure regulatory supervision and safeguarding the interests of the concerned stakeholders in the proposed mergers. A valuation report of the surviving entity or the transferee entity must be submitted to the RBI and such report shall be prepared as per internationally accepted principles of accounting. The valuation must be one by a member of a recognized professional body in its jurisdiction. As per provisions of Section 230-232, approvals from shareholders, creditors and approval from SEBI for listed companies must be obtained. The mode of payment of consideration to the shareholder must be provided in the scheme of merger. The ‘permitted jurisdictions’ have been clarified as the jurisdiction of the surviving entity, which shall be one of the jurisdictions mentioned in Annexure B of the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2017.

It contains the list of jurisdictions where the surviving entity is located, whose securities regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding as given in Appendix A or a signatory to bilateral MoU with SEBI. It also includes jurisdictions whose Central Bank is a member of the BIS and a jurisdiction that has not been identified in the public statement of Financial Action Task Force (FATF), a jurisdiction having strategic deficiencies of Anti-Money Laundering to which counter measures apply or a jurisdiction that has not been able to address the deficiencies or has not committed to an action plan developed with FATF.[2]

Issues arising from Outbound Merger

The CMR provides for approval of RBI for an outbound merger of an Indian company. Post outbound merger, there might be a situation where the foreign company would want to hold an office premises or a factory unit or a sales unit to undertake it’s business activity in India. There is no provision in the CMR specifying the requirement of prior approval from RBI for allowing foreign companies to carry on with the business of Indian company post merger.

In a scheme of merger, the transfer of assets would be taxable under Section 45 of the Income Tax Act. In case of mergers where the transferee company is an Indian company, such mergers are provided with tax exemptions under Section 47(vi) of the Income Tax Act. If similar exemptions are not laid down for outbound mergers, the taxpayers opting for outbound mergers may suffer tax disadvantages.

Corporate restructuring due to mergers of two or more companies in India requires approval from NCLT after obtaining the approval from RBI. Obtaining an approval from NCLT might take upto 5-6 months. In case of outbound mergers, it is necessary to carefully evaluate the compliances and regulations of the jurisdiction of the transferee company with which the merger is proposed to be done. Such careful evaluation would help to determine the local compliances and other additional requirements that may be specified by the foreign jurisdiction.[3]


Cross border mergers helps in economic development and expansion of business by the synergies created between different companies and potential markets of various jurisdictions across the world. Through cross border mergers, upcoming companies from developing and under-developed countries get the financial support, technological advancements, and strategic support in the form of successful business models, marketing strategies and the clientele of the transferee company. Cross border mergers help in creating a healthy competitive environment for the industries to thrive, thus leading to improved quality of products, better economic benefits, exposure to alternative products and also promotion of diversity amongst various cultures in the world.


[1] Priti Suri and Associates, 2018. India’s Cross-Border Merger Regulations, 2018: An Overview. E-Newsline, April, pp. 1-2, accessed from < https://www.psalegal.com/wp-content/uploads/2017/01/E-Newsline-April-2018.pdf>

[2] Lakshmikumaran and Sridharan, 2017. Cross-border merger provisions notified. 2 May, accessed from <https://www.lakshmisri.com/insights/articles/cross-border-merger-pr o v ision notified/#:~:text=The%20conditions%20for%20cross%20border,int erna ti ona lly% 20accepted%20principles%20on%20accounting>

[3] Athavale, R. S., 2018. Outbound Mergers – Yet another impetus for buoyant M&A market in India?. 14 June. Accessed from <http://www.lawstreetindia.com/expe rts/colu mn?sid=224>

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